The challenge of internal forces at Virgin Atlantic

When Virgin Atlantic started flying between the UK and the US on June 22, 1984, it ruffled plenty of feathers. It came offering not only better, friendlier service and lower costs for passengers, but also a commitment to put the customer first.

Reflecting the values of its founder, Richard Branson, Virgin Atlantic was a pioneer, bringing a stream of innovations that competitors sought to follow. These included individual seat-back televisions for all Economy passengers, a team of on-board beauty therapists for Upper Class and a new cabin called Premium Economy for cost-conscious business travellers. Branson himself was sometime seen massaging the backs of Upper Class passengers or pouring them drinks.

In 1999, Branson sold a 49% stake in the company to Singapore Airlines, valuing Virgin Atlantic at £1.225 billion.8

On Virgin Atlantic’s 30th anniversary in 2014, Branson told The Telegraph he had always wanted to do things differently in the airline industry.

I made sure that 95 per cent of our cabin crew hadn’t flown with other airlines and would have a fresh approach. We took our skills from the entertainment industry and translated them to work in airlines.?

Virgin Atlantic swiftly built a reputation as a different kind of airline with an insatiable appetite for fun, glamour, innovation and customer service. Without the network or golden handcuff loyalty programmes of established airlines, Virgin Atlantic had to make its mark through product differentiation.

When Joe Ferry joined the airline in 1996 as a designer (becoming head of design in 2002), he recalled a vibrant start-up culture. Richard Branson and many of the original directors were still on the board. It was a place that cultivated a healthy disrespect for the status quo, a ‘screw it, let’s do it’ mentality. ‘I’d come up with ideas and Steve Ridgway, the CEO, would say, ‘yes, let’s do it.’ It was like the parting of the waves for many innovations we had.’10

Ferry’s final year project as a student at the Royal College of Art was to design an airline seat that could transform into a flat bed. It was an industry first. Every seat company said it was impossible, but Branson took Ferry’s ideas to a friend who built Formula 1 cars and they made it happen within the constraints of an aircraft cabin.

However, during the four-year development phase, British Airways wheeled out something similar, the prototype for a business class bed. Virgin Atlantic’s design team was devastated. ‘Brand Virgin was all about being innovative, we’d invested millions and spent so much time and effort and then the person we were trying to beat had beaten us,’ said Ferry.

But instead of resting on its laurels and making good with the existing investment, Virgin Atlantic’s design team went back to the drawing board to develop an even better seat. It was a Moment of Belief. ‘The bravery of Steve and Richard was remarkable - they said, ‘No, it’s not good enough,’ and wouldn’t take no for an answer,’ said Ferry.

And this time around, Ferry’s team invented a revolutionary concept. The configuration of the seat had a different surface to sit and sleep on. It was the first fully flat bed in business class that gave all passengers aisle access and didn’t face backwards. This was unheard of. The Holy Grail. Virgin Atlantic filed the patent in August 2001.

The following month, 9/11 happened and the airline industry, indeed the world, changed overnight. People stopped flying and many airlines collapsed. At the time, 70-80% of Virgin Atlantic’s flights were transatlantic." The American airlines - United, US Airways, Northwest and Delta - all filed for Chapter 11 bankruptcy protection, and Swissair, Belgium’s Sabena and Australia’s Ansett all failed.12 Airlines suffered combined net losses of more than $35 billion (£18.4 billion) from 2001 to 2004, according to the International Air Transport Association (IATA).13

Amidst this industry turbulence, Virgin Atlantic steadfastly invested in customer innovation. A series of Moments of Belief made it clear to stakeholders that Virgin Atlantic remained customer-led. This bravery was extreme. Virgin Atlantic had gone from flying full planes to having no customers for weeks on end. Nobody was entirely sure that anyone would ever fly again. Ferry recalled:

We made loads of redundancies, and I was asking for $2 million for the new seat. Steve said, 'We’ve got to invest in innovation. Either the world will end, or we’ll have a better product and seize market share.’

At the time, I was expecting to lose my job. Even Singapore Airlines had stopped its design efforts, and no one was doing development.

