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Best of Airways — Virgin America Doing Things Differently

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Best of Airways — Virgin America Doing Things Differently

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Best of Airways — Virgin America Doing Things Differently
July 25
09:40 2017

By Michael Manning • Airways Magazine, June 2014


Over the past 18 months or so, 13 million airplane seats a year have been removed from US skies by airlines as they reduce capacity. That move to reverse the tide of red ink caused by the traditional market share at any cost approach to business has resulted in the average domestic load factor reaching 87.1% during the second quarter of 2013. With anemic growth projected for 2014, only the ultra low-cost carriers such as Allegiant, Frontier, and Spirit are poised to expand.

True marketing differentiation among domestic carriers is almost non-existent, if not a source of apathy among consumers whose sole focus is the five letter word: P-R-I-C-E.

Southwest, the largest and most successful domestic airline is distinguished by its contagious corporate culture that encourages all employees to carry out their duties (on the ground and in flight) with humor and panache while serving their customers. After all, this was the first airline where this author experienced a passenger safety briefing sung in the Rap music genre by a flight attendant over the onboard public address system.

When difference mattered

In the so-called ‘legacy carrier’ category, one would have to go back to defunct Eastern Air Line’s highly touted television and print campaign called the ‘Corporate Rate’. Created by marketing executive Jim O’Donnell, passengers in 1990 could purchase a first class seat for the price of an unrestricted coach ticket. In an aggressive bid to lure business flyers back to Eastern, passengers received an extra wide leather seat (aboard select aircraft), extra legroom, full meal service, and an extra-designated flight attendant. While unthinkable in today’s commodity-driven economy, Eastern took the bold step of doubling the size of its first class cabins. The closest competitors to this program, TWA, and American, merely offered extended legroom in coach, only to quickly abandon the idea to maximize yields.

Late in the 1990s, British entrepreneur and founder of Virgin Atlantic Airways Sir Richard Branson felt that there had to be a better way. He also observed the struggle that his arch-rival British Airways endured after it was stymied from increasing a 24.6% investment in US Air. Under a 1938 federal law, a foreign investor in a US airline is restricted to a 25% shareholding and the same percentage of voting rights.

Branson was convinced that the U.S. airline industry had succumbed to a lamentable state of affairs. Passengers complained of surly service in the airports and in-flight. What Branson saw missing was the lack of any distinguishable service characteristics when deciding upon which carrier to fly. To this end, he reasoned that U.S. travelers deserved better for their money.

Regulatory retaliation

Early in 2004, Branson’s Virgin Group announced the launch of Virgin USA (a name changed in 2005). The bold plan was for a low-fare airline but one with a high level of comfort, operating nationally in top markets from the start, which was expected in 2005.

Former Delta Air Lines, Lufthansa, American, and Pan Am executive Frederick W (Fred) Reid was named as CEO. And—unexpectedly, given the lack of presence by Virgin Atlantic, the dominance of United, high costs, and a fog-prone airport—San Francisco selected as the operating base. Investor skepticism caused delays, but $177 million in financing was eventually raised, led by Black Canyon Capital and Cyrus Capital Partners, then the largest amount for an airline venture.

An order was placed for 18 new Airbus A319/A320s, with another 15 to be leased from General Electrical Capital Aviation Services (GECAS); 17 airplanes would be in service within 12 months. Support of city and state representatives from California, San Francisco, and New York was forthcoming.

Virgin America won the World Airline Awards (formerly Skytrax) Best Domestic Airline in North America 2012 and 2013. PHOTO: VX

Virgin America won the World Airline Awards (formerly Skytrax) Best Domestic Airline in North America 2012 and 2013. PHOTO: VX

Virgin America (VX) filed with the Department of Transportation for operating authority in December 2005, anticipating approval within ten months based on the four-month process for JetBlue. According to the filing, ‘Virgin America intends to adopt the kind of employee-centered and guest-friendly business principles that have led to the success of other Virgin-branded companies and other world-class service businesses in the United States.’

The application was met with strenuous opposition, however. In a scenario reminiscent of Southwest’s experience nearly four decades earlier, Continental, American, Delta, and US Airways, plus the Airline Pilots Association (ALPA), alleged that the start-up would not be under U.S. ownership, but operated as a subsidiary of the Virgin Group in the U.K. This argument fell on sympathetic ears at the DOT.

“They are not calling into question Virgin America’s sound business plan, experienced management team or technical compliance capabilities,” Reid was quoted at the time. “Instead of focusing on actual facts that show we are an American owned and controlled company, they have created irrelevant ‘conspiracy theories’ about our application,” Reid says today that the real reason for the opposition was that, for many years, Branson had worked to convince U.K. regulatory agencies to deny to US carriers much-coveted landing rights at London Heathrow.

