Virgin America has announced its latest destination and I must say it has me eating a delicious meal of crow. 

Starting in December, Virgin America will have 2 flights a day on two routes to DFW from both Los Angeles and San Francisco.  I am thoroughly pleased to hear the news.  It’s competition we need to see in the DFW market and they’re both routes that make sense for the business traveler in the DFW area.

Now, Virgin America, get to work on marketing your wares in the Dallas / Fort Worth area.  Yes, it’s going to be a tough sale to lure the business traveler from AA but you do have potential.  You have a much newer aircraft, better interior and better service product to offer.  Get those guys and gals to try it just once and I suspect you’ll have ’em sold on the idea of flying VA to those destinations every time.

You’ve got the right introductory prices but don’t forget that the local Dallas business traveler often is allowed business/first class on trip segments greater than 3 hours.   Sell that service product. 

I’m going to suggest three other west coast destinations from DFW that have a lot of potential.  San  Diego, Seattle and Portland, Oregon.   They are dominated by AA with exceptionally high fares and an exceptional number of frequencies.  Again, the AA product is shop worn and generally on unpleasant aircraft.  You can sell this and they’ll fit neatly into your west coast ops already.

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Virgin Atlantic has remained steadfastly independent over the past 20 years despite emerging airline alliances forming around them left and right.  Richard Branson has been an outspoken critic of these alliances and managed to be a big player in keeping British Airways and American Airlines from partnering up for over 15 years.

That said, they’re starting to look awfully lonely on the playing field and even a bit anemic.  This strategy of going it alone has worked in the past but I’m not so sure it works for them in the future.  They need more “feed” for their flights and, frankly, they could stand to make it a bit more attractive to potential customers by offering more choices too.

Sir Richard, it’s time you start looking for some strategic alliances. 

Virgin Atlantic has even kind of failed at making strategic alliances with its own brands around the world.  They do not cooperate closely with Virgin Blue, V Australia or Virgin America (in the last case it was a condition upon granting permission for Virgin America to start up so we’ll give them that one.) 

But it’s time.  It’s time for more strategic alliances and there are opportunities out there.  SkyTeam might actually be an excellent fit for Virgin Atlantic since they have no real UK market penetration.  It might work even better if the airline group controlling Virgin Blue and V Australia brands were to join it as well.   Such an alliance would be well served in the US-UK market as well as throughout Europe and it would establish better competition in the US-Australia-New Zealand markets too. 

I’ll stand with Sir Richard on the fundamental wrongness of these alliances still.  However, it’s time to acknowledge that these alliances are here to stay and start finding a way to compete within their structures instead of hoping for another 2 column inches of press by objecting to them.

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I’ve thrown a few punches at Virgin America lately and their seeming cowardice when it comes to flying the markets they said they would fly.  Over the past few weeks, each time I’ve done so, I’ve realized that, in many respects, the same applies to jetBlue. 

David Neeleman has been gone for nearly 3 years and I see an airline that is kind of stagnate.  I’ll grant that times have been hard for the past 2 years but it’s notable that the airlines who’ve seen profits even in those times are the ones who have grown, not contracted.  They are the ones who had some vision to risk some new routes, not contract and play it safe. 

jetBlue, as an airline, has always impressed me with their courage and their vision.  They started in markets where there was more than adequate service and they made a difference not just because they were an LCC charging the lowest fair but because they developed an immediate and exceptional reputation for how they treated their customers.  Their amentities were innovative but it was how jetBlue valued you as a customer that won people over.

But where is that risk and vision and, frankly, customer treatment today?  The Cranky Flier recently had a post on their new food offerings.  You can read that HERE.   It really is illustrative of just exactly how jetBlue has evolved in the past 3 years.  They aren’t competing, they’re now simply matching what other airlines have to offer and holding on to what they have instead of growing themselves into markets where they genuinely have something to offer.

If an airline has the courage to get started in the New York City area and compete on some of the most important routes out of that area (and other major metro areas) and succeed, shouldn’t we see that as a successful model for the future?  jetBlue appears to now be sidestepping any opportunities to compete and instead defend their marketshare.

A partnership with American Airlines is a visionary step?  Really? 

I think it hardly surprises us that the stock price of jetBlue isn’t reflecting its former glory anymore.

How about coming down to DFW airport, setting up shop in Terminal E and going head to head with AA and Southwest.  If you can win in New York, you can win here. 

Instead, I read about “possible” nerd routes between Austin and San Jose.  C’mon jetBlue, you’re on the East Coast and the West Coast and down in the Caribbean.  Is it really possible that you’re afraid to enter into markets like Chicago, St. Louis, Denver, DFW or Houston?  And by enter, I don’t mean a couple of flights to your hub cities.  You have one of the best service products around (although it has been eroded some) and it’s time to find new focus cities and quite ignoring the middle US hub cities.  You can play there if you have some vision and courage.

One thing I’ll say about Southwest over the past 2 years is that they haven’t been afraid to explore opportunities.  Even as they slowed their growth, they still sought out opportunities and took on some risk to make things happen.  I’m not advocating that any airline bet the farm on anything.  I am, however, advocating that LCC’s like jetBlue and VirginAmerica really aren’t engaging where they can play and compete and I wonder what’s holding them back these days. 

I speculate often about that and I do wonder if it isn’t the CEO’s of those two companies.  Both Dave Barger and David Cush have long and significant histories at legacy airlines.  Continental and American Airlines respectively.   It can be very hard to break habits you learn at that kind of airline.  They’re both much more suited to a Chief Operating Officer role than a CEO role in my opinion and the boards of directors at both airlines could stand to start looking for someone who isn’t tied to “that’s how we do it in this business”.  A new David Neeleman or Herb Kelleher is what leads those airlines to the next level.  They’re out there, you just have to find them.

Sean Menke might just be available, it is certainly worth calling him.

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It was reported last week that Virgin America is now considering flights to Mexico as their next move and I’m now officially at the point of asking “What the hell?”

The original transcontinental flights kind of made sense to me.  The service product they offer is very attractive for transcontinental flights whether you’re in business class or economy.  And they’re clearly working for VA.

But then we see flights being added to Fort Lauderdale, Orlando and Las Vegas.  Even Las Vegas I kind of get because it allows a bit more utilization for the aircraft between transcon flights.  But West Coast to Fort Lauderdale and Orlando?  Even if they do make money, is that really the best use of VA’s time at this point?

There has been a lot of words from CEO David Cush about access to airports such as Chicago O’Hare and Newark and I get that it is expensive to enter those airports.  That happens in big cities dominated by large carriers.  However, other airlines have made them work, why hasn’t VA?

Access exists and being continually afraid of it is getting old.  I’ve pointed out in previous posts that there are *plenty* of destinations in the middle of the US who would love to enjoy VA’s service.  Airports in places such as Dallas / Fort Worth, Denver, St. Louis (with a big aerospace connection to both Seattle and Los Angeles which are existing VA destinations), Kansas City, Austin (big connections to the SF Bay area) , San Antonio (another aerospace connection) and I suspect that even Atlanta might welcome VA. 

But, no, the next vision is Mexico where competition from California is fierce and many other entrenched carriers are revisiting their business.  Perhaps it is to, again, increase utilization but all I’m seeing are primarily leisure destinations and/or convention destinations.  Not exactly the places where your yield is great and your service product is appreciated by high paying business class customers. 

David Cush says they’ll be profitable next quarter.  Great.  My question is, are you really viable as a choice 3 years from now? 

When does VA begin investing in the routes/businesses that its service product was designed for?  When do we see them willing to compete with established airlines (most particularly AA)?  Don’t tell me it can’t be done because I’ll point to jetBlue which started at JFK airport.  Don’t tell me most of those destinations aren’t LCC friendly because I’ll point to Southwest and Airtran.

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CEO David Cush of Virgin America made statements this week saying that he was the latest wave of consolidation as an opportunity to preserve and even extend competition on the government’s part.  Cush noted that the obstacles to a new airline entering a market are A) gate space B) landing and take-off slots and C) frequent flier programs. 

