With its cabin mood-lighting and safety video set to a tune so catchy you can’t get it out of your head even after landing, California-based Virgin America has taken pains to set itself apart from the rest of the US airline industry. The fun starts even before passengers get on their flight: “A is for awesome,” said a Virgin America gate agent while boarding passengers by group on a recent flight Airline Business was on.
But for all of its freewheeling persona, the birth of Virgin America was anything but easy. Partly owned by Richard Branson’s Virgin Group, the airline’s application for certification back in 2005 provoked a firestorm of protest from US carriers that accused the airline of violating domestic citizenship requirements.
After restructuring its financial and management structures, Virgin America finally got the green light from US regulators, but not without the US transportation department requiring the airline to replace its then-chief executive Fred Reid. Although a US citizen, Reid’s hiring by Branson had Virgin America’s opponents crying foul.
David Cush, the former American Airlines executive named to succeed Reid, has since led the eight-year-old carrier through its first profits and initial public offering. But looking back on 2007, the airline was starting on rocky ground even after attaining regulatory approval.
“You probably couldn’t have picked a worse time to start an airline,” says Cush. “It was late 2007, right at the beginning of the commodities bubble when oil prices were going crazy… The first period of high commodity prices was very challenging for us, it really depleted our capital quite a bit.”
Virgin America’s first years proved to be an uphill climb – not wholly unexpected for a new airline in a capital-intensive industry. The Burlingame, California-based carrier trudged through red ink quarter after quarter before finally reporting its first full-year profit in 2013. Along the way, Wall Street was quick to express scepticism at the airline’s business model – a low-cost carrier with a premium cabin up front, hoping to carve out a niche for itself amid a landscape dominated by legacy airlines and discounters offering a single class.
“It was a little bit of a sad commentary on the airline industry,” says Cush. “You call it a niche because we are a high-quality carrier.”
Cush gives credit to Virgin America’s investors, whom he says were patient during the years when the airline struggled to eke out a profit.
“We were quite circumspect in terms of how long it was going to take [to get] this airline to profitability. Our investors were patient; they had capital available when we needed it. They are financial investors so they were very demanding, but at the same time they were in it for the long haul.”
ALOHA TO THE NEXT PHASE
Virgin America reported a full-year operating profit of $96.4 million in 2014, up 19.2% from 2013. In November 2014, the airline became publicly traded.
“We got the airline on very firm financial footing,” says Cush. “We have a very strong balance sheet, we are highly profitable right now, and that’s really put us in a position to start growing the airline again.”
Back in 2012, the airline announced it would defer deliveries of 30 Airbus A320neos and cancelled deliveries of 20 A320ceos, in a bid to slow growth.
“We stopped at 53 airplanes back in 2013. We haven’t grown for a couple years. We now have got 10 airplanes coming the last half of this year and first half of next year, and that gives us the opportunity to start expanding the network, which we think is important from the revenue standpoint,” says Cush.
In November, Virgin America began service to Honolulu and Kahului in Hawaii, adding a new US state to its network that Cush says had been widely anticipated by the carrier’s customers. “It’s a big opportunity for us,” he says.
While the carrier is serving Hawaii nonstop from only San Francisco currently, Cush foresees service from Los Angeles to follow in the coming years. The airline is also eyeing other destinations in Hawaii, such as Hilo.
“Our expectation is that by 2017, 2018, we will be serving more than two islands, and we will also be serving Hawaii from Los Angeles and San Francisco.”
Describing the airline as pretty conservative when it comes to growing routes, Cush says Virgin America plans to learn what it can about the Hawaii market with the San Francisco service before launching flights from Los Angeles.
Away from Hawaii, Virgin America is focusing on adding key business markets to its network that it currently does not serve: Denver services start in March 2016 while Houston and Phoenix are among the cities the airline is studying. “Ultimately it’s driven by the numbers,” says Cush. “We tend to gravitate towards the highest projected margins.”
“You look at a place like Denver, or you look at a place like Houston or any of the big hubs we are not in yet, these are important markets for San Francisco and from Los Angeles. We also look at how adding a route can improve the rest of the network in terms of corporate travel. I would say we are focused on big business markets.”
The airline succeeded in adding Dallas Love Field to its network in 2014, when it secured two coveted gates at the gate-restricted airport, which is dominated by rival Southwest Airlines. Virgin America had lobbied hard for the gates at Love Field, which is attractive to airlines with its proximity to downtown Dallas. It subsequently relocated its Dallas flights from the larger Dallas/Fort Worth International airport to Love Field as the Wright Amendment was repealed. For years, that legislation had restricted where airlines could fly to from Love Field.
Another potential growth area for Virgin America’s network is adding intra-California routes, although that will be less of a priority, says Cush. Likewise, international expansion is further down the to-do list for the carrier. Virgin America operates to only three Mexican destinations outside of the USA, and Cush indicates that it is unlikely to add new ones anytime soon.