The DOT denied Virgin America’s initial application in December 2006, citing that ‘less than the required 75% of voting interest in Virgin America is owned or controlled by U.S. citizens, with most of its voting equity held by companies that are majority-owned by non-U.S. citizens.’

Virgin America’s response was to secure political support, from Senators Diane Feinstein and Hilary Clinton, as well as the former governor of California Arnold Schwarzenegger. In what Reid called “textbook viral marketing,” much use was made of the then-new social media. Thousands of potential customers wrote to their representatives in Congress, the DOT, and the White House, through LetVAFly.com. A video of the airline’s hip cabin was posted on YouTube, and a ‘name the airplane’ contest drew suggestions from around the world.

In an effort to assuage concerns of regulators at the DOT, Virgin America restructured its voting shares to be held by a DOT-approved trust. Under this structure, only two Virgin Group directors would serve on the eight-member board. In addition, the airline offered to remove Branson from the board and, amazingly, even drop the Virgin brand entirely. Fortunately, the latter proved to be unnecessary.

DOT approval was finally forthcoming in March 2007, contingent upon changes to its corporate governance to assure that a non-U.S. citizen would not have de facto control, thereby significantly restricting the Virgin Group’s influence. Reid, Branson’s handpicked CEO,  also had to leave. Virgin America fought unsuccessfully to retain Reid, who ultimately was allowed to stay on for nine months. Fred Reid, who estimated that the delays had cost $100 million, was succeeded by former American Airlines executive David Cush on December 10, 2007.

Mood changes

Virgin America began service on August 8, 2007, from San Francisco to New York and Los Angeles. Local 1960s rock star Grace Slick was on hand for the inaugural ceremony with an A320 dubbed Jefferson Airplane. She quipped that the airline had little choice in the matter of San Francisco band names as The Grateful Dead was one of the few alternatives.

Introductory fares between Virgin America’s hometown and New York were set at $278 roundtrip, at least $50 lower than the lowest advance fares available from United and American, the route’s two dominant carriers.

First Class seats offer 55in (1.4m) of pitch and 21in (0.53m) of width. PHOTO: VX

First Class seats offer 55in (1.4m) of pitch and 21in (0.53m) of width. PHOTO: VX

Similarly, Virgin America’s first class service aimed higher, with white leather-covered seats. Taking advantage of the availability of a high-tech Panasonic Avionics in-flight entertainment system, every passenger had a seatback video screen. Called RED (a nod to the color of Virgin’s trademark logo), the IFE offered 18 channels of TV from DISH Network, pay-per-view movies, and a wide variety of electronic games and music. Furthermore, passengers could text messages and send drinks to one another, and order meals through the system (at an extra cost in coach class). And there were electrical outlets in every seat to recharge laptops. Fred Reid described RED as “arguably two or more generations ahead of anything in the U.S. market today.”

Virgin also introduced ‘mood lighting’ in the cabins of its Airbus A320s to improve the perception of the journey through multiple time zones. These settings include ‘dawn’, ‘dusk’, and ‘blue sky’.

Mood Lighting offers various settings, including ‘dawn’, ‘dusk’, and ‘blue sky’. PHOTO: VX

Mood Lighting offers various settings, including ‘dawn’, ‘dusk’, and ‘blue sky’. PHOTO: VX

Personnel was chosen carefully. “We spent more time on that than anything else,” Reid said. “You always hear that people are everything, but often, that’s a platitude that gets ignored. At Virgin, it wasn’t ignored. We wanted people who were energetic and who put their heart into it. When people walk into a meeting room and they are angry or frustrated, or they annoy other people, it’s cancer on the entire organization.”

Pilots did not wear uniforms that looked like they belonged on “admirals in the Russian navy,” Reid noted and were encouraged to mingle with passengers before departure.

Main Cabin offers power-ports, adjustable headrests, and RED IFE. PHOTO: VX

Main Cabin offers power-ports, adjustable headrests, and RED IFE. PHOTO: VX

Fred Reid described the Virgin brand as “synonymous with value, style, a little bit of fun, irreverence and caring deeply” for customers and employees. With aircraft names such as Virgin & Tonic, Mach Daddy, and Contents May Be Under Pressure, Virgin America was clearly no ‘peanuts and soft drink’ only airline.

Growth, and more growth

Since launching in 2007, Virgin America has expanded its domestic network to include Las Vegas, San Diego, Seattle, Portland, Newark Liberty, Washington (Reagan National and Dulles), Boston, Chicago, Philadelphia, Fort Lauderdale, Orlando, Dallas-Fort Worth, Austin, Palm Springs, and Anchorage. International service is offered to Los Cabos, Cancún, and Puerto Vallarta, México.