It is notable that Virgin America has been essentially shut out of routes that it not only wants to fly but which it was designed to fly.  These are trans-continental routes to destinations such as Chicago and Newark. 

He states that VA’s position is that those landing slots are public assets and greater access to them is good for everyone.

I couldn’t agree more and I’ve said so before.  Allowing dominance at gateway and/or hub cities is a bad idea.  There should always be a mechanism for a new airline to enter a market if only to offer a toehold opportunity.   I’ve supported seaonal auctions for those slots at slot controlled airports and I believe airports could do a far better job of allocating assets such as gate space too.

However, I also take note that Virgin America has so far avoided any opportunities at destinations that are dominated by one airline and, in particular, dominated by American Airlines.  (Cush is a former AA executive.)  I would point out that VA could be flying routes from California to Dallas, for instance and they have so far studiously avoided that and instead chose to explore options like California – Florida (a notoriously low yield set of routes). 

An Dallas isn’t the only place.  VA has had opportunity to fly to Chicago but has refused to enter the market because the gate space that is available is less than perfect.   Another opportunity might be California – St. Louis:  there are huge aerospace and defense industries with ties to each other in both locations.  It’s also notable that, again, St. Louis is an AA and SWA city. 

I would love to see middle America experience an airline like Virgin America or jetBlue.  I think it contains some greatly overlooked opportunities.  There couldn’t be a better time to explore those opportunities while legacy airlines are otherwise occupied in managing cash and stemming losses. 

Yes, let’s open the markets up.  However, if you’re going to talk to the talk, please walk the walk.

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Two days ago, the new CEO of WestJet stated that WestJet would be pursuing a code share agreement with Delta with the potential to implement this either before or in place of their existing agreement with Southwest Airlines.   Several reports tie this in with the proposal to give WestJet some slots at (5 pair) at La Guardia Airport in the Delta/US Airways slot swap deal currently being discussed. 

 

First, I continue to be skeptical that there will be an agreement between Delta and US Airways for this major slot swap between La Guardia and Washington National airports given both the FAA’s and Department of Justice’s attitude towards this deal.  Other than Delta and US Airways, no one is thrilled about the idea of Delta and US Airways getting to “pick” their competition by granting these slot swaps to airlines who aren’t poised (and never really will be) to compete with these two legacy airlines.   If a deal does go through, I expect it will look different than the current proposals and it will involve a transparent auction of these slots to a high bidder. 

 

Nonetheless, this is a bad announcement for Southwest airlines for a few reasons.  First and foremost, the thundering silence that continues from Southwest since this announcement was made sort of indicates they were as caught off guard by this as anyone.   It isn’t good for such a large airline to appear as unprepared for this development as they seem to be.

 

Second, the original deal between Southwest and WestJet is part of a 3 nation alliance between Southwest, WestJet and Volaris, all airlines operating in the tradition of being LCC carriers and all with a model similar to Southwest’s own.  Southwest was clearly the leader in this alliance and it appears that it’s delays in getting themselves positioned to start this alliance have hurt this agreement.   Acting like the 800lbs gorilla and then not getting the job done in time doesn’t make you appear to be an agile player in the airline community. 

 

Southwest has said the delays came from making other changes a priority within their IT system.  Whilethere are some changes such as new business class options, none of those changes to date are the kinds of things that should have delayed such an alliance for a year or more.  No other airline would have taken nearly as long to integrate into that kind of alliance and that points out problems with Southwest’s IT system.  Southwest is accustomed to going it alone on their systems (they do not, for instance, participate in a global reservations system) andhave done so for nearly 20 years.  Now, that departure from industry norms is starting to hurt them apparently in being unable to make these kind of changes and integrations in a quick and agile fashion.

 

Third, Southwest’s image of leadership among LCC carriers is further hurt by this.  Many founders of LCC carriers have pointed to Southwest as their inspiration for how to run a modern airline.  No doubt that this is true but it also points out that these 2nd and 3rd generation LCC carriers have become more responsive to both their customers and the potential for new business than Southwest has managed.  Losing that image of leadership is a bad thing for Southwest both externally and internally. 

 

Making substantial partners wait to engage in a strategic alliance that, by all accounts, should be very beneficial as well as ground breaking is neither smart nor a good show of leadership.  Canada really only has 2 airlines capable of entering into an agreement like this and the last thing you want is to annoy the 2nd largest airline of Canada into exploring options with a heavy hitting airline such as Delta and its associated alliance, SkyTeam.   Volaris may prove to be more patient but you have to wonder if they aren’t asking themselves if there is another partner in the US who might be interested in them.  A partner such as jetBlue or Virgin America or even the Republic Airways two-headed beast, Frontier/Midwest. 

 

This doesn’t mean that a wholesale change in leadership is called for at Southwest but it may well indicate that it is time to find ways to become a leaner, more agile competitor.  The days of simply having to show up and winning customers are over.  Witness the competition that SWA is seeing in new markets such as Denver and Milwaukee.   In this industry, winners attack and grow rather than ponder and play it cautious.

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Instead of mergers galore, I think what this industry really needs is growth. 

 

To most people, that sounds crazy in light of the present economic situation in the industry.  It depends on who I think should be growing, doesn’t it?  We need to see more growth and expansion from airlines like SWA, Airtran and jetBlue.  Heck, let’s throw Virgin America into that mix too.  Those are the airlines that are going to drive service and price in this business for the foreseeable future. 

 

Now, how they should grow is up for debate.  Each of those airlines is pretty good at what it does and how it does it so trying to merge with an equal really isn’t a great idea.  They shouldn’t dilute their corporate culture in favor of growth at any cost.  However, that doesn’t mean you can’t pick up a deal here and there.  Frontier was a perfect example of an airline that would have been a good buy for any one of those airlines.  In hindsight, there should have been a bit more of a bidding war for Frontier.

 

There aren’t a whole lot of smaller airlines in this country.  Frankly, I think Virgin America is more of a candidate to be taken over than to consume someone else.   Sun Country Airlines still looks good to me, particularly for someone who wants an good entry into the Minneapolis / St. Paul Market.  There was a time when it would be very unwise for most airlines to attempt to compete with Northwest Airlines in that market.  Now that they are Delta, have 48 hubs and are headquartered in Atlanta, I suspect an airline could get an edge into that market.

 

But there are other growth opportunities out there.  DFW has space to be a focus city for an airline.  So does Houston.  Las Vegas is no longer to be a hub for US Airways.   St. Louis is an old city but it is still a city of industry with an airport that has nothing but crickets chirping in it.  There are plenty of regions lacking in good competition still.

 

I don’t think a merger of legacy airlines will do anyone any good.  Oh, it would take come capacity out of the system which would probably raise prices on *some* routes.  I’m not sure if that is “good” for the consumer.  It might create further dominance of a region or hub and I don’t see the benefit in that.  The Delta/Northwest merger was one that worked because it labor issues were settled, there wasn’t a whole lot of overlap between the two companies routes and each company was accepting of the idea.   Those circumstances don’t occur very often.

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According to the Wall Street Journal Middle Seat blog, American Airlines has decided to match the bag fees recently implemented by Delta and Continental.  You can read more HERE.

 

So, at present, Delta (including Northwest), American Airlines, Continental, United and US Airways are now all charging $25 for the first bag and $35 for the second bag with some of the airlines offering “discounts” if you perform your “bag fee purchase” online.   That would imply that they each see this price for checked bags being a bit more elastic than one would have thought.    Or, at the least, they see it as elastic as long as they all go for the same increases much as the case is with air fare increases. 

 

So far, no low cost carrier has adopted this pricing model or even raised their checked bag fees.  I suspect they won’t either as it gives them an opportunity to show themselves as the good guy while gaining some incremental revenue. 

