While Alaska’s takeover of Virgin America was finalized late last year, they only outlined the future of the brand last week. Alaska wanted to take time to decide whether or not they wanted to keep the Virgin America brand around.
While Virgin America has a loyal following, so does Alaska Airlines. From the beginning I thought they were going to dump the Virgin brand, as I’ve always viewed Alaska’s takeover of Virgin America as being about keeping them out of JetBlue’s hands, and establishing themselves as the truly dominant carrier on the West Coast.
So last week we learned that Alaska plans on retiring the Virgin America brand sometime in 2019. Shortly after this announcement Richard Branson wrote an open letter to Virgin America employees sharing his disappointment in this move, and also expressing how proud he is of what they’ve built. He stated his disappointment even more clearly recently, as quoted in the Puget Sound Business Journal:
“When I sat down with Alaska, I genuinely believed that they would treasure the brand, that they would treasure the people, that they would treasure the product and that they knew what they were buying,” the billionaire said. “They spent $2.6 billion buying it. And that the last thing they would do would be to rip the heart out of it, which seems effectively like what they decided to do.”
“It just seems such a waste,” Branson added.
As much as I respect Richard Branson, I have a hard time taking him at his word here, because I can’t imagine he was confident the brand would stick around. Alaska wanted Virgin America in order to keep them out of JetBlue’s hands, and that’s about it.
But it seems like this might just go beyond disappointment, as Alaska Airlines and Richard Branson are now in a dispute over licensing fees. Richard Branson thinks that Alaska should have to pay him licensing fees through 2040, when the current licensing deal runs out, regardless of whether or not they use the brand. Meanwhile Alaska was just expecting to pay those licensing fees until they retired the brand in 2019. Per the Associated Press:
Alaska’s general counsel said Wednesday that Branson was correct only about the length of the contract.
“What he didn’t mention is there are lots of ways out of the contract,” Kyle Levine said Wednesday. “No, we do not need to keep paying for a brand that we are not using.”
In a written statement, Branson’s U.K.-based Virgin Group said the licensing agreement with Alaska has “clear obligations,” including a royalty payment, and that Alaska has said Virgin America will honor its obligations.
In 2016 Branson was paid $7.7 million in licensing fees from Virgin America, which represents ~0.7% of their total revenue. I’m sure he’d love for that to continue through 2040, though at the same time I have to imagine Alaska’s lawyers considered this carefully before the deal was completed.
It’ll be interesting to see how this plays out…
The contract looks like it's in his favour actually, so I suspect this is a ploy to try and get the name back.
@Travel Dude - under US ownership laws, Virgin Group did not own a majority of the voting shares (every time Virgin Group had to pump more money into VX in the early days, Alaska whined up a storm about violating the foreign ownership rules), and so Branson couldn't block the merger. I honestly don't blame the other stockholders from voting to sell, one good economic downturn and Virgin America was likely toast.
@Alpha I don't know if anyone has mentioned this yet but delta can't just get rid of virgin Atlantic as it has a minority stake at 49% making virgin Atlantic's word final.
Branson! Dude!!! If it mattered so much and it was so treasured then you shouldn't have sold it for profit!!!! Crocodile tears at best. #WTF?
This is a negotiating tactic for him to gain back the name and brand to start another airline. It's all posturing and he has been clear he wants to do it all again.
@Prabuddha
If the issue was only that simple. When one looks "at it from a contract law perspective", one rather much needs to read the contract. (1) AS likely acceded to the rights to the benefits of the licensing agreement when it bought VA. (2) the agreement provides Sir Richard .7% of Gross Sales resulting from activities using the Virgin name.
AS seems to have decided not to exercise the right to use the Virgin...
@Prabuddha
If the issue was only that simple. When one looks "at it from a contract law perspective", one rather much needs to read the contract. (1) AS likely acceded to the rights to the benefits of the licensing agreement when it bought VA. (2) the agreement provides Sir Richard .7% of Gross Sales resulting from activities using the Virgin name.
AS seems to have decided not to exercise the right to use the Virgin name after 2018, which , on its face, means Branson gets .7% of nothing - so AS must pay nothing under the agreement, as notthing is being sold under the Virgin name. Maybe, just maybe, Sir Richard may have a claim that AS must make "best efforts" to maximize VA's Gross Sales, and that AS acts in bad faith if it fails to do so. I do note certain contract language as follows:
11.3 Licensor shall have the right to terminate this Licence immediately in respect of the Airline Rights only, and VEL [or AS as VEL's successor] shall have the right to terminate this Licence immediately in respect of the Affinity Product Rights only (provided that in each case, written notice is given to the User) if: . . . . .
11.3.4 the User [of AS as VEL's successor] passes a resolution for its winding up or a court of competent jurisdiction makes an order for the User to be wound up or dissolved or the User is otherwise dissolved.
It appears that the agreement contemplates the dissolution of Virgin America as permitting the termination of the agreement. Of course, AS terminates the agreement, it no longer has an interest in the exclusive use of the Virgin brand. Branson may well be trying to force AS's hand into terminating the agreement, thus perhaps permitting a rebranded Virgin airline to start up in the US.
Really @AdamH ?
I didn't read the whole thing but it seems that termination of the licensee is basically at will:
" Notwithstanding any other provision of this Licence nothing in this Licence shall prohibit the User at any time during the Term from electing to perform the Licensed Activities or any other activities, including, but not limited to, operating flights, code sharing arrangements with any other airlines or entities, or operating flights between any...
Really @AdamH ?
