Virgin America certainly has its fair share of detractors and critics. I’m one of them rather often, actually. It turns out that mood lighting and a cute safety video don’t make more more comfortable during a flight so the style they project doesn’t do much to woo me as a customer. I actually do not care if Jon Chu is hired to make the new safety video (spoiler alert: he was). But I’m willing to admit I might be in the minority on that front. Still, reading the feature in yesterday’s New York Times on the carrier there are some interesting considerations. What is most clear, however, is that there is still no way to know if Virgin America is going to survive or not.
The story starts with the tale of a passenger making an early morning flight from San Francisco to Seattle. She was once loyal to American Airlines, with lifetime platinum status and who loved her elite benefits but who is now a self-proclaimed “Virgin convert.” Virgin is proud of tales like this one, passengers who have “defected” from their old loyalties to the new carrier, buying in to the “flirty package of self-awareness and charisma bathed in purplish mood lighting.” Then again, as a customer based in San Francisco it might be more about American having pulled out of the market more than Virgin showing up. As a business traveler It is hard to be loyal to an airline which has so little service to your home airport when other options are available.
One of the bits I found most interesting in the story was a discussion of the interplay between fares, load factors, passenger comfort and profitability. Virgin’s load factors remain at or below the industry average for the most part. That’s not necessarily a bad thing, assuming they can demand higher fares to remain profitable. In some markets that seems to be working. The JFK-LAX route is cited in the story, with Virgin America seeing a load factor only slightly below the industry average, but fares at $305 each way, roughly 16% higher than the $263 average overall. That’s a mature market for Virgin, one which they’ve served pretty much since the very beginning. In newer markets they are not always so fortunate. The story also highlights the San Francisco – Austin route, one which Virgin recently entered against JetBlue and United Airlines. The competition is pricing ~$20-30 below what Virgin charges for tickets, a situation which often leads to fewer passengers on board. For the time being they’re holding out with the higher fares. As CEO David Cush explained:
We won’t get into a fare war…. Our product is good; we’ve got good loyalty. People will be willing to pay $20 or $30 more.
But how many will? And is that enough? More to the point, what has caused Cush to change his mind? In November 2011 he was quoted with quite a different view on the topic:
Q: How much more are people willing to pay for [food & entertainment on demand] services?
A: The model is getting them to pay the same amount with a much lower production cost.
The part where they have one daily flight against JetBlue‘s two and United’s six certainly makes it harder for them to attract the business traveler. Not everyone is like Ms. Wolaner, the sample passenger used in the opening of the story who flew earlier than she needed to just to get on a Virgin America plane.
The other aspect of loads is the impact on aircraft turn times and how those can contribute to profits. More passengers on board mean slower embarkation and disembarkation processes. If schedules are not adjusted to account for that it could mean more delays or dirtier planes (less time to clean up on the turn). And those are the sorts of things passengers notice, too, in addition to the mood lighting and the snack ordering on the IFE. Higher loads can actually work against the company, especially if they have to cut fares to realize them.
The company finally made money in Q2 ’13, eking out a $8.8mm profit. And they’re building up their corporate contracts and elite customer base. Cush wants to take the company public in the next couple of years and thinks that they’re on track to get there. Then again, he also realizes that the competition is not sitting still. This will certainly be interesting to watch play out. I’m still not convinced that Virgin America is going to survive long enough to go public. I guess we’ll see soon enough.
- Comparing the players in the “Transcon Wars”
- Fighting a fare war the old fashioned way: in court
- A delusional view of the aviation market
- Virgin America introduces status matching for Elevate program
- Is Virgin American on the ropes??
- The US aviation market as seen by Virgin America
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