 

If this rise in fees sticks for the next 1 or 2 quarters, I do think it will put tremendous pressure on Southwest Airlines to institute their own version of bag fees, at least by institutional investors and analysts.  So far, Southwest and its CEO Gary Kelly have resisted these calls to add checked bag fees and, so far, they believe it is resulting in incremental revenue from passengers switching to Southwest to avoid fees.  Since CEO Kelly (and Southwest as a whole) is not one to shade the truth, I’ll continue to believe these claims. 

 

However, with other LCC carriers such as Airtran and Virgin America and even jetBlue (on the 2nd bag) have added fees and do report significantly improved revenues from that, I would imagine that the call for Southwest to add these fees will be defeaning particularly when Southwest could implement a jetBlue or Airtran style program and see improvements to their quarterly results which haven’t been too impressive in the last year. 

 

It is sad but I don’t believe we’ve seen the last of these increases.  I do think that some airline will probe the upper limits of these fees just a bit more yet.  I do think that Southwest will resist the call to add these fees for at least another 6 months but if there hasn’t been some kind of collapse in the price of these fees by then, I would not be surprised to learn that Southwest has begun to make changes to their infrastucture to implement them.   I think the first sign will be the withdrawal of their “no fees for checked bags” advertising.

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Today, part 2 in my views on whether or not we’ll see a real “Ryanair” style airline here in the United States.

 

Watch what you fly here.  The most recent LCC entrants here have bought Airbus.  No real surprise as Airbus likes to make a heck of a deal on an aircraft for new airlines in the hopes they’ll have the “in” for future orders if that airline succeeds.  

 

Boeing isn’t too interested in that.  They want to see a solid business plan and a real possibility of success.  What’s more, big orders aren’t the enticement they once were for Boeing.  Boeing got burned on a few of those deals with Ryanair being the most notable since it allowed Ryanair to buy aircraft, fly them for a couple of years and sell them at a profit.  Boeing isn’t going to let that happen again any time soon.

 

Is Airbus the right aircraft?  Yes.  No.  Maybe.  I kind of think not.  I think it is well suited to the jetBlue and Virgin America airlines of this country because they can support that upgraded service product nicely.   That said, those airlines would have done just as well with Boeing aircraft.  In fact, jetBlue went with Airbus because Boeing refused to offer a decent price for a decent order.  

 

But Airbus doesn’t strike me as quite the right choice for an LCC.  They’re a bit higher off the ground, have a little worse operational dispatch rate and don’t always have the best range vs weight ration for certain routes.   Yes, they’re a family of aircraft that offers a range of size that captain can fly across the type range. 

 

Boeing seems better.  Supported here in the United States, you have better access to mechanics, parts and plenty of maintenance contractors to keep you going.  They’re a little bit closer to the ground, a little easier to turn around and have a little bit better dispatch rate.  In addition, their range of capacities is a little bit better for routes and virtually every model has trans-continental capability now without being weight restricted. 

 

The model I would look long and hard at isn’t either of those.  I think a new LCC carrier trying to emulate Ryanair ought to take a serious look at the Embraer 170/190 aircraft.  They’re cheaper to operate and can carry a full load of passengers and baggage although little cargo (which isn’t an LCC’s concern anyway.)  They offer a family of sizes, have a good dispatch rate, offer quick turn arounds, great range, good comfort and great potential for routes requiring frequency and low costs.  It is no wonder that David Neeleman chose them for his new airline, Azul, in Brazil.

 

But you can go used in the US and do pretty well too.  Allegiant Airlines buys used MD-82/83/87 aircraft, for instance.  They MD-80’s are overbuilt, cheap to buy and still pretty cheap to operate.  They have range, good dispatch rates, ease of maintenance and they’re abundant on the used market.   The same is true of older Boeing 737 models (pre Next Generation models) and those are becoming to cheap to purchase as well. 

 

In the end, an LCC needs an aircraft type that is relatively easy to expand into a fleet, keep one class of pilots flying it and which has a ready source of aircraft to augment and/or replace the fleet with. 

 

One type, many sizes should be the rule.   Ryanair uses one size, the Boeing 737-800 and Southwest basically uses one size, the Boeing 737-700 but they can afford to do so.  A new LCC needs operational flexibility and being prepared to use the three basic sizes of either type would be a good thing. 

 

But you can split your types too.  Airtran did this successfully by entering the world with DC-9s, transitioning to Boeing 717s and then growing in capacity by bringing on the Boeing 737.   That worked because while they needed two different pilot groups, the pilot groups could be kept “rational” with the same pay rates.   jetBlue split their types between the Airbus and the Embraer(190) and split their pilot groups pay rates too.  There was risk involved in that but jetBlue avoided that by offering pay rates on the Embraer that were as generous as that being offered other pilots flying mainline aircraft at other airlines. 

 

Find airports that welcome you and that have demand to locations you can serve.  Sounds easy but it isn’t.  In the US, airports tend to be wedded to airlines that have served them for decades.   When DFW opened, it was served by a number of major airlines and each terminal served one or more airline.  Now, DFW has been taken over by American Airlines (nearly 4 of 5 terminals) and does little to serve the needs of airlines who aren’t AA. 

 

Airports need to figure out that putting all their eggs in one basket with a major, hubbed airline isn’t a good strategy in the long run.  Once those airlines have that dominance, they use it to beat airports down on fees and coerce airports into paying for infrastructure the airlines then get to own.  It doesn’t benefit the local economy to have one dominant airline as prices rise and service falls.  This isn’t just true for DFW either.  When airports begin to aggressively pursue new entrants, everyone will win.

 

New and existing LCC entrants need to make a better argument too.  All too often, LCC’s tend to fear competing in those markets dominated by a major legacy carrier and that’s a mistake.  Airtran wasn’t afraid to go up against Delta and it paid off.  jetBlue wasn’t afraid to compete in one the most competitive markets in the world (NYC) and against some of the biggest airlines.  In the past, there weren’t good examples of what an LCC can do for both an airport and a metropolitan area.  Now there is and new LCCs in particular need to use that to their advantage. 

 

Treat your staff well.   Airlines sell a service product and while you may get customers on price, you’ll keep them with service.   Offering strategies to your crews that permit you high productivity and your crew a living wage along with a good working conditions can only lead to your success.   Treat them like commodities and you’ll fail.  Southwest, Ryanair, jetBlue and Airtran get this.  Skybus and Mesa Airlines don’t.  Look at who is making money. 

 

Quality of life is just as important to airline crew and staff as wages.  Airlines that offer good quality life tend to have happy crew flying their flights and treating their customers right.  At the end of the day, it is a lot cheaper to keep a customer than it is to find new ones every week. 

 

Will we ever see a close replica of Ryanair’s model here on a national basis?  Yes, I think so.  Right now, no.  The market is too crowded but that will change again and new airlines will be started again.   US attitudes towards fees and advertising are changing, although slowly.  

 

First we need to see a major airline liquidate or merge with another to reduce capacity some more.  Then we need to see an uptick in the economy that induces people to spend some money on travel again (both leisure and business travel.)   There needs to be a glut of aircraft useable for such a venture (and that’s happening already) and airports need to figure out that it is in their best interest to find space for these new entrants.  That really hasn’t started to happen yet but it may yet still happen.

Filed under: Airline History, Airline Service by ajax
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Since Virgin America began operations, I’ve been watching for something sensible to happen.  There have been a few developments that make sense. 

 

In addition to VA’s initial trans-continental routes, they began to add some West Coast service to places such as San Diego, Las Vegas and Seattle.  This let me increase aircraft utilization since those routes from San Francisco and Los Angeles weren’t 6+ hours but, rather, 2 hour (or less) hops.  And having a bit of network to feed into those trans-con flights made sense too. 

 

But this put them into competition with a few very well established airlines as well.  United, Southwest, jetBlue and Alaska Airlines all operate on the West Coast very effectively and on the same routes. 

 

Alaska Airlines, a legacy airline with a very good full service product started to jump on the anti-VA bandwagon and issued a number of objections to their “US Owned” status to the DOT.  Most likely because VA had a product that competed very well against their full service business class product and that was a major source of revenue.   Alaska Airlines had a lot to lose on some of those routes in particular.  Strangely, United remained pretty quiet and probably because their frequent flier program kept their business customer pretty loyal.