ABOVE: Virgin America’s current base of operations is San Francisco International Airport (SFO). PHOTO: XV.

ABOVE: Virgin America’s current base of operations is San Francisco International Airport (SFO). PHOTO: VX.

Virgin America’s first cross-border service was from San Francisco and Los Angeles to Toronto in June 2010. Lukewarm demand quickly ended that foray in favor of Dallas/Fort Worth. Texas was added to the map on December 1, 2010.

Branson flew on the inaugural flight, which received the traditional water cannon salute from the airport fire department and arrived at theme music from the television series Dallas, an outdoor press barbecue, and live cattle in a partitioned corral on the ramp. In his remarks, the irrepressible Branson, dressed in Western clothing stated:

“You’ve got a choice. You can either go on that other carrier, and get their kind of service—which is sort of a bit like those animals over there,” he said, gesturing to the cattle nearby. “Or you can come on the Virgin carrier, and you’re going to have a blast,” American responded immediately to Virgin America’s incursion on its home turf by dropping prices 20-30% on the same routes.

The airline states on its website, “Virgin America is a California-based airline on a mission to make flying good again – with brand-new planes, attractive fares, top-notch service and a host of innovative amenities.” PHOTOS: VX

The airline states on its website, “Virgin America is a California-based airline on a mission to make flying good again – with brand-new planes, attractive fares, top-notch service and a host of innovative amenities.” PHOTOS: VX

At San Francisco International Airport, Virgin America relocated in April 2011 to the remodeled Terminal 2, sharing gates with American. A reservation system outage late in October that year, during a migration to Sabre’s global distribution system, received wide coverage. Besides reservations, the GDS handles the airline’s Elevate frequent flyer program, flight operations data, and crew scheduling.

The Virgin America Loft, its first airport lounge, opened in December 2012 at LAX Terminal 3, where drinks, snacks, and WiFi are complimentary. Elevate Gold and Elevate Silver members receive a number of complimentary day passes each year, while those flying Virgin America, or an airline partner, can purchase day access.

The Virgin America experience

Three-class service is offered on all flights. As well as the previously mentioned amenities, RED IFE also features include a position mapping system, shopping with open tab capabilities, and Internet surfing.

Virgin America was the first U.S. airline to offer WiFi service, in 2009, and also introduced ‘network on the fly’, the nation’s first in-flight social network application. Based on surveys conducted in San Francisco, Dallas, and New York markets, the tech-savvy airline partnered with Here On Biz to enable passengers to download the free app (before their flight) through the Apple Store. After signing in via their LinkedIn accounts, connections can be made with complementary travelers on their specific flight, other Virgin America flights in the air, or with those at their destination. Users can also manage their privacy settings so that travelers can shut off or limit their visible connections to others onboard.

The game-changing RED in-flight entertainment system features a position mapping system, shopping with open tab capabilities, and Internet surfing. PHOTO: VX

The game-changing RED in-flight
entertainment system features a position mapping system, shopping with open tab capabilities, and Internet surfing. PHOTO: VX

First Class seats offer 55in (1.4m) of pitch and are 21in (0.53m) wide, with power-ports, adjustable headrests, a massage function, and recline controls. Passengers receive complimentary meals, refreshments and alcoholic drinks, dedicated airport check-in and security screening, and pre-boarding. RED offers free live satellite television, on-demand movies, on-demand television programming, and a selection of games.

Main Cabin Select (premium economy), while not a distinct class (the service is located at Main Cabin seats in the exit rows and behind the bulkheads), affords passengers a 38in (0.97m) pitch, 17.7in (45cm) of width, and dedicated luggage bins. Meals, refreshments, alcoholic beverages, and premium priority services are complimentary.

Main Cabin offers 32in (0.81m) of pitch and 17.7in width with power-ports and adjustable headrests. RED is available with free live satellite television, pay-per-view on demand movies and on-demand television shows, and a small selection of free games (with a larger selection of games for purchase). Passengers may also purchase snacks, meals, and alcoholic beverages from their seats via RED.

Virgin America created a stir in social media outlets last October when it released a new safety briefing video set to song and dance.

Struggle for success

In a strange dichotomy, Virgin America has become a multi-award winning major airline but has lost around $700 million in the process.

During 2013, Consumer Reports named Virgin America ‘Best U.S. Airline’; the Airline Passenger Experience Association (APEX) awarded Virgin America ‘Best Overall Passenger Experience’ and ‘Best Ground Experience’, and Skytrax named it ‘Airline of the Year’. It carries more than six million passengers a year, some 50% of which are on business trips, has three million members in Elevate, and half a million Twitter followers.

