Why Is Ultra-Popular Virgin America Still Losing Money?

Conde Nast Traveler

Photograph by Josh Edelson/AFP via Getty Images Close

Photograph by Josh Edelson/AFP via Getty Images

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Photograph by Josh Edelson/AFP via Getty Images

Virgin America is a runaway favorite with fliers. It tops airline service quality rankings and leads the list of best U.S. carriers chosen by Condé Nast Traveler readers.

So why can't this most promising of airline upstarts share in the industry's rebound? Virgin's timing—entering a notoriously difficult business just before the financial meltdown—may be one reason. But lately Virgin has been pointing the finger at another culprit: big airline bullies. When Virgin recently entered the Newark–San Francisco market, a route where United had a virtual monopoly, the response was swift and unmistakable. "They immediately dropped their fares to match ours and doubled their flight frequencies," grouses David Cush, CEO of Virgin America. "Clearly their intention is to drive us out of the market."

Duking it out with the big boys is just one of many obstacles that any new airline would face today. Another is getting past the regulators and into the air. With a more vigilant FAA review process and stratospheric fuel prices, lenders are reluctant to fork over the substantial capital required to fund a new carrier, especially given the poor track record of most of them. Shortly after deregulation in 1978, 59 new airlines entered service, but most quickly went under, many of them blaming the established carriers for dropping prices to unprofitable levels in order to starve them out.

United defends its response as smart business strategy and denies that it has undercut Virgin's prices. "Any time a competitor comes into your market and lowers fares to stimulate demand, we're going to match those fares," United CFO John Rainey told CNBC. Adding extra flights is yet another move to handle that demand, he claimed.

Holding on to airport landing slots even if they're not using all of them is another tactic large carriers employ to keep newcomers out. Richard Branson, who owns a stake in Virgin America, says that the airline was unable to gain a toehold at Newark until it could snatch up landing slots that became available as a result of American's bankruptcy in 2011. Branson is asking the Department of Transportation to investigate this and other "questionable" tactics.

While the architects of airline deregulation argued that free-market forces would ensure fare competition and plenty of choice for U.S. fliers, experts say that today's climate is keeping new airlines from getting off the ground. According to the DOT, there have been no successful applicants for new jet airlines in the United States since Virgin won approval in 2007. David Neele­man, who founded JetBlue in 2000, says that he wouldn't even attempt to pull off a similar feat today. "It would be crazy. The only upstarts that have a good chance to survive must be extremely 'nichey,' " he says, citing Ryanair clone Spirit, Allegiant, and smaller fry like Sun Country Airlines.

So how, then, did JetBlue manage to take flight? For one thing, fuel prices were far lower in 2000 and the economy was booming, which made George Soros and other investors comfortable bankrolling the upstart JetBlue to the tune of $130 million.

Fast-forward to today's market and upstart Virgin America: The carrier now has a fleet of 53 aircraft but has lost more than $500 million in its six years of operation, though recently Cush said that the outlook was improving and profits were in sight. In the meantime, some observers contend that Virgin may be a victim of its own success—by trying to be all things to all people, both high end and low, it may be more of a threat to the big airlines than, say, a scrappy budget line like Spirit. Asked why Spirit gets left alone by the major carriers, CEO Ben Baldanza explains: "They don't really bother with us. If you're a Nordstrom, do you worry about the Dollar Store that opened across the street?"

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