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What’s Virgin America’s Problem?

What’s Virgin America’s Problem?

The airline business is tough. As many investors have discovered, even the best airlines sometimes struggle just to survive, never mind generating a profit.

Further complicating the situation, it often seems like the normal rules of business and economics don’t apply to commercial aviation.

As discussed in a recent blog post, Delta is simultaneously squeezing its best customers and generating enough cash to resume dividend payments to its shareholders after a decade. Business 101 warns that mistreating your best customers is not a recipe for financial success. And yet, Delta is doing just that.

Spirit is another confounding example. The airline’s business model is based on charging ultra-low fares, and then nickel-and-dimeing travelers for everything beyond basic airfare. It’s an approach that most flyers find infuriating. But that lack of love doesn’t seem to have dampened the traveling public’s appetite for Spirit tickets. In 2012, the carrier flew 20.7 percent more passengers than the previous year and chalked up a hefty profit of $108.5 million.

Even as some carriers manage to prosper while treating their customers shabbily, other carriers do the opposite, treating their customers well but flagging financially.

A prime example is Virgin America.

At just six years old, the airline has the advantages of a late entrant, including a younger fleet and lower labor costs. And it was clearly an airline designed from the ground up to deliver a superior travel experience, with leather seats, mood lighting, food-on-demand, and an industry-leading inflight entertainment system.

Their loyalty program, Elevate, got off to a rocky start, but has been steadily improving with the addition of new program partners and an enhanced elite program.

If I had a blank slate and the resources to design an airline to my own specs, it would look a lot like Virgin America.

But for everything that Virgin America seems to be doing right, the carrier hasn’t posted an annual profit since its inception.

Yesterday, Virgin America reported its financial results for both the fourth quarter of 2012 and the first quarter of 2013.

There’s a lot of happy talk, with references to solid on-time performance and industry-best baggage handling, as well as the #1 ranking in the 2013 Airline Quality Rating survey.

But there’s no disguising the lackluster financials. For the full year, the airline lost $145.4 million. And for the first quarter of this year, the loss was $46.4 million. Although there’s some year-over-year improvement, sustained profitability is still more dream than imminent reality.

Virgin America president and CEO David Cush remains wedded to the proposition that great service will drive great performance: “We’ve always said that once people fly us, they stick with us — and show a preference for our service.”

But he’s assuming what has to be proved. The examples of Delta, Spirit, and Virgin America certainly seem to undermine the key assumption underlying traditional theories of business success, namely that consumers are rational actors.

The evidence, at least in the airline business, suggests we’re not.

Reader Reality Check

What do you make of Virgin America’s failure to realize its potential?

Are travelers hypocrites, demanding service but buying on price?

Other Posts of Interest

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  • http://www.facebook.com/tigerhunt2011 John Beeler

    If Virgin America would PLEASE fly to PHX, TUS or AZA, I would make them profitable myself! It’s the limited market that’s hurting them…

  • http://twitter.com/LupineChemist Kevin Sullivan

    Why would I fly an airline and accumulate points that’s not part of a global alliance. I care about being able to use my work travel to help me with my personal travel. Personal travel adds revenue and capacity but airlines that rely on quality service over extreme frugality really make their money through business travellers, and business travelers will avoid anything that’s not SkyTeam, OneWorld or Star Alliance.

    A true Ryanair style airline would be hugely popular in the US. Air travel around the US is hugely expensive compared to Europe. People travelling short distance to get to their vacation have voted with their wallet that they’d rather pay less for a less pleasant experience for a few hours and be able to use that money at their destination.

  • http://www.triplepundit.com Nick Aster

    I’m a big fan of Virgin. But I echo other commenters – lack of global alliance (the transfer to Virgin Atlantic is laughable) and few destinations is the problem.

    Get a nice midwest hub and add some underserved cities and I can see VA getting more mainstream and ultimately more profitable.

  • Lo

    The problem is it does not fly enough places. I would gladly fly Virgin, but it basically only has routes that are coast-to-coast. They basically only fly to LA and SF. I don’t fly to/from there. Until Virgin flies to more places, I cannot use them.

    Some flights from DC to places other than SF and LA would be a great start. How about to Las Vegas, Orlando and DFW?

  • http://www.facebook.com/profile.php?id=13806765 Thom Furey

    Spirit Airlines is probably as close to Ryanair as we have in this country and I believe they were the only US carrier that posted a profit last quarter.

  • Kevin Kilbride

    I had the chance to fly them once and really enjoyed the short flight. I think everyone here has it right – a few more places to fly to and a tie in with a global alliance would certainly help.

  • http://www.facebook.com/mpscan Mike Scanlan

    You’re forgetting that airlines are competing with trains for short to medium distances in Europe. I fly the BOS-LGA shuttles all the time… if I were in Europe I would easily take the German ICE or French TGV instead.

  • http://twitter.com/Yogacan Yogi mogi

    “Are travelers hypocrites, demanding service but buying on price?”

    I don’t really know anything about the economics of aviation, but to me it seems that the main reason for consumers demanding service but buying on price is because flight tickets prices are so freaking high compared to alternatives; or not even alternatives, just compared to what an average low-middle income earner spends on a daily basis. After ponying up that crazy amount of cash it only makes sense to demand service.

  • tolbuck

    Now THAT remark is beyond LAUGHABLE! Many of You have no idea what it takes to make a flight profitable and state of the art entertainment systems, complimentary meals and all the perks on a brand New Aircraft? For the Critics Out there, the Airlines are Not a Subsidized Business…….it is like anything else, “You get what You PAY for”………….$99 fares do NOT even pay the landing fees. Time to WAKE UP and GET REAL.

  • Tania Munk

    Like the others who have written comments, I agree that Virgin America has a very narrow base from which one can fly. I feel it would be better if they didn’t fly on most of the same routes as the other airlines as that is plain redundancy, but rather pick up some of the smaller venues in which other airlines no longer fly due to cutbacks. That would surely propel them into some popularity. The other part of this is their frequent flyer program. If most passengers are like myself who fly with Virgin Atlantic I feel it would be a great idea to be able to merge the Virigin America Elevate frequent flyer miles with the Virgin Atlantic frequent flyer miles since alot of customers use Virgin Atlantic when flying abroad.

  • AceK

    Um, Acela? Straight to Penn Station in 3:35.

  • BubbaJoe123

    “Business 101 warns that mistreating your best customers is not a recipe for financial success.”

    Business 100 (prerequisite to 101) is to know who your best customers are. Someone flying 100k miles a year on very cheap fares plus a few mileage runs, can be a much less attractive customer than someone who flies 20k miles a year on full Y fares.

  • JD

    TGV from Paris to Lyon 245mi, 2 hours, ~345 seats, $64

    Acela from Boston to NYC 229mi, 3 hours, ~303 seats, $100

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