May 3, 2020

Branson can ruin Virgin only once

written by Lisa Eason

What is a reputation worth? These desperate times are providing interesting case studies. I know about reputational damage because the Patisserie Valerie fraud in 2018 did mine much harm.

A prominent example is Sir Richard Branson and his Virgin brand. He has asked for £500m from the government to bail out his troubled airline, Virgin Atlantic. The industry is suffering a crisis brought about by the Covid-19 pandemic. Branson has said that without state intervention his 51%-owned airline will go bust, with up to 8,500 jobs lost. Delta, the US airline that owns 49% of Virgin Atlantic, has its own issues.

The idea of taxpayers rescuing a business owned by a billionaire such as Branson has caused widespread outrage among ordinary people, many of whom are fearful about losing their jobs and savings. Historically, Branson was easily the best-known and most popular entrepreneur in the country. From the beginning, he used public relations brilliantly to create an image of a maverick underdog, starting companies in music, retailing, travel, entertainment and transport — almost always under the Virgin name.

However, since it became widely known that he is a tax exile, his standing has declined. The structure of his empire is opaque. Frequently, Branson finds partners to fund his ventures, and in effect lets the Virgin name for a royalty. Unfortunately for Branson, much of his wealth was built on his reputation as a daredevil and a consumer champion. In banking, in mobile telecoms, in trains, in radio, corporates pay for the brand. If Branson, and by association Virgin, is seriously tainted, why would partners pay fees?

It defies belief that a man meant to be worth £4bn cannot find the cash to save his airline. It may be he is overextended. Branson launched Virgin Voyages, a new cruise line, in March with Bain Capital as a 51% partner. It has committed to four vessels, costing $2.1bn (£1.7bn) in total. His Virgin Australia airline has gone into administration — although he was only a 10% shareholder. Several involvements are in sectors hurt by the virus — hotels, holidays and gyms, among others. He does have a $1.1bn stake in publicly traded Virgin Galactic Holdings.

Branson has spent decades carefully curating a story about his career, but the era of flattering coverage is over. I have rarely seen such widespread anger directed towards a tycoon as at Branson. The government is unlikely to bail out other big airlines — British Airways, easyJet, Ryanair. Even if Virgin Atlantic went bust, the planes, routes, airport slots and other assets would be recycled. Quite possibly an investor would buy it out of administration, saving most of the jobs. I suspect Branson will fail to secure a bailout — but will have impaired his reputation and that of the Virgin brand.

Another company that appears to have decided to destroy its brand is Hiscox. The Lloyd’s underwriter is quoted in London, and specialises in underwriting commercial policies. About 10,000 of its policyholders had cover for business interruption. The wording on their policies seems crystal clear: they can claim if an infectious disease forces them to shut premises. But Hiscox has rejected their claims en masse, perhaps taking a view that some companies will go bust and others might settle at a discount, and that it might win some of the litigation that will ensue.

Hiscox has a “brand book”, where it discusses issues such as morals, culture, soul, honour and values. Slogans include “Do the right thing, however hard” and “True to our word”. Insurers are meant to deal in good faith. By contrast, Hiscox appears to have taken the view that any goodwill it has built up over a century is to be thrown away. With a value of £2bn, Hiscox could probably afford to honour the business interruption claims, taking into account reinsurance. It will be fascinating to see if it backs down in the face of what seems to be a serious class action. Or it may think it cheaper to reject the claims, and pay for advertising and PR to rebuild the Hiscox name.