 

Speaking of frequent flier programs, that was another area that Virgin America was a bit lax in and that kind of surprised me too.  They had 2 extra years to develop a strong program and have the infrastructure in place to support it.  It was something that, in my mind, would have made sense since the business customer likes such programs and they had a good trans-continental service product to attract those people.  Instead, it was rolled out a tad late and still lacks much of a partnership with anyone. 

 

Although VA positions itself as a low cost carrier, it really offers a 2 class service product that is comparable to any legacy airline and, in many cases, it is a service product that is much better. 

 

Aircraft are equipped with a two class cabin (first and coach) called, oddly enough, First Class and Main Cabin.  There is a Main Cabin Select product but that’s really access to Main Cabin seats that have a bit more legroom (exit aisles and bulkhead seats) with some of the First Class service product (meals, beverages and premium tv channels are free).  It’s an economy plus plus or semi-business class product. 

 

I believe all airlines could stand to offer more service products through their cabins and this was an area that I thought VA was kind of smart in.  I still think a lot of airlines could stand to differentiate even more but I liked what VA had there.   It was more “business” than “coach” than a lot of airlines’ economy plus products and even competed very well against a similar offering from jetBlue.

 

jetBlue really took things to aother level with their LiveTV offering on their aircraft.  Virgin America took it to yet another level by offering a full entertainment system (including TV) that even allowed shopping and the ability to order food and drink from a menu, thus eliminating the traditional beverage and meal cart services.   The system, called Red, worked pretty well although some reviews had it not always working or in need or a re-boot from time to time.  Such systems do take time to work out bugs and time for staff to learn to work with. 

 

VA also got aggressive and was the first US airline to offer GoGo inflight Wifi on its aircraft.  With accomodations like power ports at each seat and the existing entertainment offerings, this was likely adding whipped cream to the ice cream.  All of their aircraft are equipped with it and Virgin says they’re doing OK with it.  Probably more so than some airlines. 

 

All of these offerings cost a lot of money to both purchase and maintain and VA continued to see red ink as time passed by.  (It is difficult to get a very good picture of VA’s finances because it continues to be a private company instead of a public corporation.)   At one point, rumors that its US investors wanted out spread around and Alaska Airlines filed yet another objection to VA with the DOT who, recently, yet again ruled that VA was more than sufficiently US controlled.  (Read THISfor more info.)   CEO David Cush did continue to speak publicly that their revenues were improving monthly and that he did think VA was edging closer to an operating profit.

 

In fact, VA did manage to eek out a small third quarter operating profit as reported in December which, frankly, surprised a lot of people.  I know I was.  It was a 59% improvement (according to VA) over the previous year’s third quarter and they managed to make it happen in what has been arguably one of the worst economic climates for airlines ever.  This got my attention.  Frankly, the climate hasn’t been good for VA since they started to improvement during those times is impressive, to me anyway.

 

Virgin America is also a bit unusual for the airline industry in that it has a number of women in senior leadership positions.  Their SVP for Inflight Services, VP – Marketing, SVP-CFO and VP – Planning & Sales are all women. 

 

Also curious is the rather interesting Canadian influence in their leadership.  The Chairman of Virgin America is Canadian Don Carty, former Chairmen and CEO of American Airlines.    Frances Fiorello, SVP – Inflight Services has had a long career with Candian airlines such as Canadian Pacific, Canadien Airlines and Air Canada.   Bob Weatherly, SVP of Flight Operations, has a similar Canadian history. 

 

And then there is the American Airlines connection which kind of puzzles me at times.  Don Carty, David Cush, Diana Walke,  and Ross Bonanno each have a history with AA.  Virtually all their senior leadership has extensive with experience with previous airlines.  In fact, after looking into their biographies, it made me realize just how VA might be managing to make it despite all predictions against them. 

 

It’s a strong team with a strong background in successful airlines that, for the most part, have reputations for good cost control and good service products. 

 

Virgin America has been on my death watch for at least a year.  Now, a lot of my inclination towards that has been based on routes.  Yes, they’ve grown and, yes, they’ve added routes.  But they don’t seem to want to really compete except where there is really low hanging fruit against their service product. 

 

They recently opened up routes between, of all places, Fort Lauderdale and Los Angeles and San Francisco.  Obviously they saw some opportunity there but I don’t get what the attraction is in adding those two routes before a lot of other opportunities.

 

VA doesn’t have an East Coast network at all.  They have destinations in NYC, Boston and Washington, D.C. (in addition to the Fort Lauderdale routes) and that’s OK.  Competing on the East Coast is brutal and those three main destinations have enough originating traffic in them that they don’t necessarily need network traffic feeding in on the West Coast yet.

 

David Cush has, at times, talked of adding routes from the West Coast to Chicago but he wants O’Hare airport and claims there are no gates to be had.  This isn’t exactly true.  There are gates but VA doesn’t want to pay the price to get entry to them.   There were, at one point, gates available at Chicago’s Midway airport but VA doesn’t like that idea either. 

 

More recently, Mr. Cush dropped hints of adding a route possibly to Austin or Dallas / Fort Worth.  Most agree that Austin might happen (there is a strong tech connection between Austin and the West Coast) but doubt the DFW possibility. 

 

You see, my problem is that VA seems to be ignoring the possibities in the middle of the country.  With their service product, they could compete very well against AA on routes between DFW and San Diego and Los Angeles.  They could compete well with AA and United on routes between Chicago and Los Angeles and San Francisco.   There is a strong connection between Denver and Los Angeles and despite the back alley fight going on in Denver, it has possibilities. 

 

They’ve by-passed Portland, Oregon which has strong ties to both LA, Seattle and San Francisco and Alaska Airlines, who owns a lot of that traffic has already proven to be susceptible to VA’s service product.

 

Indeed, if you look at their route map right now, they have every appearance of avoiding any destination that is a real hub for a legacy airline. 

 

I can’t think of a market that is more need of a real competitor in service product to destinations on the West Coast than DFW.   Completely dominated by American Airlines, the service product and prices to West Coast destinations is weak and expensive respectively.  Atlanta could stand a bit of competition on routes to the West Coast too.   The same is true for Miami, Minneapolis / St. Paul, St. Louis, Detroit, Kansas City, Cleveland and maybe even Philadelphia and Baltimore. 

 

It’s always a nice strategy to enter airports where the barriers to entry are easy and cheap when you’re getting started.  But VA is more than 2 years old and clearly has a product that, like jetBlue, can compete against major airlines and win.   In any of the major hubs I”ve named above, they are dominated by one or two airlines on those West Coast routes that are flying old aircraft with little new service product and who have much higher costs than VA.  It isn’t going to get easier to compete with these guys with time. 

 

That’s why a part of me continues to view VA with skepticism.  New airlines don’t win by being afraid to compete.   Airtran and jetBlue are perfect examples of airlines who were willing to go up against major legacy airlines and beat them on both price *and* service.   Airlines who weave and duck from their opponents tend to lose.  Skybus was a great example of that. 

 

There are often moments that are ripe for smaller businesses to make a commitment to going against their major competitors and, if you wait too long, those moments go away and never come back.  I’m starting to sense that Virgin America is beginning to lose those moments. 

 

Would I fly VA?  Sure.  I’d love to enjoy their service product.  However, they fly nowhere I want to travel so it is going to be a long time, if ever, that I get to try them.  Would I suggest them?  Absolutely.  At least for now.  They aren’t going to go bankrupt any time soon.  They’ve managed to get past that infancy stage now and kudos to them.  They offer some fantastic prices on their routes and I doubt anyone would be disappointed by flying them.

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I tend to ignore Virgin America often even when they do make the news.   I’ve had a lot of trouble figuring out what this airline is supposed to be and even more figuring out whether or not they are really going to succeed. 

 

VA has made some news in the past couple of months, though, and I figured it was time to talk about them. 

