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Does Virgin America’s Route Strategy Make Sense?

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Does Virgin America’s Route Strategy Make Sense?

Does Virgin America’s Route Strategy Make Sense?
September 22
14:21 2015

MIAMI— Virgin America has been touting a great deal of success lately, and that has translated to the addition of several new routes.  However, its highly anticipated focus city at Dallas Love Field appears to be underperforming, and I suspect it has a lot to do with the way Virgin has approached its route planning opportunities.

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The most current information on load factors available from the DOT indicates that the Virgin operation at Love Field sat at a paltry 61.59% in January, compared with 76.74% system wide.  Unfortunately the statistics don’t break down load factors by individual routes, but judging by Virgin’s behavior and historical performance, I would venture to guess that its original destination routes to LAX and SFO are the highest performing, followed by LGA somewhere in the middle and DCA bringing up the rear.

Direct Competition

All four of Virgin’s current routes at Love Field must compete directly for precisely the same airport pairs against hometown favorite Southwest Airlines, whose headquarters sits adjacent to the airport.  This is perhaps the most obvious cause for Virgin’s low load factors, and it cannot be overstated.  Dallas passengers are very loyal to Southwest, and many have never traveled with Virgin America, particularly to the east coast.  And perhaps the fact that Southwest does not allow booking through OTAs has trained some of their customers not to bother looking for airfares elsewhere, which I’m sure, would delight Southwest to no end as validation of that long-held strategy.

On the other hand, Virgin America has a more comprehensive product.  I say that very deliberately, rather than calling it better or worse, because the two products are fundamentally different.  While both brands emphasize that they like to have fun, Southwest has been able to sell that, whereas Virgin has not.  On the other hand, a premium passenger has no incentive to fly Southwest based upon product (though schedule is also worth consideration, and this is where Southwest takes the cake).  Both airlines offer wi-fi, inflight entertainment, leather seats, etc.  For Virgin, despite great valiant efforts, there is very little hope of monetizing purple mood lighting.

In terms of soft product, Southwest wins without contest.  Hard product is a different story, and Virgin has the edge.  Southwest really should take note.  Now that Southwest offers wireless IFE, it would be ideal to see their aircraft equipped with power outlets, which Virgin has available to every passenger.  Virgin also offers a bit more seat pitch at 32″ than Southwest’s 31″ on its 737-300/500/700 aircraft (the -800 has 32″ of pitch, but this is a small subtype in the fleet).  I am not certain, having experienced both seats that this translates to extra legroom.  In fact, I have yet to see a seat that did more with 31″ of pitch than Southwest’s Evolve seat, inadequate padding aside; Virgin’s seat design seems to waste that extra inch.

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Fare War

Because Virgin seems to have been somewhat unsuccessful in attracting customers based on product, which has been its preferred strategy from its inception (back when its cabin was truly revolutionary, rather than tired and dated as it appears today).  Southwest’s customer base is essentially content with a minimum of creature comforts as long as the customer service is good.  So for Virgin to flood the market with a product seen as unnecessary is a difficult sell.  In order to combat this, Virgin has been slashing fares to incredible levels to attract people to fly with them.  $54 each way between Dallas and Washington comes to mind as the best example (and which is probably the least trafficked route).

But Virgin cannot sustain such cost cuts indefinitely, whereas Southwest, which has been matching those fares, has the necessary mass to outlast Virgin easily.  Perhaps it is rather ironic that Southwest has become the large fortress carrier that it once sought to disrupt.  But considering Southwest carrier more passengers last year than rival American Airlines, it is hard to call Southwest a disruptor as much as a market leader.

An Unexpected Strategy

In order to overcome competition from Southwest, Virgin has opted to take one of the most surprising strategies to date.  Rather than seeking out a market where they will not compete with Southwest, Virgin has decided to compete on one of Southwest’s bread-and-butter routes: Dallas-Austin.  Southwest has served this route several times a day for decades now.  Virgin has offered only one route to Austin thus far, which has been from its largest hub in San Francisco.  But the Dallas-Austin service is primarily designed to allow connecting traffic to fill more of Virgin’s empty seats from Dallas.  While before Austin passengers could only travel to San Francisco, it will now be possible to connect onward to the three other cities served from Dallas.  These markets could not be supported from Austin alone, but the combination of Dallas and Austin passengers could be enough to fill Virgin’s aircraft more effectively.

