Richard Branson's Next Big Adventure

He has no qualms about jumping into the tough airline market in the U.S.

Eight years ago, Sir Richard Branson was offered the chance to invest in a new discount airline in the U.S. The charismatic founder of Britain's Virgin Group Ltd. was sorely tempted. In exchange for use of the Virgin brand, Branson would get a minority stake in the new airline. But the deal never got off the ground. "We were sensitive about giving away the brand without control," Branson recalls. And the startup? It went on to become one of the most successful low-cost airlines in the U.S. "JetBlue (JBLU ) was the one that got away," he laments.

Now Branson, 53, is getting a second chance. He plans to launch his own discount airline, Virgin USA, by the start of 2005. The Virgin publicity machine has been unusually quiet about Branson's latest big bet. But observers say the imminent announcement that Delta Air Lines Inc. (DAL ) President and COO Frederick W. Reid will be named Virgin USA's CEO is testament to the strength of the new company's business plan and the Virgin brand. By the beginning of March, Virgin will name the location of its new U.S. headquarters from a shortlist of three: Boston's Logan International Airport, Washington Dulles International Airport, and San Francisco International Airport. Politicians and airport officials have been bombarding Virgin officials with offers of tax breaks and other financial incentives.

The new airline is just one of many projects on Branson's to-do list. His privately owned Virgin Group, which includes 200 companies in businesses ranging from planes and trains to music and mobile phones, is in the midst of an all-out global expansion. He's contemplating a summer flotation of Virgin's British mobile phone service, launching a Canadian mobile company, expanding his international airline Virgin Atlantic, and attempting to merge his Brussels-based discount airline Virgin Express (VIRGY ) with SN Brussels Airlines. He's also revamping his retail music chain, Virgin MegaStores, with a range of new products such as clothing, mobile phones, and consumer electronics aimed at teens. Oh, and he's interested in running a proposed high-speed rail system in Florida that will link Tampa and Orlando by 2009.

DEEP POCKETS. It's an ambitious, not to mention expensive agenda. But while Virgin Group and its founder have never been busier, they've also never been richer. London's The Sunday Times estimates Branson's personal wealth at more than $2 billion. Credit that to the success of Virgin's newest ventures, which account for much of the group's $450 million cash war chest. Take Virgin Blue Airlines, the Australian discount airline that Branson founded five years ago with $8 million. Following a December, 2003, flotation on the Sydney stock market that valued the company at some $2 billion, Branson's remaining 25.1% stake is worth more than $500 million. Virgin says the group's overall earnings before interest, tax, and depreciation in 2003 were $680 million on turnover of $8.1 billion.

Entering the crowded and brutally competitive U.S. airline market may be Virgin's biggest challenge yet, bulging coffers or no. Discount carriers, including Southwest Airlines (LUV ), JetBlue Airways, and AirTran (AAI ), are bigger and stronger than ever before, with 22% of the overall market. At the same time, the network carriers have stabilized their finances and are fighting aggressively to maintain market share. David G. Neeleman, CEO of JetBlue, warns that it won't be easy for Branson to emulate JetBlue. "This is not Australia with Ansett (a now defunct carrier) going out of business," he says. "This is hand-to-hand combat over here. It's very tough."

Ever the optimist, Branson thinks the time has never been better to start a U.S. airline. With the majors downsizing their fleets and staff, he believes there's ample opportunity to recruit top talent and start with reasonable labor costs. And low interest rates are pushing down the cost of buying or leasing planes.

Virgin's likely strategy will be to fill in the gaps left by Southwest and JetBlue rather than compete head to head. Described by Branson as "low-cost, high-frills," Virgin USA will copy Virgin Atlantic's whizzy technology, superior service, and innovative in-flight entertainment. "The product will be sexy," says Frances Farrow, CEO of Virgin USA Inc., the group's American business-development and management arm. "Not like Southwest but more like a JetBlue Plus."

What everyone really wants to know is who will be Virgin's U.S. partner. Under U.S. law, foreigners may own up to 49% of the equity and 25% of the voting rights in any U.S. carrier. Ever since Virgin made its intentions known late last year, several U.S. airlines, aviation companies, and private-equity firms have expressed interest. Talks between Virgin and US Airway Group (UAIR ) about acquiring some of the ailing carrier's assets have foundered, say those familiar with the deal. So Virgin is expected to start from scratch, backed by deep-pocketed U.S. investors. "We are in the lucky position of having had a great deal of interest from investors," Farrow says.

A HANDFUL OF DUDS. Even if the U.S. airline venture flops, Branson has other ways to make money. He is considering taking his profitable British cell-phone company Virgin Mobile Telecoms Ltd. public. It is Britain's fifth-largest but fastest-growing mobile company, with 3.7 million subscribers. Analysts value the British unit at $2 billion. Not bad considering that Virgin's total investment in the project to date is $75 million. Virgin Mobile USA, launched in 2001 as a venture with Sprint PCS Group (PCS ), is expected to be in the black by yearend. In November, Sprint and Virgin valued the business at $650 million, making Branson's 50% stake worth more than double his initial investment.

The mobile businesses are vintage Virgin. Branson runs the group as a "branded venture-capital firm." He supplies the brand, a small initial investment, and takes majority control while big name partners stump up the cash. "We haven't had any dramatic failures," Branson says. There have, however, been some duds. Virgin Cola, Virgin Vodka, and Virgin Cosmetics have all but disappeared. Branson just sold the loss-making Virgin Cars, a British auto dealership.

Not to worry. Other ventures beckon. A film based on Branson's best-selling autobiography, Losing My Virginity, is set for release in 2005. Not only will Branson get a percentage of the ticket sales but heartthrob Jude Law is being tapped to play the man himself. Maybe you can catch the movie on a Virgin USA flight.

By Kerry Capell in London, with Wendy Zellner in Dallas

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