 

Virgin America began as a concept annunced by the irrepresible Richard Brandon (founder of Virgin Atlantic and the Virgin Group) and it went through quite a few iterations before it launched.  It changed its announced name from Virgin USA to Virgin America, for instance.  Ownership structure was fiddled with several times to meet US restrictions on foreign ownership of airlines.  Business leaders changed and their original CEO, Fred Reid, was eventually removed to satisfy the DOT and gain permission to launch. 

 

Their approach to finding a home was weird to me and kind of reflected a European viewpoint that led me to believe they weren’t necessarily looking at the US market properly.  After leading a kind of competition to find a home, Virgin America settled on San Francisco as its “operations” home and New York City as its “corporate”  home.   Neither location struct me as particularly wise because NYC and California are expensive places to operate and they’re no more representative of the United States than a lot of other locations.

 

While they went through the start up process, Virgin America faced a lot of criticism from other airlines.  Flatteringly, it was quite a bit more than many startups have received over the years.  On the surface, the objection was always to the perceived foreign ownership of Virgin America.  My own sense was that other US major airlines saw another potential jetBlue starting up and given jetBlue’s success, yeah, it would worry a few airlines. 

 

Strangely, at the end, some of the loudest objections came from Continental Airlines who, from my point of view, had the fewest reasons to fear Virgin America’s competition.  Continental had a strong 2 class operation that was highly favored by businessmen for both its service, comfort and frequent flier program.   From my perspective, American Airlines and United Airlines had the most to fear from this upstart’s trans-continental plans.   Even jetBlue had some reason to be worried since VA’s product most closely competed with jetBlue’s and had the biggest chance of nibbling away at jetBlue’s customers.

 

I think the biggest concern from existing airlines was that, once again, a well financed 2 class airline was entering the market that had low labor costs and brand new efficient aircraft.  Startups always have low costs because the airline industry is based on seniority.  A new airline with all new employees quite naturally has some of the lowest labor costs but that does change over time and it really depends on the airline on whether or not those costs rise dramatically or not. 

 

jetBlue has been able to keep its labor costs relatively low by being pretty good at taking care of their employees, for instance.   By having such low costs, airlines like jetBlue and VA, are able to compete very hard on those trans-continental routes that are many airlines bread and butter. 

 

When VA agreed to remove CEO Fred Reid from the operation after no more than 9 months of operation after the certification was awarded, they had to go find a new CEO.  Now, Fred Reid never had the kind of reputation that I would expect an operation like VA to need or want.  Formerly of Delta, Fred Reid performance at Delta was mixed and he certainly wasn’t a charismatic leader which I thought would help VA quite a lot in the US.  Richard Branson’s kind of bravado has never played nearly as well in the United States as it has elsewhere in the world.

 

My thought was that VA would seek a more personable, charismatic leader who would not only have a strong airline background but who would also be a good public figure for this venture.  VA, apparently, felt otherwise and found their next CEO at American Airlines in the form of David Cush.  

 

Mr. Cush certainly fit the bill when it came to having a strong airline background.  He had 20 years of airline experience in a wide variety of positions and a great education too.  The thing is, Cush did it all at the most conservative of airlines, American Airlines.  Huh?  Yes, Cush had youth going for him and he does present himself rather well but it still didn’t mesh in my mind.

 

I suspect VA’s investors, most particularly its US investors, wanted someone who had a very strong financial background and who understood just how important it was to preserve cash and operate with strong controls in place.  They had, after all, funded VA with more money than had ever been put together for an airline startup in the US when VA began.   He did most recently work as Vice President of Alliances and Chief of Sales for American and this hints at Mr. Cush’s ability to access corporate clients.  With VA’s transcon strategy, this kind of made sense.

 

Virgin was so delayed in getting permission to start up, it leased several of its delivered Airbus A320 aircraft to the late Skybus Airlines.  When they did begin to operate, they were hindered in fully starting up operations because some of those aircraft were occupied until Skybus failed miserably. 

 

But . . . operate they did.  Finally in August of 2007 and fully 2 years delayed, they began flights between San Francisco and NYC and Los Angeles and NYC.  This wasn’t a bad start in that they were connecting major business centers with lots of traffic but it didn’t allow them to really get high utilization of their aircraft and pricing on those routes has always had lots of competitive pressure so they lost lots of money operationally. 

 

Every airline loses lots of money in its first months and years.  Airlines really operates lots of small businesses.  Each route is really its own business and it takes time to grow those routes into profitable operations and it takes varying time to do it for each route.  It is an investment that takes time to go profitable and much more time to provide a good ROI (return on investment.) 

 

VA was off and running and I was still scratching my head.  There were still many parts to this airline that defied rational thought in my opinion.  Tomorrow, more on VA and its service and routes and where it is today.

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Now that it is 2010, what can we expect?

 

Unlike this time last year, probably not much.  There was some momentum for change last year that really doesn’t exist this year.   Airlines will continue to fight to hold their own in the marketplace and with the reduction in capacities, even the worst of the lot will likely cling to life this year.

 

North America:

 

Major airlines of North America have made all the changes they can and all are managing their businesses and cash very closely right now.  I don’t expect much, if any, change to develop in the next 12 months but let’s take a look anyway.

 

American Airlines has some labor issues to address but with the current economic climate, they have been getting away with their efforts to defer those issues.  Labor unions would like to push a few issues with American but they’re smart enough to realize that now isn’t the time.   Most likely they’ll continue their face saving efforts at making a point with their members but I don’t expect any real labor action at this airline this year.  Perhaps, if things get better, we’ll see some movement in the 4th quarter.

 

United Airlines, my least favorite legacy airline, has similar issues that American has with labor but, again, those labor issues aren’t likely to see much movement either.   I suspect that United will continue to move more of their flights over to regional airline partners because its worked (for now) and their customers will find themselves on more and more regional jets.  Since price is the prime driver for customers right now, they’ll accept that move and hate the flights as much as they always have.

 

Delta/Northwest should see more of its operatioins combined and, possibly, a unified single operating certificate by the end of the year.  That doesn’t mean much for their customers since Northwest aircraft are being painted into Delta colors at a furious rate.  The service product is already being harmonized to a fair degree and it’s a good one already. 

 

I don’t see any major aircraft purchases and I remain interested in whether or not they’ll keep their 787 orders.  There has been rumour and innuendo that they won’t but I kind of think they will keep them.  Their 767 fleet is old (except for the 767-400) and I can’t think of a reason why you wouldn’t want to have the 787 begin filling the role of those aircraft.  I’ve wondered if their hints aren’t just an opportunity to get Boeing to get interested in offering a better deal for more aircraft. 

 

US Airways needs two things in this next year.  First, they need their pilots to get together and start operating as a single group.  As dangerous as it is to try to interfere with a union group, I wonder if US Airways won’t wade into the problem in an attempt to have a final resolution.  Certainly they could argue that they’ve been patient enough. 

 

They also need to manage their cash very, very closely.  Cash is blood to an airline and US Airways has a bit of risk in this department.  Should cash holdings be depleted more, they’ll have to start seeking that merger partner again and no one appears interested in marrying with them.  This is another reason it needs resolution for its labor problems.   That said, I don’t see US Airways disappearing or filing for bankruptcy again. 

 

Continental Airlines has felt the hurt this past year and its unlikely to feel much better this year.  Their business model depended a bit more on business class travel and the economy hurt that demand the most.  That said, I can’t imagine a better group of managers for keeping that airline on track through the rest of the downturn.  Things will hurt and belts will be tightened a bit more but I don’t see the service product changing.   When the economic downturn does really turn the corner, Continental will be better placed to succeed than many. 

 

Despite their recent move to the Star Alliance, I do *not* see Continental getting any closer to United Airlines whatsoever.

 

Low Cost Carriers / Regionals:

 

Southwest Airlines continues to manage itself to the tune of its own drummer and the results of their long(er) term thinking are showing left and right.   They’ve managed to make solid overtures to business clientele in areas that, I suspect, count more day in and day out.  

