Virgin America is going to be flying into Newark Liberty International Airport in the near future with flights from Los Angeles and San Francisco. It’s a destination that Virgin America has coveted for some time but which has been unable to get into due to slot restrictions at the airport.
The real surprise, to me, is who they’re getting the slots from: American Airlines
American, through its bankruptcy proceedings, is terminating existing leases of its slots to both United and Porter Airlines and making those slots available (plus additional slots direct from AA) to Virgin America for the exact same price.
Given just how much Virgin America has attacked American Airlines on certain routes, I’m rather surprised at this development. This development potentially puts pressure on American Airlines on transcontinental routes between NYC and SFO/LAX. American doesn’t have dominance at Newark and certainly isn’t the dominant airline in NYC at this time.
The dominant airline at Newark is United Airlines and certainly so for that route between those airports. Between SFO and JFK, both Delta and United have more dominant positions but AA is certainly not a minor player either. Between LAX and JFK, American Airlines is the dominant carrier but only barely so with Delta and United also being major players.
So I can make a few interpretations here.
First, American sees United as the competitor to fight with on these routes and wishes to make trouble for United in the form of Virgin America. Why AA doesn’t wish to add frequencies into and out of Newark, I do not know. There are several trunk routes that presumably would fit neatly into AA’s system for that airport.
Second, American has traditionally viewed even upstarts like Virgin America as a threat and gone to great lengths to price them out of markets. AA has most recently done this when Virgin America entered the DFW market with flights from LAX and SFO. So perhaps American views Virgin America as insignificant competition when compared to the SuperLegacy landscape. Personally, I wouldn’t be quite ready to write off Virgin America when you give them access to an airport in the NYC area that plays very well into their strengths.
Third, I now wonder if American (primarily CEO Tom Horton) is starting to eye Virgin America as an acquisition. This isn’t quite as far fetched as it might seem. Virgin does have some valuable landing slots (although many are currently leased) into slot constrained airports. Virgin is also run by a former American Airlines CFO, David Cush. And Virgin has the equipment that American has decided to adopt for its future: The Airbus A320 and A320NEO.
Virgin America has done poorly and even I think it’s time for Virgin to seek a partner. Their value isn’t much at this point given that they’ve never earned a profit and their position has worsened in the last year. An acquisition of Virgin America would essentially be an asset purchase to get their hands on aircraft faster. Virgin America has nothing in terms of infrastructure, IT, leadership or service product that AA wants or needs.
Right now, I think that AA wants Virgin America alive to provide competition to the airline that best represents trouble for it: United Airlines. That competition can hurt United in the near term and allow some breathing space for AA to gets its bearings and start competing with United again. If I’m right, I would not be surprised if the next market we hear about Virgin entering is Chicago. Virgin has wanted to fly into O’Hare airport for a long time as well but hasn’t been able to get decently located gate space thus far.
It could be one other thing: This could be part of a strategy to form partnerships with Virgin America and a closer partnership with jetBlue to give both Delta and United more trouble. Virgin America competes hard with United on the West Coast and on trans-continental routes. It also competes heavily with Alaska Airlines on the West Coast and Alaska Airlines has been moving closer and closer to Delta.
On the East Coast, American’s partnership with jetBlue has worked out OK and expanding upon that partnership would put some pressure on both Delta and United as well. Since this strategy benefits two of the Cornerstone markets of AA, this may well be the purpose.
For now, we’ll just have to watch this play out. If a US Airways / AA merger isn’t consummated, I’ll be ready to bet heavily on a partnership approach to building the AA network upon bankruptcy exit. This may well be Tom Horton’s method of not engaging in a merger where he is ousted. He may well be ready to argue that AA can do as well or better in this approach vs a merger.
Filed under: Airline News, Mergers and Bankruptcy by ajax
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