Richard Branson's Flight Plan

By Jyoti Thottam/Los Angeles

The West Hollywood sun is beating down on the patio, a cold wind is blowing through, and Richard Branson is hosting a long lunch poolside at the Sunset Marquis hotel. "It's an old rock-'n'-roll hotel, which has--it's gone out of fashion a little bit, I think," he says. The Rolling Stones and U2 are regulars; Courtney Love wrote a love letter to Kurt Cobain in one of the suites. It's exactly the setting you would expect from the self-styled "rebel billionaire," the man who signed the Sex Pistols and the Stones to Virgin Records and then tried to bring that same swagger and cheek to the airline business at Virgin Atlantic. I ask him about his mother, a stewardess in the glamour days of the 1950s, and Branson launches into a well-worn tale about her blithely crossing the Atlantic on an airline whose planes didn't always cover the distance.

Then he stops himself, having noticed the looks from the guys gathered around the table. They aren't rock stars; they're airline executives who work in outposts of the Virgin empire--San Francisco, Geneva and Brisbane--and they've heard this story before. Rather than bore them, Branson spends the next couple of hours dishing with his crew. Whose airport lounge can passengers use in San Francisco? (Alaska Airlines.) Is anyone making money flying direct to India? (American is, Chicago--New Delhi.) Which U.S. carrier will fall next? (ATA shuts days later.) We all gossip a bit about a Los Angeles politician. Everybody laughs, and Branson digs into his Greek salad and Diet Coke.

No champagne? No starlets? Don't worry; he'll get to them later. Right now, Branson is just enjoying his role as pilot of what he calls the world's first truly global airline, one that serves as a signpost to where the battered U.S. airline industry must head: scaled back, smarter, more global and perhaps even profitable. With just 122 planes, 13,600 employees and about $5 billion in revenue last year, all the Virgin airlines put together--Branson's Virgin Group has stakes in Virgin Atlantic, Virgin America, V Australia and Virgin Blue in Australia and Virgin Nigeria--are a speck in the eye of the largest U.S. carrier, American, whose 655 planes generated $23 billion in sales.

Yet Branson and his team actually seem to have hope for air travel in the U.S., where poor service and perpetual bankruptcies have turned the industry into a sick national joke. Customer complaints soared 60% last year, a number that will surely get a boost from the 300,000 passengers who endured the abrupt cancellation in early April of nearly 3,300 American Airlines flights for inspections; there may be more at other airlines this summer. Crushed by high fuel prices, four airlines have declared bankruptcy since March 30.

Having brutally slashed costs, staff and service over the past decade, the big airlines still lose money. High fuel prices are a culprit, triggering American's $328 million first-quarter loss, but so is excess capacity, which keeps airlines from raising prices enough to earn a profit. The skimping has turned flying into an ordeal for most passengers. And new "open skies" agreements that have deregulated international travel give better-capitalized foreign airlines more access to travelers to and from the U.S. This accretion of failure has caused some in the industry to lose faith. "There really is no such thing as a healthy airline industry," a former top airline executive told me.

Branson does not accept that idea. Virgin, he says, can succeed where discount and traditional carriers have failed, by offering something different: a hybrid that delivers good service at a reasonable price and eliminates the hub-and-spoke approach that creates mayhem whenever the weather sours. He has convinced his investors, who have so far put $312 million in capital into Virgin America, that this model can work in the U.S. "We're going to shake up the market," he says. Branson expects Virgin America to be profitable within two years. He has done this before: both his British and Australian airlines opened to wide skepticism, and both are profitable billion-dollar businesses. He is now laying out a flight plan for the next great American airline.

Can Cheaper Be Better?

Experiencing the future as Branson imagines it will cost you less than $300, the price of a bare-bones economy ticket between Los Angeles and New York City on one of Virgin America's 149-seat A320s. The planes are new, and the leather seats are comfortable enough for sleeping, even in coach. There are power outlets at every seat. The most profound change, though, doesn't look like much of an improvement at first. Like many U.S. carriers, Virgin America charges for food in economy class. But flight attendants don't dole it out from a cart like gruel in the orphanage; a touchscreen at each seat lets passengers pick what they want and pay by credit card. A few minutes after I swiped my card, an attendant brought my fruit-and-cheese box and a glass of cabernet to my seat. The food was fine, but what I remember more was the simple pleasure of getting what I wanted when I wanted it, freed from the Sisyphean tyranny of the cart.

