A Big Power Bill

Sydney Morning Herald

Saturday December 4, 1999

RICHARD Branson was up to old tricks yesterday. Just four days after putting the cat among the pigeons in Australia's domestic aviation industry, he was abseiling with a Spice Girl down the side of a new three-storey Virgin Megastore in Glasgow.

Naked self-promotion is Branson's calling card. He once shaved his legs and slipped into a bridal frock for a photo opportunity. He has stripped to his boxer shorts alongside Hollywood's silicon heavyweight Pamela Anderson, decorated himself as a Zulu warrior and delivered an annual address in a rabbit suit, hardly the modus operandi expected of a leading corporate figure who British teenagers once ranked second only to Mother Teresa as a 20th century icon.

"He's never conformed," Branson's mother said in a rare interview last year. "Bringing him up was rather like riding a thoroughbred horse. He needed guiding, but you were afraid to pull the reins too hard in case you stamped out the adventure and wildness."

But of all the qualities that she hoped to instil in her little blond-haired boy, Eve Branson invited independence and toughness, on one occasion choosing the hedge-lined country lanes of Devon to impart a survival lesson. "Ricky must have been four or five," she said. "He was being a bit bolshie in the car. So I stopped it, opened the door and shoved him out. Then I drove off and made him find his own way home." Several hours later a farmer appeared at the door to return the lost child.

"I thought he was getting a bit namby-pamby and needed toughening up." she said.

Branson is nothing if not hardened to the task of taking on Australia's market duopoly. It's more than a bloodied nose that he hopes to dish out to Qantas and Ansett with his proposed low-cost airline, modelled closely on his Belgium-based "no frills" Virgin Express.

The operator is the reincarnated EuroBelgian Airlines which started up in 1991, chiefly as a charter service cramming Belgian sun-seekers onto 737s destined for the Canary Islands.

When Branson acquired the company in May 1996, charter flights accounted for around 70 per cent of its business. He rebadged the fleet in Virgin's instantly recognisable red and white livery, imported a couple of hot-shot US managers who remodelled the airline along the lines of the leading American "no-frills" operators, and took the company onto stockmarkets in Belgium and New York.

The airline flies to 10 European cities for as little as #27, is consistently adding new destinations (Berlin last month, Dublin and Paris soon) and is turning a modest profit (4.95 million euros in the September quarter).

Its formula looks relatively straightforward, and the idea easy to sell to price-conscious consumers; slash costs, put safety ahead of cabin luxuries, charge for in-service drinks and forget customer loyalty.

As one cut-price operator noted recently: "There's no such thing as brand loyalty on short haul flights." Which makes Virgin Express something of a paradox as it seeks to trade on the strength of the ubiquitous Virgin name while competing on price on some of the most competitive sectors in the world.

The philosophy contrasts sharply with Branson's other, hugely successful, trans-Atlantic operation which combines competitive - not rock bottom - fares with good, quirky service.

Some of Branson's detractors say the billionaire's brand dependency is a two-edged sword, simultaneously corporate backbone and Achilles heel. They warn that a couple of failures among his myriad interests - as diverse as trains and holiday packages to clothing, soft drinks, records, cosmetics, financial services, TV and radio, even bridal wear - could undermine the group's star performers.

"When I'm delayed on a Virgin train I start wondering about Virgin Atlantic," said Marcus Mitchell, a brands specialist, in Accountancy magazine. "Every experience of a brand counts, and negative experiences count even more."

So far, Virgin Express is managing to hack it in the cut-price market. If it's a type of aviation hybrid, then it's a hybrid that is successfully combining brand recognition with a bums-on-seats ethos.

But the airline could be facing turbulence with analysts predicting a crunch six months because of rising cost pressures and the fact that Virgin Express has been inadequately hedged against exchange rate fluctuations and escalating fuel prices. Slower-than-expected route access has also stunted earnings growth.

The company acknowledges the difficulties. Its new managing director, John Osborne, says he wants to stabilise the business, restore the airline's image after a damaging scrap with Belgian authorities (miffed by a steady stream of management changes) and drive profitability harder.

