Branson or bust for an airline that's all at sea: Nick Gilbert on the route Dan-Air took to its present problems, and the question marks over its future

THE PICTURE is of the Dan-Air plane miles short of the runway, its tanks registering virtually empty, and circling in heavy cloud. But pilot David James, the company doctor who chairs the struggling airline, is convinced that Richard Branson will be able to bring him down safely.

And after a week of negotiations over a cash injection from the Virgin Atlantic boss, Mr James said on Friday that the chances of a deal were 'better than evens'. Lawyers and financial advisers for Mr Branson and Dan-Air were locked in talks this weekend. 'We have reached a significant level of agreement on the intended structure,' Mr James said.

He has to be hopeful. Dan-Air can hardly survive on its own. Some 2,500 jobs are at stake, many at Gatwick, the hub of the airline's scheduled and charter operations.

Mr James's own reputation as a company doctor virtually capable of raising Lazarus is also on the line. It is less than 12 months since he tapped City institutions for pounds 50m to rescue Davies & Newman, Dan-Air's quoted holding company.

Even with backing from Mr Branson of pounds 10m for a 20 per cent stake, Dan-Air's future is insecure. And Mr James admits he will need more cash, possibly another pounds 20m, from those same shareholders who last year bought shares at 50p, only to see them crash to 23p when they were suspended last Monday.

Large shareholders such as Schroders, M&G, Mercury Asset Management, Fidelity and Equitable Life, which between them own 52 per cent of the group, may decide that what is good enough for Mr Branson is good enough for them and oblige Mr James once again.

But even some of those institutions will think long and hard. Fidelity, Mercury and Equitable own stakes in either Owners Abroad or Airtours and may not relish investing further in a sector bedevilled by overcapacity.

Some institutions with smaller stakes have already voted with their feet by cutting their shareholdings, and they are unlikely to change their minds. 'Why throw good money after bad?' asked one of last year's disappointed backers.

Mr James insists that even if Mr Branson walks away, 'he is not the only game in town'. But if the fabled Branson purse remains closed, it is hard to imagine who will back the group. Without Mr Branson, the institutions will take a closer look at Mr James's last cash-raising prospectus, which suggested that losses of pounds 35m could be transformed into a profit of pounds 20m and that revenues would soar by 22 per cent this year.

Now Dan-Air is believed to be heading for a full-year loss of pounds 7m, and most of the pounds 50m raised from the City has gone. Its present minimal bank debt will soar in the passenger-starved winter months.

Under the current rescue proposals, Mr Branson would put his own money - not Virgin Atlantic's - into Davies & Newman and rename the airline. This would eradicate the 'Dan Dare' nickname awarded for its past uneven performance by British charter passengers bound for the sun or the ski slopes.

Virgin would apply its marketing and administrative skills and gain the advantage of what the industry calls 'interlining' - the chance to feed Dan-Air's European passengers on to Virgin's international routes, and vice versa. The new-look Dan-Air would become a baby sister to the separately run Virgin Atlantic, leaving a question mark over the charter operation.

Even Mr James admits there is not much future in an independent charter business.

Some doubt, though, whether even Mr Branson's plan would work.

'Only a full merger with another airline will do the trick, since Dan-Air has too much overhead which must be cut,' one industry expert said.

British Airways took a look at the group earlier this year but turned away. Sir Michael Bishop of British Midland approached Dan-Air early this summer but was rebuffed. He is thought to have talked about a merger - Dan-Air and British Midland would control 15 per cent of the landing slots at Heathrow, and 20 per cent of those at Gatwick. Mr James reckoned that Sir Michael wanted to pick and choose and was proposing rape rather than marriage.

The prized spoils are hardly Dan-Air's planes. The fleet is ageing and it is a buyer's, not a seller's, market for second-hand aircraft. The jewels are the landing slots and some routes to Paris, Zurich and Berlin.

Dan-Air controls nearly 20 per cent of the slots at Gatwick and six at Heathrow.

Those Heathrow slots have already come under siege. Even before the current talks, Virgin Atlantic applied for a licence to fly from Heathrow to Inverness, to grab some of Dan-Air's existing slots. Some reckon that Mr Branson, whose Virgin business is strictly long-haul, has more interest in using the Heathrow slots to expand his international flights than developing the Inverness route. Either way Sir Michael promptly appealed last Tuesday for the routes for British Midland.

Meanwhile Mr James and his supporters believe he has been unlucky, with his revival plans swept away by the recession. His strategy was intended to move the group into scheduled services and away from a charter operation tacked on to an aircraft engineering business. Dan-Air Engineering was sold in early 1991, and Mr James began to run regular services to European destinations.

But instead of the hoped-for improvement in passengers and yields - revenue per passenger - Dan-Air suffered from a continuing slump, particularly in high-yielding business class traffic.

Mr James's tendency is to blame advisers for producing what now seem to be optimistic business forecasts. But some industry experts reckon the Dan- Air chairman over-reached himself. 'Mr James smelt the paraffin,' one airline boss said. 'Everybody who gets involved in this business gets emotionally involved, even a company doctor.'

Mr James should, he argues, have followed the instincts displayed in earlier corporate rescues - concentrate on the profitable and cut back or sell the non-profitable side. Instead Dan-Air expanded, adding new scheduled services to Oslo, Stockholm, Athens, Rome and Barcelona just as the economy and the airline business were turning down.

Within months, Mr James had to pull Dan-Air off the routes to Barcelona and Stockholm, after rivals had begun services to those cities first.

Mr James admitted: 'We did shoot ourselves in the foot but we won't make that mistake again.'

But even if Virgin plays the role of white knight, Mr James's reputation will have been dented. For Branson belies his laid- back image by driving a hard bargain. If the deal does not go ahead, the outlook is grim for Dan-Air and Mr James will be in danger of being struck off the City's company doctor list. Even pounds 30,000 a month for a four-day week may not be enough compensation.

(Photographs omitted)