Business Stripped Bare (9 page)

I have always said that I love tackling lazy industries: Qantas and Ansett are good airlines but they had a duopoly ripe for challenge. In August 1999 we announced our intention of setting up an Australian domestic airline. We had A$10 million of capital to invest.

At the time of writing, in 2008, Virgin Blue has 32 per cent of the air-travel market in Australia, with over 2,200 flights per week to twenty-two domestic destinations. It has expanded into New Zealand as Pacific Blue, it flies in Tonga, Samoa and Fiji as Polynesian Blue, and is planning to fly to the United States as V Australia.

In under ten years we have built an airline that Australians, New Zealanders and Polynesian islanders really seem to love, and there's an infectious spirit every time I step on board one of our planes.

Virgin Blue was the brainchild of Australian Brett Godfrey, whose dad worked for Qantas, and Rob Sherrard (who set up Sherrard Aviation and gave Brett his first job as an accountant). They jotted their idea on the back of some beer mats in 1993. Brett had walked around with this stack of cardboard in his back pocket for several years before he approached me. It's strange that some of the best ideas in life emerge after some liquid lubrication!

Brett first came to my attention when he wrote a brilliant reply to an article that was hostile to our European carrier, Virgin Express. It encapsulated my thoughts exactly, and stuck in my mind for a long time.

By 1999, Brett was Virgin Express's chief financial officer. We'd gone through three CEOs, and Brett had been acting chief operating officer, so by now he knew all the snags and problems of the airline business up close. He was incredibly hard-working, and had a great way of getting along with people. His force of personality had smoothed over some sticky situations.

So, one Thursday evening, I phoned Brett to offer him the job as head of Virgin Express, staying on in Brussels. He was polite, but turned me down. He said he wanted to quit because he now had two young children, Ryan and Nicholas, with his wife, Zahra, and wanted to return to Australia.

I said: 'If you want to do anything in Australia let me know and we'll see what we can do.'

'Funny you should say that,' was his reply. And he proceeded to tell me about his plan for a low-cost airline in Australia.

'Well, why don't you put a plan together? I'll have a look at it,' I said.

Brett went home that evening, dusted down his proposal, and got one of his colleagues to fly to Oxford next morning to deliver the plan. I read it and phoned him the next evening. Brett's idea had already been rejected by the Virgin executive team in London. But I believed there was value in this case. He told me I was the first person who shared his vision and that he had almost given up on his idea. I asked him to look at five outstanding issues and then get back to me. My questions were about slots, good aeroplanes, terminals, ticketing and staff and pilots. Brett went off to Australia and returned within a week with all the answers nailed down. After speaking with our team I said: 'Screw it, let's do it.'

There was a handshake. I said I would give him A$10 million, and the next day it was deposited into his bank account. (His bank manager phoned him up, thinking it was a mistake!)

Brett had already garnered support from Queensland's government, led by Peter Beattie, which would help with the marketing of this untapped tourist region. This was a great stroke of luck – all of the regional capitals in Australia were keen for a new airline to be based in their states, but Brisbane, along with Perth, was the fastest growing part of Australia, with the Sunshine Coast a huge attraction. The payroll tax was better than elsewhere, and so too were the beaches. When we launched we had 12,000 CVs from people all wanting to relocate to Queensland!

When the American low-cost carrier JetBlue was set up, it had a budget of $120 million. Brett's budget of A$10 million was extremely tight, but he had done his homework. He knew that Compass, Australia's first budget airline, which was under-capitalised, collapsed and died in December 1991, squeezed out by Ansett and Qantas in a price war. Compass boss Bryan Gray gave us an indication of what to do – and where it all went wrong. We didn't need to repeat his mistakes. And what followed was as perfect an example of Virgin's 'branded venture capitalism' in action as you could want, and also a good illustration of why it is sometimes better to follow a pioneer than be a pioneer.