We were under a lot of pressure, but there was bravery and devotion to the brand. It was that dynamic that made Virgin shine ,..’4

Thankfully, passengers did begin flying again, and Virgin Atlantic took a more systematic approach to development, taking care to retain its entrepreneurial spirit. It was still David to British Airways’ Goliath, railing against the newly built Terminal Five in Heathrow with a revolutionary clubhouse, limousine pick-up and drive-through check-in that could take passengers through security from car to lounge in three minutes. Ferry explained:

We created a service design team, looking at our guest journey through their eyes and all the touch points we could affect like the security check and queues. How could we pick up a guest after a bad experience and turn it into a good experience again?’5

Indeed, in 2003, Virgin Atlantic’s Upper Class suite changed the face of business travel with a reclining leather seat for take-off, a place to eat a proper meal opposite your partner, a fully flat bed, on-board bar and private massage room.

While these innovations delighted customers, they also impacted the return on investment (ROI). If Virgin had been the kind of company to look only at the short term, the on-board bar and flat bed would never have been signed off. ‘Our first fully flat bed meant we were losing two or three seats,’ said Ferry. ‘And we could have fitted three seats in there instead of an onboard bar, that’s hundreds of thousands of pounds per seat per aircraft across the fleet. That’s what a bar costs in terms of lost revenue .. ,’16

By May 2003, Virgin Atlantic was flying more than a million passengers annually from its bases at London’s Gatwick and Heathrow airports to 22 destinations including LA, Barbados, Cape Town and Tokyo, and it was profitable too.17

During this period of Virgin Atlantic’s growth, its management team - CEO, Steve Ridgway, COO, Lyell Strambi and CFO, Julie Southern - created the perfect climate for customer focus, says Ferry:

We had a Coca-Cola budget with champagne aspirations. And sometimes we were quite maverick. Leadership was fired with belief and optimism that we were doing the right thing.’8

Outside the aircraft, Ferry and his team created a 2,000 square metre lounge for passengers. The Clubhouse opened in Heathrow in March 2006 and featured a spa, cocktail bar, Jacuzzis, hair salon, games room and a brasserie - all associated with modern luxury brands like private members club Soho House.

Meanwhile, quirky design innovations delighted Virgin Atlantic’s guests in economy class, including a rubber duck in their bath kits alongside the toothbrush. The amenity kits cost hundreds of thousands of pounds a year, and were created to answer the design question, ‘How could the on-board loos feel more like bathrooms?’ Even today, passengers reminisce about the duck. Similarly, the salt and pepper pots had labels on the bottom saying, ‘pinched from Virgin Atlantic,’ and the Upper Class butter knives were engraved with the words ‘stainless steal’ because of passengers’ propensity to take them home as envelope openers. There were 1930s champagne glasses, which were horrendously impractical to load and store on a flight. But these design choices were all about delighting customers, harking back to old-school glamour, fuelling big picture brand appeal, freed of the common constraints of proving narrow or short-term ROI.

Change was one day inevitable. ‘Organisations have to grow up as they scale up,’ says Ferry. ‘How do you hold onto that spirit that got you there in the first place? It’s a challenge.’19

Pressures from external markets started to change the focus of the team. The price of oil spiralled from around $30 a barrel in 1996 to $140 in 2010. The brand benefits of adding new products to the airline cabin were tougher to justify with higher oil prices. Fuel and weight in the airline industry are proportional. Anything on board that increases weight, like an on-board bar, also increases the fuel bill.

In this tougher business climate, Ferry’s design team had to change its mindset. It was no longer about layering product into the airline cabin; instead, it was about what could be taken away without guests noticing. Innovation became about investigating materials that could strip 30% of the weight from an economy seat and therefore reduce fuel bills. And these design challenges that linked innovation so tightly to an economic spreadsheet were not necessarily the kinds of challenges that motivated the original team.

In December 2012, Delta Airlines bought Singapore Airlines’ 49% stake in Virgin Atlantic for £224 million and in 2013 an executive from American Airlines, Craig Kreeger, became CEO. Jeremy Brown had joined Virgin Atlantic’s design team in 2004 and stayed until 2018. He describes the nature of the shift:

When Singapore had 49%, they were quiet, but Delta was much louder, and outside factors were having more and more effect on the airline’s room for manoeuvre. As margins shrunk, we had to become more streamlined in the ways we worked.20

Alan Penlington was at the airline from 2005 to 2017, in roles including leading on customer experience, innovation and change. He described the benefits of the new approach - there was more structure, with clearer objectives to make a profit, a set strategy and shared plans. It was clear that product-driven innovation would no longer be a sustainable way for Virgin to compete and a shift was made to the softer qualities of the customer experience: people and service.