Despite the consistent accolades, profitability has been elusive. In 2012, the year it achieved major carrier status with revenue of $1.6 billion, another net loss—of $145 million—was recorded. A capacity increase of 30% and new services, including to Newark Liberty International, contributed to the financial result.

The contagious Virgin brand has invaded the US.PHOTO: SPEEDBIRD HD

The contagious Virgin brand has invaded the US. PHOTO: SPEEDBIRD HD

The San Francisco–Newark service put it in direct competition with United, which has hubs in both of those cities. Cush says that Virgin America’s flights to Newark are profitable, but how long can this profitability last against the entrenched United? “We can sustain it forever. We think it’ll be profitable at current fare levels,” he claims, noting “All it did was reduce Newark fares to the same level as JFK fares.  Our costs are so much lower than United’s.”

Wolfe Research analyst Hunter Keay criticized the strategy with harsh words, citing the move as “an example of behavior that still keeps many longer term equity investors out of these stocks.”

Virgin began flying from Newark to San Francisco and Los Angeles with $99 one-way fares. Meanwhile, United increased frequencies between San Francisco and Newark from eight to up to 16 per day.

“United responded by nearly doubling its frequencies in that market, which now has 111 % more capacity than it did over the prior decade, on average. Fares remain depressed, with both airlines charging an identically sickening $381 for travel less than two weeks away,” she said.

Growth hiatus

Between 2010 and 2012, Virgin America almost doubled in fleet size, taking delivery of 24 aircraft. Late in 2012, expansion was sacrificed to achieve profitability and orders for A320s were canceled or deferred. Virgin America took delivery of one aircraft in the first quarter of 2013, increasing its fleet to 53, and does not plan to accept any more aircraft until July 2015, with another four A320s due by the end of next year. Five more A320s are scheduled in 2016, and 30 A320neos between 2020 and 2022.

In May 2013, the airline converted $290 million of debt and accrued interest (mostly owed to the Virgin Group) into conditional equity that the debt-holders will own after an initial public offering, providing the stock hits predetermined targets. As a result, interest expense declined to $10 million per quarter through 2014.

An IPO, considered possible by year-end, would give the Virgin Group and other shareholders a chance to recoup some of their investment and facilitate more favorable aircraft leasing terms. Currently, the company is held by VAI Partners, a consortium of four US-based investor partnerships holding 75%; the balance is held by the Virgin Group.

This sharklet-equipped Airbus A320-214(WL) N361VA (MSN 5515) was seen taxiing at Los Angeles International Airport. PHOTO: SPEEDBIRD HD

This sharklet-equipped Airbus A320-214(WL) N361VA (MSN 5515) was seen taxiing at Los Angeles International Airport. PHOTO: SPEEDBIRD HD

The transcon war

Virgin America’s transcontinental product, which accounts for two-thirds of its total capacity, is now being matched by others. American A321s offer 20 sleeper seats in a revamped Business Class, and JetBlue’s new Mint will feature 16 seats, also on flights from New York to Los Angeles and San Francisco.

“JetBlue is a great airline with a great product, just as we are,” Cush responds. “But it’s a question of whether you can create a first class product and first class service in a small percentage of your markets. We have first class in all our markets,” Cush notes. “It’s not as simple as throwing a lie-flat seat on your airplane and calling it a first class product.”

Profitability sustained

For the first quarter of 2013, Virgin America’s losing streak continued with a deficit of $46.4 million, albeit an improvement from a $76 million loss during the same period a year earlier. In the second quarter, however, a net income of $8.8 million was posted, with a third quarter net income of $33.5 million, reflecting an operating margin of 11.5%.

A robust fourth quarter resulted in the first yearly net income of $10.1 million, an increase of $155.5 million over a loss of $145.4 million in 2012. Load factor was 80.2%, up one point from 2012.

In order to settle a lawsuit brought by the Department of Justice seeking to block the merger of US Airways and American, the airlines agreed to give up 52 slot pairs at Washington Reagan National and 17 at New York LaGuardia.

After securing four slot pairs at Reagan, Virgin America will expand service from a sole daily flight from SFO. Six slot pairs were acquired at LaGuardia.

Together with Delta and Southwest, Virgin America is bidding for two gates at Dallas Love Field. If successful it would transfer from DFW in October, after the expiration of the Wright Amendment, and offer flights to Los Angeles, San Francisco, LaGuardia, and Reagan National; Chicago O’Hare would follow early in 2015.

Virgin America has withstood seven uncomfortable years of distinguishing itself from competitors with service and in-flight amenities not seen in the U.S. for a decade or more. Against all odds, Virgin America may be poised to vindicate its business mantra of ‘Love your people, love your guests and show that all the time.’

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Michael Manning

Michael Manning

Aviation journalist and broadcaster with a passion for uncovering stories of the visionaries and mavericks of commercial aviation.

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