Rumours started to fly about a new entrant in the domestic airline market, and on 30 November 1999, at a press conference in Custom House Quay, Brett's backer was revealed. It was Virgin. We had kept our deal under wraps brilliantly and caught the market on the hop. A one-way fare from Brisbane to Sydney, which had cost A$150 each way, would now be less than A$100. ASX, the Australian stock exchange, went mad. A$2 billion was wiped off Qantas's stock price. Brett and I joked that if we had thought to take a hedging position on the fall in Qantas's shares, we could have already recouped our start-up costs.

We both knew that Qantas was one of the best-run airlines in the world – but they had become very cosy with their duopoly with Ansett. Virgin Blue simply had to be different. Our culture would be the point of differentiation – and no one could copy the Virgin culture.

From day one, Brett was on the lookout for people with no previous airline experience. The advertising for Virgin Blue was along the lines of: 'If you've got purple hair and you're working in a butcher's shop and you can still smile after a tough day, you're the kind of cabin crew we're looking for.' His whole approach reminded me of the tone we set for publicity at Virgin Music. It was direct, informal and genuinely informative.

And, of course, these were exactly the qualities he was looking for in his people. A genuine smile is impossible to fake for very long, and we needed people who were prepared to smile. The job of an airline cabin crew is arduous. You're standing for ten hours a day, in confined spaces, dealing with the public. At least the pilots get to sit down and don't have to face the passengers. But a cabin-crew member has to have the right spirit to deal with customers who have lost their bags, missed their flights or spilt red wine over their white sundress. On Virgin Blue, Brett and his team called his cabin staff 'guest-facing crew' and he worked hard to get their ethos right. I remember telling him once that his Virgin staff were more Virgin than anywhere else in the business. Admittedly the morning after a great party with them! I would have said the same about Virgin Atlantic staff the morning after the night before!

Once I was asked by an Australian reporter why we had decided to call our new airline Virgin Blue when the Virgin symbol was red. The fact was we'd run a competition, and some people had sent this idea in to take the mickey. Since in Australia a redhead is known as a 'bluey' we thought, Hang on, that's quite clever. Let's make our red planes Blues.

We're by no means the only company to gently mock our own brand, and the strategy is often very effective. You do need years of successful delivery before it's worth doing, but the idea is a sound one. It shows that you're comfortable with your public. Some commentators complain that Virgin's chumminess is a bit hard to take, given our global reach. On the contrary, I think the public are pretty smart. They know how big we are. They see our planes in the sky. I think the public are irritated far more by pompousness and cant, and so it's much better to make gentle jokes at your own expense than to make out you're more important than you are.

Back in March 2000, Brett was still talking about starting slowly, with only a dozen people, including director of communications and third founder, David Huttner. But the momentum took hold. By August we had 350 staff and we were ready to take to the skies. We wanted to be ready in time for the Sydney Olympics, due to start on 15 September, but we were burning through our cash. Manny Gill, the finance director, went to see Brett to tell him there was nothing left in the coffers and they couldn't afford to pay the wages. Brett was shrewd: he had set up a separate account and tucked away a spare million for exactly this eventuality, and Manny was able to run the payroll.

We needed new planes and Brett had to deal with this too. Our first planes were leased but later we also decided to buy ten New Generation Boeing 737s, delivered brand spanking new from Seattle. A few days later I received my daily phone call from Brett. The cheeriness was gone from his voice, and I sensed his nervousness.

'Richard, I've a cheque in front of me for $A600 million. Are you sure you want me to sign it? The biggest cheque I've signed before was for my mortgage.'

'Brett?'

'Yes, Richard?'

'Just sign the bloody cheque.'

Our initial sales projection had us reaching profit within three years, but we overtook those goals sooner than we expected. Brett wanted to enter the New Zealand market after Air New Zealand's subsidiary, Freedom Air, began a service from Tasmania to Brisbane. This allowed us to launch Pacific Blue, operating out of New Zealand and flying from Christchurch to Brisbane.