Why, after all, can't cheaper also be better? The software behind the touchscreens (which also serve as individual video monitors) knows when the turkey-bacon wraps are gone, so they disappear from the screen and you're never disappointed. Meanwhile, the first-class cabin, $1,600 on the New York--L.A. route, has more luxurious, traditional service.

Virgin America's minimalist approach extends much farther than the cabin door, to what CEO David Cush calls its "operating and complexity costs." The airline is flying newer, more fuel-efficient planes and only Airbus models, to simplify maintenance, which it outsources. It flies only point to point, on high-traffic routes that it expects will be profitable. This streamlining allows Virgin America to introduce itself to American flyers with ultra-low fares, which its competitors are scrambling to match after losing a two-year regulatory battle to keep Virgin America out of the U.S. The airline will raise prices eventually, says Rick Seaney, CEO of travel website FareCompare.com just as JetBlue and Southwest did. But Virgin, he predicts, "will try to be different" and hope customers value the services enough to pay for it.

The Virgin Confederacy

Branson is in Los Angeles to celebrate the launch of V Australia, which will begin flying from Sydney to Los Angeles on Dec. 15. With that last piece of the puzzle in place, he proclaims, "I can finally fly all the way around the world on a Virgin plane!" Over lunch, he and the Australians hatch plans to promote it with a classic Virgin publicity stunt, inevitably involving an appearance by Sir Richard.

They're proud because even though this is a symbolic achievement, it's something no other airline in the world had done. The biggest carriers--American, Lufthansa, British Airways and Singapore Airlines--have all poured resources into expanding direct flights to Asia, but they are held back by their origins as so-called flag carriers, dedicated to travel to and from their home countries. Airline alliances like SkyTeam, Oneworld and Star Alliance link them, but without fully integrated marketing and sales it's difficult to build a cohesive global network, says Henry Joyner, senior vice president of planning for American.

So airlines are trying to patch together closer alliances through investment or gain strength through mergers. Lufthansa recently bought a 19% stake in JetBlue, hoping to take advantage of JetBlue's strong presence in New York City to expand its reach with U.S. passengers. On April 14, Delta and Northwest agreed to a $3 billion merger, and a Continental-United union could be next. "Foreign carriers are merging to grow larger and financially stronger, and U.S. carriers have to match that to remain competitive," says Giovanni Bisignani, head of the International Air Transport Association.

Virgin's airlines operate more like a loose regional federation, connected by the Virgin brand (an extension of Branson's lighthearted persona in a red-and-purple color scheme) but otherwise owned and operated independently. Each has its own business model--different services for different customers in a different set of cities--but they can work together as needed. Virgin Atlantic, V Australia and Virgin America, for example, plan to share a first-class lounge at LAX and thus reduce overhead. Virgin America, V Australia and Virgin Blue can decide on a whim to allow some of their flight attendants to trade cities for a year or compare notes--as their CEOs did during lunch with Branson in Los Angeles--on in-flight-ordering software or customer feedback on the latest Embraer jets. Coordinated online booking among the airlines is the next logical step. The lesson? When your brand transcends borders, building a global network can be as easy as talking across the patio table.

The Art of Calculated Risk

Branson likes to cultivate an image of himself as a risk taker. He was right in character at the press conference announcing V Australia, staged inside one of the departure terminals at LAX, to the slight confusion of people walking toward security. As Brett Godfrey, Virgin Blue's CEO, unveils the airline's introductory fare--$1,000 round trip between Sydney and Los Angeles--Branson, in jeans and a rumpled polo shirt, interrupts. "That's not good enough," he declares. "What kind of plane are we flying? 777s? Then let's make it $777 for the first thousand tickets!" People cheer, as if Branson has just spontaneously handed out $223 in dollar bills, but his lines are part of a well-choreographed bit of corporate theater--never mind that the first thousand tickets had just been sold.