“As far as the leisure network goes, we are more focused on developing Hawaii than developing Mexico. We got a nice network to Mexico, and it’s profitable. We are pretty happy with where it is now.”
Cush points out that markets in Latin America and the Caribbean are also less popular for the airline’s US West Coast clientele. “It’s a long way,” he says. “Look at Puerto Rico as an example… That’s an eight-hour flight from Los Angeles.”
FLEET UPGAUGING
An operator of A319s and A320s, Virgin America has increasingly expressed interest in adding the A321 to its fleet. The A321 would allow the airline to operate to Hawaii from Los Angeles without weight restrictions, says Cush. The aircraft would also be a good fit for slot-restricted markets such as New York and Washington National, he adds.
“We’ve been talking to Airbus for a while about the airplane. I think up to now we haven’t been able to come to an economic arrangement that makes sense for them and makes sense for us,” says Cush. “We’ve also been talking to lessors about A321s. We love the airplane, we love the operating economics of it, and we continue to have discussions with Airbus and lessors… My expectation is that some time in the next few years that airplane will be in our fleet.”
The carrier is especially keen on the A321neo, which would complement its future A320neos. “The A321neo is quite a spectacular airplane in terms of performance and costs,” says Cush.
After deferring its Airbus deliveries, Virgin America expects to welcome its first A320neo in 2020. Cush is unconcerned that the carrier will add the re-engined aircraft years after some of its rivals take delivery of it.
“Our view back in 2013 was that it was more important to balance and do some things on the financial side than to be an early taker of that airplane,” he says. “The significance of that airplane is around cost… but in a lower fuel [cost] environment, it’s not so much a concern.”
Virgin America will likely take delivery of all its A320neos from Airbus’s new A320-family final assembly line in Mobile, Alabama. “That assembly line will be cranked up fully by then and I’m guessing it would be able to supply all of Airbus’s needs in the US.”
Even as the airline grows its fleet of A320s, Cush indicates that the A319 will probably exit the fleet in the coming years. “It’s a high-cost airplane. We originally took those aircraft because the A320s at that time could not fly in particular Boston to San Francisco during the winter. We had very high weight restrictions.”
Phasing out the A319s eventually, he adds, would be a reasonable way of looking at the type. Virgin America’s 10 A319s have in-service dates ranging from 2006 to 2008. “We will fly that airplane for 12 to 15 years. I highly doubt we will order more of them. At some point, the math says it will leave our fleet.”
FIRST-MOVER ADVANTAGE
Virgin America, with its base near Silicon Valley, offers an onboard product that will keep any technology-lover happy. Passengers can stay connected while in-flight with the airline’s fleet-wide wi-fi, and order food and drinks with a few taps on the touchscreen in-flight entertainment system, all while watching a TV show or movie.
“The advantages of being a young airline were that we were able to start from scratch,” says Cush. “We were able to go in and design a product that is much different and go in and buy systems that don’t have some of the legacy challenges that older airlines have.”
While proud of its in-flight product, the carrier plans to make it even better. “We are not tremendously interested in having the other guys catch up with us,” says Cush. The airline is debuting faster wi-fi on its new aircraft and is also rolling out an upgraded version of its IFE system, Red.
Virgin America, however, has no plans to change its first-class cabin, which is the only product currently that operates on US transcontinental routes without lie-flat seats. New York-based JetBlue Airways debuted a new premium cabin with lie-flat seats on such routes in mid-2014 – a move that Cush acknowledges has disrupted the transcontinental market.
“We think our first-class product is very competitive,” he says. “We are quite satisfied with our small, intimate first-class cabin with eight seats.” Cush also points to the cost complexity of introducing a new cabin on some aircraft, arguing that it would create a sub-fleet that would drive costs up. “It is simply not worth it for a handful of seats on one or two routes.”
FIGHTING TO COMPETE
While Cush touts the advantages of leading a young airline, he also constantly speaks of the competitive barriers facing smaller carriers like Virgin America. Of particular concern is the dominance of US legacy carriers at airports in major cities, which Cush believes has only increased after the several major airline mergers in the country.
He cites an example in Chicago, a city that the airline has long wanted to grow further in. But it has not been able to obtain commercially viable timings for additional flights. “United and American control more than 90% of the gates at the airport even though those gates are underutilised,” says Cush.
“I think what we are going to see over the next few years is a pretty significant increase in price, very simply because you’ve got so much of the capacity controlled by so few.” He believes that regulators can do more to guarantee access for smaller airlines to the nation’s key airports.
An ongoing call by three US mainline carriers for their government to curtail the expansion of Gulf carriers into the USA has not won much support from Cush. “I understand the argument the big-three carriers have in terms of subsidised competition, but I think their arguments are certainly self-serving, and at the same time we’ve got competition issues here in the US that are probably more important than that.
“My view is not only should the Middle Eastern carriers be allowed to do what they are doing, but we are for ‘cabotage’, we are for open access to all airports, we are for pure competition because we think we do best when there are no barriers.”
Source: Airline Business
