Why did Richard Branson kill the AF-KLM deal?

On November 22nd the various authorities approved the Delta-Virgin Atlantic-AirFrance-KLM Joint Venture.

In order to get AF-KLM to take part they wanted a slice of Virgin Atlantic – it was a deal killer for them if Virgin Atlantic didn’t widen its ownership so that AF-KLM could gain from both ends of the joint ventures profits.

AF-KLM couldn’t afford to buy the 31% they wanted so they did a deal with Delta for the sale of 6% of their shares for $330m. They would use that money to buy the shareholding in Virgin Atlantic Airways Ltd (NOT Virgin Group, it’s owner).

That would reduce Virgin Group’s shareholding to 20% leaving Branson as board chairman but effectively powerless as to the airlines future. 69 year old Branson hasn’t been running the airline for over a decade, despite being routinely rolled out for publicity purposes.

But, Virgin Atlantic is his baby. He sold Virgin Records for £900m to invest in the airline, he’s done almost anything to keep it going through good times and bad.

Neither of his children are interested – a fact he accepts but 69 might be too old to run the airline day to day with all his other interests, yet it doesn’t mean he had to sell it, or did he?

In 2017 Delta had taken 49% of the airline having bought a slice for £240m from Singapore airlines – they’d paid £600m back in 2002 and never seen a return on their money.

The airline faced nearly disastrous years from 2009-13. Delays in the 787-9 programme forced it to lease A333’s and it was burdened by a fleet of four engined aircraft that cost a fortune to run – just as everyone else was buying twin engines. Branson’s choices weren’t always the best ones.

In 2017 it needed investment, it was in the middle of finally getting its 787-9’s and cash was still tight.

The next two years though were to be transformative. The 787-9’s brought in savings and customers, revenues rose and profits materialised. The Delta partnership was paying dividends for both sides. But the need for investment back in 2017 had forced the agreement to sell to AF-KLM. For one the A350-1000’s were due and needed financing, (deposit payments start about two years prior to delivery), and Branson was aware that the airline needed a future beyond him.

Two years later though and the airline is doing well. It doesn’t need the investment and Branson’s fear about the future of the airline – of which he’s highly protective – made him fear for it. Loosing Virgin America to Alaska as a minority share holder wasn’t something he was pleased about, and didn’t want to see happen again.

On top of that Brexit has had an impact on the future of airline ownership rules in the U.K.

Government has made it clear that once out of the EU they don’t care how much of an airline is owned by foreign players as long as it’s safely operated. That would mean almost certainly, Virgin Atlantic would end up fully in foreign ownership in time.

Once the JV was finalised this November, Branson had to sign the sale deal. And he simply couldn’t. Not only did he not want to, he no longer needed to. Furthermore why, having had the whole thing approved, a two year process never guaranteed, would AF-KLM want to pull out of it? And they could easily use the cash rather than spend it on buying shares in Virgin Atlantic.

So he changed his mind. And despite an ominous silence for 24 hours, AF-KLM let it pass by with an innocuous press release accepting the situation and looking forward to the JV succeeding.

So Sir Richard Branson gets to keep his airline and no doubt Delta’s CEO and AF-KLM’s Ben Smith are both irritated, but respectfully amused by the fact they’ve been outmanoeuvred.

Branson’s move is one the British admire and why he’s still intact as one of the countries most respected businessmen. He’s no angel – nor is Virgin Group, but it’s an underdog victory and Brits love nothing more.