Backers of Virgin America, the United States’ newest airline, spent several years trying to convince federal regulators that the carrier isn’t simply an extension of British billionaire Richard Branson’s worldwide aviation empire. That would be illegal under the strict limits on foreign ownership of U.S. airlines.

But, as the airline launches service today with flights between San Francisco and both New York and Los Angeles, they’re tweaking that message.

“We’re a proud member of the Virgin brand team,” says Virgin America CEO Fred Reid, the 57-year-old airline industry veteran recruited by Branson in 2004 to get the carrier off the ground. The Virgin brand, he says, is “synonymous with value, style, a little bit of fun, irreverence and caring deeply” for customers and employees.

It’s been a balancing act for Reid and the team of executives who have brought Virgin America to this point. To comply with U.S. restrictions on foreign ownership of airlines, they’ve had to persuade Washington that the carrier won’t be owned or controlled by Branson.

But to distinguish itself from the competition in the United States’ saturated domestic air market, Reid and his team need to play up a close association with the ultrahip Branson, a larger-than-life character who infuses a cool vibe into a global empire that consists of air and space travel, media, telecommunications and retailing.

“There’s a lot of mystique in the Virgin brand,” says Brett Snyder, a former airline marketing executive who writes The Cranky Flier blog. “That will help (Virgin America) bring in a lot of customers the first time to try it out.”

Virgin America is positioning itself between the discounters and the traditional network carriers. It’s big British cousin, Virgin Atlantic, is similarly known for providing stylish service (especially to its Premium Economy and Upper Class passengers) at discounted prices.

Virgin America’s service will be less grand than the lavish international service offered on Virgin Atlantic, Reid said in an interview. Nonetheless, he promises the best customer service in the business.

Virgin America aims to give domestic travelers more for their money by providing a higher level of comfort and by making lots of its coach seats available at prices well below the fares of bigger rivals.

For example, its introductory fares between San Francisco and New York are $278 round trip, about $50 lower than the lowest advance fares available previously from the route’s two dominant carriers, United and American.

Similarly, Virgin America is positioning its first-class service as a more comfortable, higher-tech experience than what the traditional big U.S. carriers offer in their domestic first-class sections, at prices as much as 50 percent lower.

The centerpiece of the service will be a sophisticated in-flight entertainment system at each seat throughout the plane, dubbed Red in a nod to the planes’ red-painted tails.

Reid says Red is “arguably two or more generations ahead of anything in the U.S. market today.” In addition to 18 channels of TV from Dish network, pay-per-view movies, a wide selection of music and electronic games, passengers can text-message other passengers or order meals, which cost extra in coach.

Beyond Red, Virgin America officials are schooling customer-service workers on the ground and in the air in some of Virgin Atlantic’s tricks for getting passengers to relax. Virgin America has charged Todd Pawlowski, former head of customer and airport service for Virgin Atlantic’s North American operations, with creating a similar service style.

“Mood” lighting inside Virgin America’s fleet of Airbus A320s will be used to improve travelers’ perception of the cabin environment and the passage of time as they zoom through multiple time zones. Settings include dawn, dusk and blue sky. The Virgin sense of fun extends to the naming of its Airbus A320s. The carrier has given the aircraft names such as Mach Daddy, Virgin & Tonic, An Airplane Named Desire and Jane (Get it? Plane Jane?). It even selected this name entered in a plane-naming contest: Winner of Naming Contest.

Chief image builder
Virgin America, like almost all other Virgin-branded companies, is selling image as much as it is service. And its chief image builder is Branson. The U.S. Transportation Department’s concerns that Virgin America would be owned and controlled by a foreigner were resolved in spring. Branson’s Virgin Group initially had invested $135 million in equity and loans to fund the start-up. But, to overcome DOT objections, Virgin America’s U.S. investors, led by Black Canyon Capital and Cyrus Capital Partners, agreed to increase their investments from $10 million to $162 million.

That, plus the impending repayment of the money lent by Virgin Group, will leave Branson-affiliated entities with only a 23 percent ownership stake, just under the U.S. limit for foreign investors. And Virgin America made changes in the company’s governance to assure that a non-U.S. citizen won’t have de facto control. Also part of the resolution: Reid, Branson’s handpicked CEO, has to leave the airline by mid-November.

Formally, Virgin America is an independent licensee of the Virgin brand rather than a subsidiary of Virgin Group. As such, says Reid, “We’ll have to earn our own stripes.”

Nonetheless, says veteran aviation consultant Jon Ash, Branson “will be very influential, even without actual control. I don’t think he really knows how tough the U.S. airline industry will be. But he does know the airline business in general, and he understands brand-building like very few people do.”

Ash, president of InterVistas-ga2 Consulting in Washington, D.C., says Branson “doesn’t fly hot-air balloons around the world because he likes to fly balloons, or appear in TV reality shows because he’s a big reality-show buff. He does it because it’s the best free advertising in the world.” The team of industry veterans running Virgin America “will do well to listen to him.”

On the marketing front, Branson’s hype machine continues working, albeit subtly. Apparently because of the U.S. government’s wariness about the role he’ll play at Virgin America, Branson is taking a lower-than-usual profile in Virgin America’s launch. Though he will be center stage at today’s formal launch events and aboard the ceremonial first flight for VIPs and reporters, he declined to be interviewed for this story, and for most other pre-launch media stories.