The precisely calculated risk he is taking on those fares, 15% less than competitors, is the only kind Branson, 57, has ever really taken. His autobiography reads like an adventurer's litany of near misses and narrow escapes from hot-air balloon crashes, storms at sea and unruly lovers. But Branson the accountant is unmistakable. He is methodical about risk and rigorously applies that principle to the diciest of industries, airlines. That's why, for example, Virgin America does not plan to have more than 100 planes--limiting itself in the first five years to the 30 largest U.S. cities, those that attract both business and leisure travelers, particularly the young creative types who identify with the Virgin brand. Don't expect Virgin on the Pittsburgh-Indianapolis run. "They will be very sad," Branson says of the passed-by places. "That will be part of the discipline of our company. Our model will not work for every city."

That same discipline has kept him from investing in an all-business-class airline (not enough weekend traffic) or one for the Indian domestic market (too much competition, too many restrictive ownership rules). And it allows him to do things that, on the surface, appear extraordinarily risky. His pledge to devote all the profits from his transportation businesses to fighting global warming, for example, is actually just a decision to channel some of Virgin Group's money, up to $3 billion over a decade, into a wide range of environmental companies, some of them as prosaic as a start-up that aims to reduce fuel costs through safer driving.

He starts small and usually shares the risk. When he wins, he wins big. Branson's initial $10 million investment in Virgin Blue, for example, earned him a payoff of an estimated $500 million when the company went public, although the stock has since declined. When he fails, he always has an exit strategy. "If it doesn't work, we'll bow out gracefully," he says of Virgin America, where his total investment is $72 million. He put $25 million into Virgin Nigeria, but problems with the Nigerian government contributed to $82 million in losses last year, considerably reducing the profits of Virgin Atlantic, which owns a 49% share. Branson says he may reduce his stake in that business, but he won't cut services at Virgin Atlantic to compensate, and the rest of the airlines are insulated from the loss. When you're investing in airlines, it helps to have a parachute.

The "portfolio" approach to airlines is not unique. "I've always thought of the network as being a lot like an investment portfolio," says American's Joyner. "You have the opportunity to move your assets around--in this case it's airplanes--and allocate them in different ways." American, for example, flies 37% of its seat-miles outside the U.S., up from 27% five years ago. But while Branson and his private investment partners can wait for long-term returns, publicly held U.S. airlines are under constant short-term pressure to deliver results.

The Ultimate Hedge

No matter how innovative Virgin's Airlines are, no matter how loudly Branson trumpets biofuel, every plane in the sky runs on the same stuff. The price of jet fuel has risen 69% in the past year, and Virgin's executives, like their rivals, lie under its sword. "Other than the recession and $110-a-barrel oil, I see nothing but opportunity," CEO Cush deadpans. He can't cost-cut his way out; the limits of that strategy are obvious. The big carriers have taken $15 billion in costs out since 2001 but are paying $17 billion more for fuel.

In spite of it all--long lines, delays and indignities--Americans still travel. Even with a recession, demand in the U.S. is expected to grow 5% a year. Worldwide tourist visits are expected to double, to 1.6 billion, by 2020. It's one of the great missed business opportunities in recent memory: there are more flights connecting the U.S. to the rest of the world than ever, but U.S. airlines are flying fewer of them. "America led the world in aviation, and they should still be No. 1," says Steve Ridgway, CEO of Virgin Atlantic. "America built the planes that made this possible."

Branson thinks he understands those intrepid travelers a little better than his competitors do. The only way to survive crushing fuel costs in a global slowdown, he says, is to be an airline that people seek out and will pay for. "You can't just make it a standard product," he says. He wants to give them, and his employees, something different, something memorable. So the Australian staff who've flown 19 hours for a press conference get their treat at sundown: Branson in full celebrity mode on the roof of the Hollywood Roosevelt hotel. Reclining like a pasha on an upholstered banquette, he downs champagne and chats up Daryl Hannah and an 18-year-old aspiring actress-environmentalist named Zelda Williams. He seems to enjoy himself but leaves the party early. He's got a plane to catch.

A New Model Airplane?

Branson believes Virgin America can make flying fun again and still make money. Here's what it does differently: [This article contains a table. Please see hardcopy of magazine.] BIG U.S. AIRLINES VIRGIN AMERICA In-flight service Delete some services. Charge as much as you can for the rest Charge for the things that enhance the trip, like good food Routes Lose money on hub-to-hub flights. Earn it on the feeder business Fly point to point to cities with high business and leisure traffic International links Try to create seamless global travel through alliances or investments One brand, many airlines, each tailored to its local market

With reporting by Coco Masters, Mark Thompson/Washington