It is worth noting, however, that Southwest offers a number of direct flights out of Austin, including to all four metro areas Virgin serves from Dallas—New York (Newark), Washington (BWI and DCA), San Francisco (OAK and SJC), and Los Angeles (LAX and SNA).  And service to all four of the airports served by Virgin is available via the same one-stop connection in Dallas.  Virgin is unlikely to capture a large share of the very Southwest-friendly Austin market, but perhaps Austin’s proud heritage of self-proclaimed weirdness will offer Virgin some intangible benefit.

SW-DCA

Split Operations

Back in October, I had a conversation with CEO David Cush where I asked him about the Dallas strategy and plans for expansion, to which he responded by emphasizing his unwillingness to split operations in Dallas.  Interestingly though, Virgin has split its operations in two of the four markets they serve from Love Field.  In New York, Virgin serves all three major airports (JFK, LGA, and EWR); and they also serve both airports in Washington (DCA and IAD).  In both cases, Virgin serves the domestic-only airport (LGA and DCA, respectively), both of which also have severe distance restrictions on operations.

Because Virgin is still a relatively small carrier, it doesn’t make sense for them to serve all three airports in New York or both in DC, especially when none of the five airports in question are used for passengers making connections on Virgin America metal.  The only available connections would be on Virgin’s large assortment of partner airlines, but domestic airports are distinctly unhelpful in that department.

New York

For a carrier as small as Virgin America to serve all three of the major New York airports is positively absurd.  On one hand, I can understand that there are problems with getting slots at those airports.  But connections between them are best avoided, and most travelers wouldn’t dare attempt such a connection.  In light of New York’s potential significance for transatlantic connections with partners Virgin Atlantic, El AL, Emirates, Etihad, Icelandair, LAN, SAS, South African Airways and Turkish Airlines, LGA serves very little purpose for Virgin America.  In fact, thanks to LGA’s very inflexible distance limitation, Dallas is the only market currently served from LGA, and Southwest competes in the same market with even greater capacity.  JFK offers 11 daily flights to LAX (5), SFO (4), LAS (1), and FLL (1); Newark offers six daily flights to LAX and SFO (three each).

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Because NYC-Dallas is currently a point-to-point only market, it would make more sense to shift that route to either JFK or EWR.  Although still not entirely ideal, two airports would not be out of the question in New York due to the large market size.  Due to the small size of the Newark operation, that seems the most logical choice for the Dallas service since additional slots would more likely be available.  And it bears mentioning that both JFK and EWR are connected by rail links to the city, which is not the case at LGA.  JFK certainly offers the most connection opportunities on partner carriers, but many of those connections would be available from EWR as well.  And neither airport would greatly offend New York-bound passengers from Dallas (or soon Austin as well).

Washington

While split operations in New York may be viable to a lesser extent than seen today, the same cannot be said for Washington.  Washington Dulles International has long been infamous for its inconvenient location and lack of connection to Washington’s excellent metro rail system.  For those actually bound for the District, IAD is not the ideal situation, and many would sooner fly into Baltimore than into Dulles.  But the best option by far is Ronald Reagan Washington National Airport, which is located just a couple of metro stops from the District proper.

Metropolitan Washington Airports Authority taxi cabs, motor coaches and SuperShuttle transportation services 2007, Washington Dulles Airport, September 2007

Metropolitan Washington Airports Authority taxi cabs, motor coaches and SuperShuttle transportation services 2007, Washington Dulles Airport, September 2007

Virgin currently serves DCA with only four daily flights: three to DAL and one to SFO (which required special approval since it is outside of DCA’s service radius).  They serve IAD with six flights: three each to LAX and SFO.  Both operations are very small, so once again this presents a challenge.  Ideally all operations should be moved to DCA.  Unlike in New York, very few international connections are convenient in IAD, and so the strategy in Washington should not be based on partner connections, making the domestic-only DCA the ideal choice.

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All of that said there are still issues with DCA.  The 1,250 mile perimeter restriction remains in force, and only 40 daily slots (allowing 20 round trips) are available for flights exceeding this distance.  Virgin has two of these slots, allowing its one daily flight to SFO, but its remaining SFO and LAX flights would require 12 more of these coveted slots in order to operate from DCA.  It would be virtually impossible for Virgin to obtain this many slots, as the most currently held by any one carrier is eight (by both Alaska Airlines and US Airways, though the AA-US merger gives the new AA a collective 12).  Their solution will ultimately require an act of Congress, but an act that already has support.  Attempts have already been made to lift the perimeter restriction, and one such attempt will likely be successful in the next couple of years.  If this is unsuccessful, however, Virgin should consider moving its IAD operations to BWI, which is better connected to DC in addition to offering the Baltimore market itself.

 

 

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