 

I don’t see a merger partner in the future for them except,  possibly, for Sun Country Airlines.  For some reason, I see this as a real winner for Southwest in that it gives them space and routes in Minneapolis / St. Paul, a labor group that is accustomed to delivering Southwest style service and which can be harmonized into the Southwest labor groups relatively easy.  There is no rumour of this purchase but Sun Country has its own problems and it’s a match that fits the Southwest acquisition model. 

 

I think Southwest will remain persistent in its Denver expansion and will work hard to create a network in the upper midwest states of Wisconsin, Minnesota, Illinois and Missouri.   The wild card, in my mind, is the Washington D.C.  area and the NYC/Boston areas.   Shuttle type service is what Southwest knows very well and I wonder if they won’t try very hard to organically grow their flights in these areas.  If so, Southwest needs to find an “in” at Washington Reagan airport.  To do this, they would need to buy a shuttle operation from US Airways and/or Delta.  Perhaps US Airways will be interested in such a sale if their cash holdings erode more. 

 

Frontier/Midwest/Republic:   I don’t know what happens here.  Midwest really isn’t an airline anymore.  It really isn’t even a brand anymore.  It’s a name for selling tickets.  Frontier remains an airline and a brand and Republic seems to want to continue caring for both.  Since Republic is managed by very smart people, I kind of think that they may look for a way to wind down the Midwest name over the next 12 to 18 months and make Frontier the primary airline.   A tasty cookie isn’t a good reason to keep the Midwest name around.

 

Airtran deserves some applause.  This airline has managed to grow itself some, find new markets and earn some money during one of the worst downturns in the airline industry.  

 

Their move into Milwaukee has succeeded and promises to continue to succeed.  Milwaukee is a loyal city, to be sure, but it is a city that appreciates value even more.  Airtran has managed to offer great value, good service and appeal to a city that just a couple of years ago was kind of anti-Airtran.   The one obstacle in their way is the arrival of Southwest, another airline very good at offering value and appealing to the Milwaukee kind of customer.   I think Airtran has the upper hand but they are by no means the sure winner in this market.  Southwest may be able to beat them with frequency.

 

Virgin America keeps showing up and usually right after I become convinced they’ll disappear.  I still don’t know what this airline does best and I still don’t see them as being a scrappy enough operation to fight their way into the cities it needs to be in.   Virgin continues to dance around Chicago (claiming they can’t get space but if they wanted it bad enough, they could).  Their product would servce cities such as Dalllas, Denver, Houston, Chicago, Atlanta, Baltimore, Philadelphia, and, perhaps, Cleveland/Cincinatti very well.  

 

Instead, they added flights from the west coast to Fort Lauderdale and talk about adding service to a Texas city such as Austin.  This is too timid.  The CEO, David Cush, seems afraid to compete against his old employer (AA) and that is a shame since they have a very competitive and attractive trans-continental product.   I would speculate on VA being bought by another airline but . . . why?  They just don’t have much there and seem to have little interest in exploiting real advantages that they do have.   Maybe they’ll just run out of money and get shut down.

 

Alaska Airlines has felt the heat from Virgin America but they continue to do pretty well with their little airline and they continue to do it without being aligned with a major.  I don’t see much changing for Alaska Airlines.  They’ll continue to be a scrappy airline with good service to a limited number of destinations.  And, somehow, that seems OK when it comes to Alaska.

 

Next up, the world.

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At the first of the year, I wrote 3 blog posts shown HERE, HERE and HERE.  It was really just my random speculation on what to expect over the next 12 months.  Well, now it’s December of 2009.  Let’s see how I did.

 

Boeing 787:  I guessed at an April 2009 first flight.  It still hasn’t flown although speculation has it flying this month either by December 14th or December 22nd. 

 

Airbus A380:  I guessed they would make their goal of producing 21 aircraft this year.  As of November 30th, 2009, Airbus says they have delivered 7 A380 aircraft this year.  Ouch.  This is a program that is in financial trouble.  No, I don’t think it will be cancelled.  Not yet but please don’t try to tell me this program will make a profit. 

 

My deathwatch had Midwest Airlines going away most likely by a sale.  That did happen and while the airline has essentially evaporated (from its original form), it does remain as a brand being run by Republic Airways.  

 

I speculated that Frontier Airlines would be bought out of bankruptcy but I guessed that jetBlue would be the buyer.  In fact, Southwest Airlines and Republic Airways were the suitors and Republic won.

 

I thought that United Airlines and US Airways would announce a new merger with Continental a dark horse candidate for buying United.  In fact, Continental became a member of the Star Alliance and firmed its relationship up with United but wisely kept its distance otherwise. 

 

I said that Southwest Airlines would maintain its status quo but that Gary Kelly would be under fire from both employees and outsiders and he was.  However, that view is already being reversed again by Southwest’s resurgent strength in the business.

 

I thought that the Middle Eastern airlines such as Emirates, Etihad and Qatar wouldn’t see a bankruptcy or merger but would slow their growth and aircraft deliveries.  That, in fact, has happened and now we see Emirates working hard to distance itself from Dubai World’s financial woes.

 

China:  I said deferred orders.  Pretty much what happened.

 

The Far East:  I said airlines from that region would maintain their status quo, probably would not defer orders and might make new orders to replace existing equipment for greater effiency.  Again, pretty much what happened.

 

Australia:  I saw QANTAS slowing growth, deferring some orders and fighting hard against new entrants.  Again, that’s pretty much what happened.  I also saw two weak competitors on the US-Australia routes:  United and V Australia.  That is pretty much what is happening although V Australia has been pretty smart in working into a relationship with Delta where it appears the two airlines will cooperate with codeshares.  United remains alone and with weakening demand.

 

South America:  I said the Argentine government would take Aerolineas Argentinas back from Grupo Marsans and the airline itself would muddle along or contract rather severely in some areas.  Bingo.  Exactly what happened.  I also predicted Azul would become the jetBlue of Brazil and its not hard to guess that that airline is pummeling its competitors.  A future prediction was for the airline to fly internationally in 2014 with Airbus equipment.  We’ll see.

 

Africa:  I saw Delta continuing to pursue flights to major African cities (true) and SAA (South African Airways) issuing a small RFP for 777 aircraft to replace its rather inefficient A340 aircraft (didn’t happen.)

 

India:  I thought Jet Airways and Kingfisher might merge with the name Jet Airways being retained.  In fact, both airlines continue to exist but both are suffering severe financial problems, deferring aircraft deliveries and generally flailing about trying to find a way to continue.   One of these airlines will still ultimately have to exit the market and I continue to think it will be Kingfisher.  They have the wrong aircraft and the wrong aircraft on order.  However, Jet Airways is suffering badly from labor actions among its employees. 

 

United States:  I picked United to fail.  It hasn’t happened and while they continue to live, their cash holdings are being reduced, they still have severe labor issues, their service product continues to suffer and I still think they should be the ones to disappear.  I also thought Glenn Tilton would be ousted and, possibly, replaced by Doug Steenland.  That didn’t happen but John Tague has been groomed as Tilton’s replacement.  I still think Tilton should go if United can’t fail.

 

Europe:  I thought we would hear of a surprise from Lufthansa.  I didn’t like their purchase of SWISS and I didn’t like their flying the A340 in competition against the 777 being flown by many of their direct competitors.  They’re still here, still making money and they bought BMI.  I still think we’ll here of misfortune from them but apparently it will take a while longer. 