Virgin's major asset remains the Brussels-London route which it flies under contract for the Belgian carrier Sabena. The big plus is the access the deal delivers to a busy and profitable sector; the downside is that it has anchored Virgin Express in Brussels, which is by no means cheap, while it inconveniences customers from high catchment regions like London by having to put down in Brussels enroute to southern Europe.

Ticket price remains the compensating factor. Travellers from Heathrow to Rome today might take more than four hours getting there but five fare options ranging from #91 return (discount) to #126 flexible) and the choice of eight flights is putting bums on seats. London-Brussels offers similar choice, from #27 to #55 return.

Analysts are wary, however, that Sabena, rejuvenated after mid-90s money troubles, may seek to take the Brussels route back, although it's fair to say that they view continuing high costs as exerting the greater pressure, especially in view of intensifying competition from manic fare-cutters such as Ryanair, easyJet and the British Airways offshoot Go. Unlike Virgin Express, all benefit from operating out of low cost airports - either London's Stansted or the just-refurbished Luton, north of London.

"The fact is that Virgin Express has not been one of the great successes of low cost operators in Europe," says a market analyst. "Ryanair and easyJet are beating them on costs, and they are almost mindlessly aggressive price-cutters."

To help offset expenses, Virgin has relocated a number of its 21-plane fleet to Shannon, Ireland, where it has established a multi-lingual reservation centre. Typically, distribution costs - ticketing, commissions and so forth - account for about 6 per cent of the total, less than half the 20 per cent endured by the big carriers with massive sales divisions, ticketing and loyalty program marketing. For a start, you just don't get a ticket from Virgin. In return for your booking, you receive a "confirmation number" only.

Some industry observers believe Virgin Express has yet to create the best possible mix.

Kevin O'Toole, the editor of Airline Business, says he is surprised Virgin Express hasn't more closely mimmicked Virgin Atlantic's operating approach.

"Virgin Atlantic has made its name by being slightly friendly and kooky, stylish and independently-minded . . . I think they have managed to make it work, to get that certain `feel' and I think that those less-easily qualified ingredients should never be underestimated."

Another analyst says of Virgin Express: "I just wonder whether Branson might have let it fall off his radar screen. Virgin Atlantic has been expanding strongly, he's launched mobile phones, he's into everything basically."

There are bigger issues brewing for the Virgin empire too. His British rail investment is destined to soak up excess cash for the forseeable future. Reducing government subsidies and the prospect of fees payable to the British Government from 2002 have raised doubts about Virgin Rail's long term viability. Some analysts have even wondered whether Branson might offload Virgin Atlantic - estimated to contribute about two-thirds of the empire's total profits - to raise enough cash to make the railway investment flourish.

They point to his decision in 1992 to offload the then hugely-prosperous Virgin Music to EMI for $US1 billon as a precedent and say it wouldn't be the first time Branson has sold his past to finance his future.

The alternative would be to take Virgin Atlantic public but Branson watchers say the entrepreneur would not welcome the close scrutiny that a listing would bring, especially the brief and spectacularly unsuccessful mid-80s float of the Virgin empire.

The group, after all, is rooted in the British Virgin Islands, a tax haven, and up-to-date financial information on Branson's 200-plus companies and joint ventures (glorified franchises, according to critics) is hard to come by.

Suffice to say that the Virgin brand, the great intangible of the Branson empire, is fundamental to the companies' value; tangible assets are not generally the yardstick of the entrepreneur.

What is clear, say the accountants, is that there are three profit-earners in the empire - Virgin Atlantic, the music retailing business and the railways - but there are serious risks to each.

Although the group has managed to brush aside occasional rumours about financial difficulties, Branson's operating style, as expressed in his autobiography, Losing my Virginity, is hardly succour to nervous bankers.

"Back in the early 1970s I spent my time juggling different banks and suppliers and creditors in order to play one off against the other and stay solvent.

"I'm still living the same way, but I'm now juggling bigger deals instead of the banks. It is only a matter of scale."