Virgin America Gears Up for Debut
By Ted Reed
TheStreet.com Staff Reporter
August 3, 2007 3:43 PM EDT
Virgin America will finally take off Wednesday, three years after
the start-up carrier unveiled its initial operating plan.
A lot has changed in that time. Most importantly, Virgin's base, San
Francisco International Airport, welcomed two low-cost rivals. JetBlue (JBLU) began flying from there to New York's Kennedy Airport in May, and Southwest (LUV) will begin flying Aug. 26 to Chicago, San Diego and Las
Vegas.
Meanwhile, a succession of bankruptcies caused costs to plummet at the
legacy carriers that fly many of the trans-continental routes being targeted by
Virgin America. Costly flight delays surged at the major airports Virgin wants
to serve. And the Transportation Department ruled earlier this year that Virgin
CEO Fred Reid must leave his post six months after the airline starts flying.
Virgin announced its name, its order for Airbus jets and the basics of an
operating plan in June 2004. It applied to the DOT in December 2005, triggering
objections from U.S. carriers and labor unions.
This past May, after continuing adjustments by Virgin, the agency
mandated various additional changes -- including Reid's departure -- to ensure
that Virgin's relationship with U.K.-based Virgin Group and its chairman,
Richard Branson, does not violate requirements mandating that U.S. citizens
control U.S. airlines.
Reid says Virgin has not been deterred, but instead has adapted. "We're
not as [transcontinental] -centric as we were thinking two or three years ago,"
he said in a recent interview. "The way things will look now will be a little
different."
The 57-year-old sounds resigned to his departure. "Nobody expected the
cards to fall that way," he says. "It's bizarre, but if that's what it takes to
get this off the ground, I will try not to take it personally."
On Wednesday, the carrier will inaugurate service from San Francisco to
New York and L.A., as it begins to implement a strategy of establishing itself
at major airports and then filling in the gaps. On Aug. 29, it will begin New
York-Los Angeles flights. It will add San Francisco-Washington Dulles on Sept.
26, San Francisco-Las Vegas on Oct. 10, and Los Angeles-Dulles on Oct. 24.
At this time, 39 additional destinations are under consideration. They
include major airports in Atlanta, Denver, Detroit and Phoenix, as well as seven
cities in Florida and five in Texas. "We could be up to 25 or 30 in five years,"
Reid said. But he adds: "I never saw a five-year plan that [didn't change] after
five months."
Growth is a given. Virgin has firm orders for 31 new Airbus A319 and A320
jets, with 23 options. Branson said that "with 20 planes our U.S. rivals will be
beginning to take us seriously," the London Sunday Times reported. "Until
we get to 40 or 50 planes, they will not be too panicked."
On a United (UAUA) conference call, Executive Vice President John
Tague said the carrier is not worried about Virgin. "We are in the transcon
markets to provide a market-leading, competitive, profitable product for our
very best customers," he said. "We are not in the transcon markets to win the
volume war at any price."
JetBlue, however, anticipates a negative impact because Virgin will
overlap more than 10% of its routes. Virgin offers first class and "is a
significant brand name," said CEO Dave Barger, on a conference call. " [It]
isn't like it's a new brand." But he cited a JetBlue advantage: "We are
attacking the Bay Area from the East Coast, [and] we are doing that with seven
years worth of brand loyalty."
Reid said Virgin will distinguish itself with low fares, advanced
entertainment systems, good service and a focus on major airports.
Additionally, while JetBlue has been slow to embrace alliances with other
carriers, Virgin is targeting them. Virgin Atlantic and Australia-based Virgin
Blue are possibilities, Reid says, but they are not the only possibilities.
Reid knows alliances. As president of Lufthansa, he was a key negotiator
in the 1992 creation of the Star Alliance. Later, as president of Delta (DAL) , he was instrumental in the creation of SkyTeam.
Consultant Robert Mann says alliances could help Virgin America, but
notes that they don't typically provide a huge boost. At the same time, he says,
the effort to affiliate with other Virgins could revive concerns about foreign
control. Meanwhile, Virgin will suffer from losing Reid, Mann says. Directors
will have to "turn it over to someone who is perceived as an equally adept and
impassioned leader."
Still, he says, the carrier will succeed if it can replicate JetBlue's
beginnings. The pieces are all there -- attractive fares, high capitalization
($312 million), new Airbus jets and popular routes.
"The bloom is off the JetBlue rose," Mann says. "The question is, can
Virgin America do what JetBlue did in the first three years -- build a halo
around the thing and offer a great service story?'"
On The Net:
Virgin America: http://www.virginamerica.com |