The experience was mapped out end-to-end and attention paid to having a Virgin way of doing things. This included investing in development for the on-board crew to help them tune in to customers’ different emotional states, having more to say about the provenance of the food and drink provided and using digital technology in smart ways to help give colleagues data to tailor their approach, underpinned by a new Microsoft partnership.21

Luke Miles, who took over as head of design from Joe Ferry, played a leading role in this different kind of innovation, developing ‘tools for conviviality, creating uniforms designed by Vivienne Westwood that celebrated Virgin’s people and changing the design feel to become more muted and elegant, creating a canvas for the crew to shine.’22

Attention was also paid to aspects of what customers value, but in areas where Virgin Atlantic needed to catch up rather than continuing to add to strengths. The Delta deal led to a true joint venture, opening up their domestic flows of passengers from across the States. Before the JV, 90% of Virgin’s transatlantic flyers were just shuttling between London and their US destinations. After the JV some flights had half their passengers coming from locations across the US. Virgin customers went from having a limited choice of purely Virgin Atlantic flights to having flexibility across hundreds of options. New York to London flights available to Virgin Atlantic customers went from three a day to fifteen, a huge difference if your meeting over-ran and you wanted to get back as swiftly as possible.23

The focus had moved from the burningness of beating big brother BA to a more conventional balanced scorecard considering customer satisfaction alongside on-time performance, colleague engagement and profitability. This was a more subtle shift than it first appeared.

As Alan recalled:

Perhaps for the first time there was a genuine belief that Virgin could not only make customers happy but also be commercially successful. To make profit for future investment and to secure the long-term future of Virgin was inspirational to all, and Craig Kreeger had set out a plan to do this.24

Customer innovation was becoming less ‘screw it, let’s do it’ and more data driven. But not everyone was happy with the evolving approach, as Alan described:

HQ bought into it, but cabin crew never felt the same way. They tended to have a lot more long-serving people, many with 25-30 years of service. They wanted the airline to succeed but perhaps in the old way more than the new way.25

It’s important not to characterise this as a loss of all the shared beliefs that had made Virgin Atlantic great. But the spirit was definitely changing, and it mattered that what was done for customers made sense financially as well. In a debate about reducing cabin crew numbers from 12, a view that considered the customer experience was that Virgin needed 10, not the industry norm of 9. Although BCG, brought in to review the business, pushed hard for the lower number, the executive team agreed to a trial to see what effect the changes would really have, and with some more traditional smart innovation in parallel - in Premium Economy an extra glass of bubbly with the meal, which was served on china plates for example - passenger ratings went up not down.26

Nonetheless, there was definitely less of a burning sense of leading the market. Alan talked of going from ‘glitz and glamour for glamour’s sake to grown-up, acting like a 30 year old.’27

Clearly, it’s not black and white. The airline is still a distinctive business and it still innovates in a Virgin kind of a way. But is it exceptional like it was? Perhaps it never could be as a grown-up business in a difficult industry. Although other examples in this book show scale alone is not necessarily an impediment to customer-led success. As Ferry sees it:

The challenge is that good isn’t really good enough for a brand like Virgin; it has to be exceptional. When you’re not constantly innovating, the competition catches up and satisfaction from guests reverts to the norm. If you don’t do crazy, exciting things, you become a conventional airline.28

In March 2019, Virgin Atlantic reported its 2018 results, a Group loss before tax and exceptional items of £26.1 million, with a £49.0 million loss in 2017. It is clearly tough for a challenger brand like Virgin Atlantic to continue pioneering as it matures and deals with industry pressures outside its control.

Looking in from a distance, our judgement is that Virgin Atlantic went from an exceptional, customer-led success to something more mature, a little less pioneering, a little more holistic in its view of what matters to customers and how to provide it.

As the airline grew, it needed different people to run the business well, just as easyjet had beyond its early founder-led growth phase. These people brought different beliefs about what success looked like and how it could be achieved. The oil price made the environment MUCH harder to innovate in, and as the business evolved the leadership team’s character changed too.

Virgin Atlantic’s success was an amazing achievement, not just in the early days, but repeatedly as a stream of incredible Moments of Belief happened again and again. As Ferry sums up:

Our accolade was that we invested in innovation in the darkest of dark times. That was down to the bravery of the senior leadership. We were genuinely living the brand. Lots of companies say they are. But are you when the going gets tough? We did, and I’m very proud of my time with the airline.29

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