 

Random Speculations:

• I thought Southwest might add another aircraft type.  It didn’t happen but I think their interest got perked up when they looked at buying Frontier and saw the economics on the Q400.
• I thought Delta might order more Airbus A330 aircraft.  Instead, Delta is parking them in the desert for the winter season.
• I speculated that both China and Japan would defer or drop their regional jet programs.  That didn’t happen but the Chinese jet program appears to be a bad aircraft and unlikely to be used by anyone except Chinese airlines forced to buy it.
• I thought Bombardier would see a major order (20+) for their Q400 series aircraft from a US customer.  Horizon Airlines did up their orders  for 10 more but there were no other significant orders. 
• Airtran to form a small midwestern hub.  Yup, that happened.  In Milwaukee where they’ve taken over from Midwest Airlines and now face Midwest (brand owned by Republic) and Southwest Airlines entry into the market.  I think Airtran will hold on here and continue to develop business.
• Last, I hoped that jetBlue or Virgin America would enter the DFW market.  Virgin’s CEO, David Cush (formerly of American Airlines) did recently speculate about adding flights to either DFW or Austin.   I suspect they’ll choose Austin and DFW will remain a fortress for AA.

 

That’ s it for my 2009 predictions.  I’ll make more at the start of 2010.  On the whole, I probably did as well as anyone in making predictions in this business.

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Almost everyone who follows the airline business and the airlines themselves continue to insist that people buy overwhelmingly on price and there is quite a bit of evidence to support that general feeling.    The best example is that among legacy carriers serving a particular non-stop route, when one airlines lowers their price, the other airlines can and do see a drop in their bookings for that route if they don’t match that price.

 

There is a lot of truth that individual routes can be seen as nearly perfect competitive environments.  Any airline executive worth his salt will tell you that when an airline opens up a city pair, they look upon it as growing another business.  Each route is a “business” to be developed and nurtured and maintained.

 

Legacy airlines are the masters of being all things to all people.  Low cost carriers are the masters of high frequency/low cost models.  Leisure airlines have learned how to serve market with low frequency but high value.  

 

But what do most people want?  That isn’t ever as clear as people want to believe.  The dynamics between two cities change over time and adjusting to those changes is essential to maintaining that “business”. 

 

My father, once a very senior airline executive, told a story to me long ago that I’ve never forgotten.  His airline, Braniff, served the Dallas / NYC route with a daily late afternoon flight that for years was a huge money maker because it was flown primarily by businessmen.  In the mid-1970’s, they noticed that traffic on that route began to erode ever so slightly and even a small erosion worried an airline even back then.   Then he happened to take the flight to do some financial business in NYC on behalf of the airline and he realized the problem.

 

Business between the two cities had begun to change.  Traditional businessmen such as bankers or leaders of large corporations had continued to fly that flight because their model was to go to NYC the night before, conduct some business until 2 or 3 in the afternoon and then fly home to be in their own homes by mid-evening.   But entrepreneurship had begun to flower and more and more businessmen/entrepreneurs saw that as a waste of time for such a trip.  They wanted to work until late afternoon and fly home as late as possible in order to maximize their time there.

 

So Braniff added a second flight in the early evening that allowed businessmen to work until 4:30pm, go to the airport and catch the 7:30pm flight home which put them back in Dallas late at night but which met their needs to stay as long as possible to maximize their work.   As a consequence, both flights began to do much better because even the entrepreneurs could recognize that when their work was done, it was time to go home and if it was done at 2pm, they went to the airport and caught the early flight home.  Traditional businessmen began to be expected to be more efficient and when they couldn’t leave at 2pm, they knew they had another option for later in the day.  Braniff began to own that route again.  Frequency was the answer.

 

I would argue that when two or more airlines “own” a route, service is often going to be the discriminator.  But what form of service will be necessary?  Is it options in seating that allow a traveler to have more legroom?  Is it more frequency?  Is it some form of a meal?  Is it WiFi or video on demand?

 

For 30 years airlines have worked to harmonize their fleets, reduce the different number of equipment types and flatten their service offerings to the lowest common denominator.  Particularly the legacy airlines.  But for the past 10 years, we’ve seen new airlines offering more segmented choices on each flight and those airlines are the ones who continue to earn a profit, experience growth and satisfy shareholders.

 

There have been some half hearted experiments with increased choice and segmentation.  Delta had Song airlines offering more entertainment and a brighter, cheerier environment.  United had Ted airlines which was economy oriented.   But I suspect that it wasn’t necessary to change the brand so much as it indicated a need to offer more choice on the aircraft.

 

I think in the future we’re going to see more choices in seating on airlines.   The low cost only passenger wants price above anything else.  The business traveler needs an economy choice (to satisfy their company’s desire to economize) that offers a little more room.  I think we’ll see different seat pitches offered and different service choices (a la Frontier) offered as well.  This is an area where Frontier has pioneered change and seen positive results.  Same for jetBlue.  Those airlines continue to earn an operating profit and grow.

 

Legacy airlines are going to have to be more flexible in fleet, fleet configuration and they’ll even have to consider offering things like meals and entertainment.  There already is a move to do this among certain airlines.  Continental is adding LiveTV to their fleet.  Delta/Northwest has recognized that having a varied fleet allows them to “tune” their service to the demands and continue to earn a profit. 

 

When an airline can adjust capacity on a route by season, month or time of day, it can continue to make money.  When it has just two choices of aircraft to use on a route and both have more capacity than needed, they start to lose money.  (Hello AA.)

 

I think that one day one legacy airline will have the guts to start advertising in markets that speaks to “real world” experience on their line versus the airline that “owns” the city.   For instance, I think Continental could come into the Dallas market and already argue that yes, you have to connect in Houston to go to NYC but if you do, more often than not you’ll get there in the same time with better service than flying American Airlines who has an untrustworthy on-time record and who treats their passengers to old aircraft and little or no service.   Someone will have the guts to start trying to change the perceived value of travel.

 

The truth is that there is a great difference between legacy airlines on any two city pairs.  The key is to identify that difference and communicate it to the traveler.  Right now, that really doesn’t happen.   An airline such as Continental shouldn’t attempt to compete with AA on price alone.  They should offer the real differences such as a meal on flights of 3 hours or more, LiveTV, equipment that is as much as 10 years newer or more than AA and a staff that enjoys doing its job.    They should offer incentives for changing airlines and trying them once such as a guaranteed business class seat for the price of AA’s economy seat. 

 

It will happen in some form.  It has to.  The newer airlines such as Frontier, Airtran, jetBlue and Virgin America have all proved that offering more choice on the aircraft works.  Even Southwest has recognized that it has to offer more choice in order to retain their very valuable business traveler.   What’s more important is that even some passengers who buy on price alone have realized that the incremental extra cost of one or two of those “extras” is worth it once again.

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USA Today’s Today in the Sky Blog is reporting that Richard Branson, billionaire backer of V Australia (Virgin Blue) as well as Virgina Atlantic, Virgin America and Virgin Nigera has pronounced that one of the new or future competitors on the US – Australia routes will have to drop out.  I myself predicted someone would have to fall out in this post HERE.  The difference is that I predicted it would be United or V Australia. 

 

I agree that United Airlines is probably the most vulnerable on this route system but even United has something that V Australia doesn’t and that’s a network feed.  United can route its considerable network to flights departing for final destinations in Australia and that’s tapping a country (the United States) with a population of over 300 million. 

 

V Australia, on the other hand, does have the network feed from Virgin Blue but it pales in comparison to QANTAS and it has no firm partners in the United States at present.  (I don’t count a very weak agreement to sell seats on Alaska Airlines from Los Angeles to Seattle.)  Even if V Australia entered into an agreement with its US cousin, Virgin America, it still isn’t tapping into a major network.  Virgin America can feed some traffic from major cities and that’s good but those major cities (New York, Bostin, San Francisco) are exactly where their competitor may be strongest.  United has the San Francisco market, QANTAS and Delta has both NYC and Boston covered. 

 

QANTAS also has the powerful OneWorld alliance to help as well.  Airlines such as American Airlines help feed it traffic from their networks to destinations in Australia.  V Australia has no such alliance or even a single dominant partner.  Delta, on the other hand, has never flown to Australia but has a huge network in the United States, modern equipment to fly to Australia and a will to do so. 

 

After 2 to 5 years, I would expect QANTAS and Delta to be the dominant airlines on these routes and potentially the only airlines.  I agree that United may well be the first to go but I don’t think V Australia has that much greater a chance of sticking out to success. 