I didn't read the whole thing but it seems that termination of the licensee is basically at will:
" Notwithstanding any other provision of this Licence nothing in this Licence shall prohibit the User at any time during the Term from electing to perform the Licensed Activities or any other activities, including, but not limited to, operating flights, code sharing arrangements with any other airlines or entities, or operating flights between any points regardless of where such flights originate or terminate, without the payment of royalties, so long as the User does not use the Names or Marks while undertaking such activities. Provided, however, that in the event user ceases to use the Names or Marks in a material manner, which shall include but not be limited to where Licensee derives more than twenty percent of its operating revenues within the territories without using the Names or Marks then Licensor will have the right to terminate the Licence after 45 days prior written notice and failure to cure by User. Nothing in this provision shall in any way give Licensor the right to terminate the Licence on the basis of the User’s non-use of the Names or Marks outside the Territories."
This seems like an easy case. Once Alaska stops using the Virgin America brand, Virgin Group can end the agreement. If Virgin doesn't do that, then Alaska can fly billions of flights branded Alaska and pay Virgin nothing.
Lets look at it from contract law perspective. A contract to be valid has to be 2 sided. One Sided contracts are not legal (slavery comes to mind). So if Branson had decided he wants to start another Virgin airlines in USA and said lets stop the licensing deal in 2019 instead of 2040 Virgin America would have screamed murder. The reverse applies. When I rent an apartment if I want to leave early I...
Lets look at it from contract law perspective. A contract to be valid has to be 2 sided. One Sided contracts are not legal (slavery comes to mind). So if Branson had decided he wants to start another Virgin airlines in USA and said lets stop the licensing deal in 2019 instead of 2040 Virgin America would have screamed murder. The reverse applies. When I rent an apartment if I want to leave early I have to pay the rent till the end of the lease or someone else occupies the apartment. Well at the minimum Alaska will need to pay the fee till another Virgin airline gets launched in the US
At first bluch, I think Sir Richard would have to prove that AS acted in bad faith, rendering the "Gross Sales" upon which the .7% royalty is based zero. Importantly, AS is not a party to the licensing agreement, leaving Sir richard little room to complain about any ordinary actions they might take.
Okay Dick, you and I both know you aren't getting paid for a retired brand until 2040. Stop it.
@alpha just to clarify. Delta owns 49% of Virgin Atlantic thus not a majority. They have expanded their partnership and take a far more hands on role than the previous minority owner Singapore Airlines, but Richard Branson / Virgin group still controls the airline.
or even more nefarious approach - setup a shell corporation with no assets and no employees, transfer the exclusive rights of the Virgin name licensing to that shell, and have it file for Chapter 7 liquidation immediately.
Hey Lucky, I think the acquisition was much more about growing Alaska to compete with the other 4 large domestic carriers than stoping JetBlue from entering the west coast. To grow you need access and routes, and VX was the only decent asset available. Delta's expansion in Seattle was Alaska's wake up call.
JetBlue on the other hand felt the same way, and happened to come in second place in regards to the bidding war.
...Hey Lucky, I think the acquisition was much more about growing Alaska to compete with the other 4 large domestic carriers than stoping JetBlue from entering the west coast. To grow you need access and routes, and VX was the only decent asset available. Delta's expansion in Seattle was Alaska's wake up call.
JetBlue on the other hand felt the same way, and happened to come in second place in regards to the bidding war.
Branson wanting fees until 2040 just sounds crazy. I'm sure the litigating attorney's will make a couple $$$s for sure.
The agreement was publicly disclosed in the past -- read it for yourself (https://www.sec.gov/Archives/edgar/data/1614436/000119312514365735/d761206dex1050.htm). I think Branson has a decent case as the royalty fee is linked to any affiliate (including any parent company) of Virgin America. I would not be surprised if this ends up settled in such a manner than Alaska releases the Virgin rights back to the holding co. to drop the suit and we have a new independent Virgin America in...
The agreement was publicly disclosed in the past -- read it for yourself (https://www.sec.gov/Archives/edgar/data/1614436/000119312514365735/d761206dex1050.htm). I think Branson has a decent case as the royalty fee is linked to any affiliate (including any parent company) of Virgin America. I would not be surprised if this ends up settled in such a manner than Alaska releases the Virgin rights back to the holding co. to drop the suit and we have a new independent Virgin America in a few years time.
I'd expect that in the original contract for licensing fees and the usage of the Virgin brand would have a section dedicated to ending the contract early in multiple situations, including this one.
Did he honestly expect either JetBlue or Alaska to keep the Virgin brand? I understand Delta keeping Virgin Atlantic, as Delta is synonymous with 'terrible airline,' but I don't think it was ever under consideration that Alaska, let alone JetBlue -needed- the Virgin Brand.
And how many of Virgin America's 'innovations' required further licensing? That may be the most logical explanation as to why Alaska kept nothing innovative Virgin America, and may explain why...
Did he honestly expect either JetBlue or Alaska to keep the Virgin brand? I understand Delta keeping Virgin Atlantic, as Delta is synonymous with 'terrible airline,' but I don't think it was ever under consideration that Alaska, let alone JetBlue -needed- the Virgin Brand.
And how many of Virgin America's 'innovations' required further licensing? That may be the most logical explanation as to why Alaska kept nothing innovative Virgin America, and may explain why they're rushing this and why he's asking for more money. Did the Virgin brand also claim ownership of the 'Red' ordering system, the purple moodlighting, even the seat designs and finishes? That may be why the new 'improved' airline is the same dumpy Alaska product liked by nobody.
2.6 Billion well spent.
I got a lot of respect for Richard Branson, but I feel he's beating on a dead horse here.