Too Friendly to Fly?
Travelers love Virgin America, the hip, mood-lit airline backed by Richard Branson. And why not? The self-described "low-fare, upscale" carrier promises passengers that they don't need to accept the dismal nickel-and-dime, fee-for-everything flying experience offered by the competition. Instead, fly Virgin and you can have it all -- legroom and the cheap ticket.
Unfortunately, telling customers they can have it all rarely ends well. And Wednesday's news that Virgin America is seeking buyers suggests that its business model -- beloved as it is -- will turn out to be little more than a happy historical blip.
When Branson founded the airline in 2007, he had an optimistic vision. Rather than focus on routes where he could outcompete older carriers, he wanted to offer a better product. "The American airline system, 10 years ago, didn't have a decent airline," he told Bloomberg Television last week. "So I thought, let's launch Virgin America."
He targeted hip young fliers in cities like San Francisco and Austin, Texas, and tricked out his planes to resemble after-hours clubs, complete with stylish cocktails (explicitly marketed as pick-up tools) and trendy boarding playlists. Virgin would offer more legroom, comfortable leather seats and in-flight WiFi.
There was just one problem: money. During its first five years, Virgin America had exactly one profitable quarter, while recording a cumulative net loss of $671.3 million. Some of that loss was due to normal start-up and expansion costs. And Virgin's launch nearly coincided with the onset of a historic recession. Still, by 2011, most major U.S. airlines were back to enjoying record profits. Virgin, by contrast, suffered a net loss of $100 million.
It wasn't as if Virgin was losing out to competitors with better amenities. Rather, by 2011, the industry had figured out that it could achieve sustained profitability by packing more seats into the same cabin, and charging fees for everything from checked bags to extra legroom. Most notably, low-cost, no-frills Spirit Airlines was making a record profit ($95 million in 2011) while earning a reputation as the country's most-hated carrier (basically, the yin to Virgin's beloved, low-profit yang). The secret to Spirit's success wasn't hard to discern: U.S. fliers will choose low prices over amenities.
But Virgin wasn't just getting out-competed on price. The airline's target demographic -- affluent millennials in cool cities -- was necessarily limited. In 2013, it slowed down its delivery schedule for new jets, and last September it conceded that it was having trouble coming up with enough flights for its new gates in Dallas. With a smaller network, there's more pressure to compete on each route. Or not: In February, when fares between Dallas and New York's LaGuardia fell to as little as $41, Virgin said it would rather fly empty than lose money fighting for market share on the route. In all likelihood, then, it'll lose market share.
Fortunately for Richard Branson, Virgin has been making money since 2013. But that profitability rests on shaky ground, including a debt restructuring that lowered its interest costs ahead of a 2014 initial public offering, and a concerted effort to slow expansion. Another key factor is one that has helped airlines worldwide: plummeting fuel costs.
Sooner or later, Virgin will have to expand, and fuel prices will rise again. Can it survive both changes, much less profit? That question will have to be answered by whoever acquires the airline. JetBlue and Delta seem like the most likely suitors at the moment -- and that doesn't bode well for Virgin's model. Delta has lately earned record profits by adding seats to planes and fees to everything. The once-beloved JetBlue has been following suit since 2014. The likelihood that either will tolerate a quirky business model for long is slim.
Virgin America, Richard Branson’s vision for decency in the sky, will soon be just another airline.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Adam Minter at email@example.com
To contact the editor responsible for this story:
Timothy Lavin at firstname.lastname@example.org