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And now we come full circle back to the United States and Europe.  Both have highly developed, highly competitive airline markets.  Each has both LCC type carriers and legacy carriers (and Europe’s legacy carriers are the former national flag carriers in many respects.) 

 

This won’t be a rebuilding year.  To the contrary, both markets really need one large airline to be removed from the market.  In the case of the United States, I firmly think that should be United Airlines but in Europe that is a harder guess.  If I had to pick an large airline in Europe for the surprise of the year, it would be Lufthansa.  They are, by all accounts, a great airline but I smell trouble in that group.  First, they have been buying into airlines that have been unable to survive on their own.  That lack of survival, in many cases, isn’t because of poor management but just a lack of market share being available to them. 

 

Lufthansa has bought SWISS, for instance.  I’m not sure why and I’m not sure if they can tell us why.  They could have just as easily taken SWISS’ business  and left them in a heap.  Further, Lufthansa has a lot of Airbus A340 aircraft.  Those airplanes just don’t compete on high capacity, long haul routes anymore.  What’s more, they also have orders in for the Boeing 747-8, another large capacity, four engine aircraft.  Their competitors, Air France/KLM and British Airways, have seen the light in buying more and more Boeing 777 aircraft for their long haul, high capacity routes.  It costs less to operate them and they make more money as a consequence.  So, going out on a limb here, I say we’ll discover that Lufthansa is nearly insolvent some time by the end of 2009. 

 

Both markets in Europe and the US will continue to face challenges in costs (fuel and more particularly labor) and LCC competition will continue to press air fares downwards.  The real solution for large legacy carriers won’t be found this year.  Expect more losses (with some exceptions such as SWA and jetBlue) and more merger talk in general.

 

Here are a few more random predictions:

 

• United Airlines will ask Glenn Tilton to resign and hire an experienced airline executive.  One possibility will be Doug Steenland, most recently Northwest Airlines CEO and now Vice-Chairman of Delta.
• Southwest Airlines will, for the first time, examine adding another aircraft type to their fleet.  My guess is it will be the Embraer 170/190 series.
• Airbus will land a major order for aircraft from a traditional Boeing customer in the United States.  My bet is that Delta orders more Airbus A330 aircraft.
• China and Japan will drop their regional jet programs or, at the least, defer them for up to 5 years.
• Bombardier will announce a major order (more than 20 aircraft) for the Q400 Turbo-Prop from a US Airline.
• If fuel prices remain steady, Airtran will seek to form a small mid-western hub.
• Last but not least, one LCC type carrier such as jetBlue or Virgin America will attempt to fly to DFW Airport (wishful thinking on my part.)

 

 

Happy New Year Everyone.

 

 

Filed under: Airline Fleets, Airline Service, Death Watch by ajax
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I got asked today what airline(s) I thought might be in real trouble.  Thinking about it for a few hours, I’ve come up with a sort of “death watch” list.

 

First on my list is Midwest.  They just announced they’re grounding their MD-80 aircraft and, as a result, cutting several important routes while expanding their codeshare with Northwest Airlines (who now owns a “passive” 47% stake in Midwest.)

 

Giving up routes such as Milwaukee – Los Angeles does not bode well.  With only Boeing 717 aircraft, they have limited themselves to routes that are “heartland” oriented.  For instance, the 717 can’t make it from MKE to LAX.  It can fly from Kansas City to Los Angeles (that route stays for now) but who wants to fly from MKE to LAX via MCI (MCI stands for Mid Continent International by the way)?  The airline business is, first and foremost, a network game and Midwest just cut 40% of its network putting itself below the critical mass in my opinion.

 

The proposed merger with Airtran would have saved them but they made a deal with the devil (Northwest) and Northwest has no interest in Midwest surviving really. 

 

Next up is Frontier.  Their hub is Denver and they have already cut back their focus cities.  While their fleet is new and fuel efficient, part of their business model counted on being the only LCC (Low Cost Carrier) game in town.  Not so true anymore. 

 

They have United Airlines above them as a legacy carrier operating a substantial hub in Denver and offering a nicely segmented set of seat choices and a global frequent flier program.  Below them is Southwest Airlines.  Southwest has entered that market with a vengeance and contrary to denials on te part of Southwest, it is crystal clear they intend to put Frontier out of business.  Much of Southwest’s growth has been focused on Denver and their CEO has already stated their intention to put more capacity into that city.  Denver can support two airlines, not one.  Since Frontier is already in bankruptcy, they’re my pick for going away. 

 

The only saviour is an airline that fits into their network and I can’t identify one that really meshes well with both their route network and their fleet. 

 

My third pick is Virgin America.  This is an airline that doesn’t quite know what it wants to be.  On the one hand, they want to be a trans-continental, high value, high service airline.  On the other hand, they want to be perceived as the west coast version of Jet Blue.   Trans-continental flights can’t make money using the equipment they have (Airbus A319/320) and their base, SFO (San Francisco) can’t support a real hub operation with good traffic given the competition they have from both legacy carriers and established LCC’s.

 

 

Filed under: Death Watch by ajax
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Read this blog entry first.

 

This press release from Virgin America came out this morning:

 

http://biz.yahoo.com/prnews/080728/clm051.html?.v=101

 

It says:

SAN FRANCISCO, July 28 /PRNewswire/ — Virgin America, the California-based airline that is on a mission to make flying good again, today announced that guests now have a new option called “Main Cabin Select” (MCS), in addition to First Class and Main Cabin service currently available on every Virgin America flight. The new service is taking Main Cabin to the next level by offering guests the greatest available legroom within the existing Main Cabin configuration, at 38-inches of seat pitch in the exit row and in the bulkhead, as well as a host of perks that every traveler loves.
(Logo: http://www.newscom.com/cgi-bin/prnh/20080123/LAW179LOGO-b )

“Our guests expect an upscale experience for less and they’ve been very enthusiastic about features like our on-demand menu and in-flight entertainment platform. We’ve responded by offering a new service option that combines many popular elements of our Main Cabin experience with the other premium services all travelers want,” said Virgin America President and CEO David Cush.

Main Cabin Select service will offer:

— Complimentary food, cocktails, and beverages from the full in-flight menu, via the airline’s unique touch-screen food ordering system

— All-access pass to the Red In-flight Entertainment(TM) system’s countless on-demand entertainment options, including premium TV and films (currently live TV, videogames, Google Maps, MP3s and music videos are complimentary for every class of service)

— 38-inches of seat pitch
  — A dedicated overhead bin space for luggage

In addition to special features in the air, MCS also offers guests premium services before leaving the ground:

— Priority check-in at airports
  — Priority security screening
  — Priority aircraft boarding

“MCS is for the business or leisure traveler who wants a more streamlined boarding process, a spacious, custom-designed leather seat, an unlimited all-access pass to the most extensive in-flight entertainment library in the skies, and the ability to order cocktails, food and snacks right from their seatback video touch-screen or remote control,” added Cush. “In short, this is for the traveler who wants an upscale experience for far less than what they would pay for business class on someone else.”

Virgin America’s premium entertainment options includes a 25-film library with latest releases like “Ironman,” “Hancock,” and “Smart People,” as well as premium TV like Showtime’s “The Tudors” and NBC Universal’s “The Office.”

MCS will be available for purchase starting Sept. 15, 2008, for flights from mid-October 2008 on.

Virgin America’s brand new planes offer guests mood lighting, custom-designed leather seats and the Red In-flight Entertainment(TM) system which allows guests to control their on-board travel experience. Guests can order food, watch one of 25 movies, satellite TV, play a videogame, create a personal play list from over 3,000 MP3 music tracks onboard or instant message with other guests – all from a 9-inch video touch-screen and qwerty keyboard/remote control at every seat.

 

While I have other issues with Virgin America and their business model, it’s interesting that this came out at the time it did.

 

One other item of note: David Cush, Virgin America’s CEO, used to work for American Airlines as CFO until recently.

Filed under: Airline Seating by ajax
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