Mr Branson is understood to have offered to pay pounds 5m- pounds 10m for a 51 per cent stake in the airline, which would take on the existing operations of Dan-Air and be run under the Virgin name.
In return, shareholders in Davies & Newman, the parent company of Dan- Air, would be asked to inject a further pounds 30m- pounds 40m by way of a share issue to meet the airline's cash needs over the next 12 months.
The bones of the deal were discussed over the weekend between Mr Branson and David James, chairman of Davies & Newman. Mr Branson is thought to have ruled out investing money and the Virgin name in a rescue of Dan-Air unless he has control over the resulting airline.
Shares in Davies & Newman were suspended yesterday pending an announcement. It is expected to take until the end of this week before Virgin and Dan-Air know whether they are in a position to proceed.
Dan-Air is continuing to operate and is unaffected by the suspension of its parent company's shares. But a deal with Virgin may prove the key to the long- term survival of the Gatwick-based Dan- Air, which employs 2,800 and flies scheduled and chartered services to 30 UK and European destinations with a fleet of 38 aircraft.
A number of Davies & Newman's institutional shareholders have indicated they will back the new fund-raising only provided the talks with Mr Branson succeed. 'It is likely that some new element will have to be brought in for us to participate in any fresh funding exercise,' one of the company's biggest shareholders said last night.
However, others said it was too early to say whether they would continue backing Dan-Air if the negotiations with Mr Branson fell through.
Lawyers and accountants for Virgin are examining Dan-Air's finances in detail and Mr Branson is holding talks with BAA, the owner of Heathrow and Gatwick, and lessors of Dan-Air's fleet.
If agreement can be reached, Virgin Atlantic will take charge of Dan-Air's services and the marketing of the new airline, which might be called Virgin European.
Mr Branson's investment would be funded from his personal fortune, swollen by pounds 300m in March through the sale of his Virgin music business to Thorn EMI, and would not involve any merger of Dan-Air and Virgin Atlantic. The two airlines would pool some of their maintenance and handling activities and enter 'interline' arrangements. These would allow Virgin Atlantic to feed its long-haul passengers on to the former Dan-Air's domestic and European networks and vice versa.
However, it is likely to take at least three to six months before the new airline is operational. There also remains a great deal of uncertainty over whether a deal can be struck. One informed source said: 'Four days ago the odds on Dan- Air surviving were very bleak. Today they are better, but it still remains make- or-break time.'
Dan-Air's cash position is strong, and despite the depressed level of air travel its scheduled operations are thought to have enjoyed a reasonable summer, with the addition of services to Oslo, Stockholm, Athens and Rome.
But it desperately needs a further cash injection to see it through the winter months when air travel drops off sharply. Analysts expect Davies & Newman to make a pounds 7m loss this year compared with the pounds 20m profit it forecast at the time of its pounds 50m refinancing last October.
Yesterday, British Midland, the UK's second-biggest scheduled airline, applied for a licence to operate from Heathrow to Inverness, citing the 'uncertainty surrounding the future operations of Dan-Air'.Reuse content