The idea was simple: to fly directly, point to point, rather than herd passengers unnecessarily through a larger hub airport. This 'hub-busting' approach made life far easier for the customer, and since our new planes were extremely reliable, there were huge efficiency gains. Within four years, Virgin Blue was flying forty-one Boeing 737s, the packhorses of the worldwide expansion of budget flying, and we had 3,000 people on our payroll and more than 30 per cent of the market. It was a considerable achievement.

The day of the launch was 31 August 2000 at 10 a.m. The flight was packed and Brett, Rob and the team took a leaf out of my book and began a tradition of dressing up. They arrived as the Blues Brothers. I wish I could have seen the expression on the face of Geoff Dixon, Qantas's CEO, when he heard that. Here were his only serious rivals, taking the piss out of themselves, and everybody – crew, press and passengers – was loving them for it.

A year in, and we were going head-to-head with Qantas and Ansett. We knew we were hurting them. They were running into a lot of difficulties. Virgin Blue, the new kid on the block, was roughing up the market.

From the start, Virgin Blue was the airline of the Internet. If you wanted to fly, the cheapest way was booking over the Net. Qantas and Ansett, with their legacy systems and relationship with travel agents, took around 2–3 per cent of their bookings on the Net. Virgin Blue's Internet bookings were 60 per cent of the total at the launch, and 92 per cent within six months. The Net was easier to use, and because the transaction fees were minimal for us, this gave us an edge on costs.

Then, in June 2001, we received an unsolicited offer for Virgin Blue. Brett was approached by Gary Toomey, Air New Zealand's CEO, and they had dinner at the Chairman's Club Lounge in Melbourne – an opulent place with its gold-plated toilet seats. They chatted away and Brett said that he would definitely listen to any offer, and wanted to keep the channels open if there was any way they might work together. A few weeks later, Brett was invited to catch up with Gary again at the Crown Casino in Melbourne, a popular haunt for big dealmakers. Before their hors d'oeuvres were ordered, Gary offered him $70 million for the airline. Brett, as quick as a flash, asked if this was US dollars. 'Of course,' replied Gary.

That was A$120 million.

When Brett finished supper he phoned me with this info. It meant that at least we had a valuation for the business on the table. As far as the wider Virgin Group's position was concerned, it would have been a good time to realise some of the investment but, in truth, it was far too early to contemplate.

We turned down the offer but it wasn't long before we had another, more significant approach. The chief executive of Singapore Airlines, Dr C K Cheong, called me up. I knew him well. In December 1999, we sold a 49 per cent stake of Virgin Atlantic to Singapore Airlines for £600 million, using the proceeds to invest elsewhere within the Virgin Group.

Singapore Airlines had a 20 per cent stake in Air New Zealand – and Air New Zealand owned Ansett. We knew that Ansett was in deep trouble. Air New Zealand had bought it for too much money, only to discover it couldn't afford the number of planes necessary to replace Ansett's ageing fleet. Given Ansett's troubles, it didn't surprise us that Cheong wanted Virgin Blue out of the way.

What startled us was his offer. 'Look,' he said to me, 'it only cost you A$10 million to launch Virgin Blue last year. Now I'll give you A$250 million for the company. But you have to give me a decision by tomorrow morning. If you don't say yes, we'll put massive investment into Ansett, and put Virgin Blue out of business within six months.'

Cheong was our new partner. And this was a friendly conversation! But Virgin Blue was a fantastic airline. It was really making a difference in Australia. It was a fun airline to have a stake in. It had the best cabin crew, wonderful new planes and everyone thought the world of it. So we had a dilemma. On the one hand we had this amazing offer – it really was a fantastic return on the money we had invested. On the other hand the business had massive potential and the public and the staff relied on us.

Brett understood the position. He knew that I might sell at this stage. We met up in Brisbane and had a long chat. We walked around the hotel room all evening, discussing the different options. There was something fishy in all this. Why were Singapore so desperate to get rid of us? Why were they willing to hurl their money down the bottomless pit that was Ansett, just in order to destroy Virgin Blue? They were our partners. They had taken a stake in Virgin Atlantic. I couldn't figure out their intentions.