But he does plan to stir the pot today by bringing satirical TV comic Stephen Colbert along on that New York-to-San Francisco inaugural flight.

Branson also is finding other ways to build the brand image by playing — with gusto — his customary role of international mogul and bon vivant. In the current issue of GQ, the glossy men’s magazine sold mostly in the U.S., the 57-year-old Brit with flowing blond locks and signature goatee dishes racy tales of his youth that involved in-flight sex and marijuana use with rock stars.

For Branson, who was careful to specify that he does not smoke marijuana regularly because he wants to keep a clear head to run his 350 companies, the GQ interview was a textbook example of how to draw attention to the jet-set hipness of everything Branson, including Virgin America.

The downside of such a highly personalized approach to promotion and brand-building, says University of Wisconsin marketing expert Thomas O’Guinn is that it leaves no room for failure, either by the individual or by the companies associated with the individual.

Branson and his Virgin brand should produce “higher-than-average trial rates” for the carrier, he says. “But if the airline doesn’t deliver very well on its promise and if it doesn’t meet passengers’ pretty lofty expectations, it won’t matter who Richard Branson is.”

A matter of speculation
Whether Virgin America can succeed in the hypercompetitive domestic air market is a matter of speculation. It already has 10 of the 33 Airbuses it ordered on hand and expects to be flying to 10 U.S. cities, including Washington and Las Vegas, within a year. It’s aiming for the nation’s top 30 domestic travel destinations within five years.”

“Still, in addition to the brand’s cachet, Virgin America is one of the most well-funded airline start-ups ever. Spokesman Gareth Edmondson-Jones notes that company easily met the government’s financial fitness test requiring that it be able to operate at least one quarter with no revenue coming in. Its investors also have promised additional loans, if needed.

Henry Harteveldt, travel industry analyst at Forrester Research, credits Virgin America for its attempt to deliver air service that’s different and better than what the market offers now. But he questions some of the carrier’s early moves, starting with its choice of base operations. “Basing an airline in San Francisco is one of the dumbest things you can do in this business, because of the high cost of doing business in California, and particularly in the Bay Area,” says Harteveldt, a Bay Area resident. Bad weather also makes the San Francisco airport prone to delays, he says.

Harteveldt also says he’s concerned that Virgin America does not have a replacement lined up for Reid and that it has no executive in charge of marketing. He also says the crash of Virgin America’s online ticket-selling system within hours of its launch on July 19 sent up a red flag. Management says a still-unidentified outsider hacked its system.

JPMorgan airline analyst Jamie Baker, among other industry watchers, is looking for a fierce response from competitors to the new air service. In 2003 and 2004, when United and American faced interlopers on their bread-and-butter transcontinental routes, flying capacity on those routes jumped 42 percent in nine months. The result: Fares dropped 26 percent, and airline revenues plummeted. The principal interloper, America West, beat a hasty retreat.

This time around, the big network carriers have fewer available planes to throw into such an effort. But Baker still expects a 10 percent to 15 percent increase in capacity in markets that Virgin America attacks. “It would simply be without precedent for the industry to sit idly by as Virgin enters the markets and steals share,” he says.

Reid, though, dismisses any suggestion that the competition could deliver an early knockout blow or keep Virgin America from meeting its growth targets. Despite the defensive efforts of the big traditional carriers, discounters have captured about 30 percent of the domestic market.

“None of those (discount airlines) have been deterred from providing what customers want. And we won’t be deterred, either,” Reid says.

US Airways officials went to the Paris Air Show last month and did something executives at most big U.S. carriers haven’t done in years. They ordered planes: 92 new Airbuses at an estimated cost of $10 billion.

After a brutal half-decade in which U.S. airlines rang up $35 billion in losses, they’re again profitable. But”,” US Airways’ order notwithstanding, the little money they’re making isn’t nearly enough cover what they’ll need to rejuvenate and enlarge their fleets in the next two decades.

If the projections by the giant plane manufacturers — Airbus and Boeing — are to be believed, U.S. airlines could need as many as 9,000 new jets in the next 20 years. That could cost the industry nearly $1 trillion.

The high cost of fleet replacement and expansion will add to the financial pressures that already weigh heavily on the airlines, including the pressure to raise fares. But failure to launch the enormously expensive process soon could relegate the big U.S. carriers to flying antiquated aircraft for years while their foreign and low-cost domestic competitors fly newer, more fuel-efficient jets.

The planes flown by the nation’s six largest conventional network carriers are now, on average, 13.3 years old, according to industry tracker Back Aviation Solutions. That’s the oldest ever for this group of airlines.

“The situation with these very old planes is starting to get serious,” says Michael Roach, a veteran consultant who co-founded America West Airlines in the 1980s. If the big U.S. carriers that haven’t resumed buying planes don’t do so soon, “they may never get out of the hole they’re in.”

” “Roach notes also that U.S. carriers have never operated their planes more intensively, getting more hours of flight out of them and packing more people into them than ever before.

Their planes are, in the vernacular of the cowboy, being “rode hard and put up wet.” Yet, with a couple of exceptions, the big U.S. airlines are still financially hamstrung by the huge losses of the post-9/11 era.”

” Airline executives acknowledge they face a daunting, but not insurmountable, task.

“It’s a multiyear process,” says Tom Horton, CFO at American, the world’s largest carrier. “It took us five bad years to get where we were; it’ll take a while for us to get back on firm footing.”

Among the big carriers, Northwest Airlines has the oldest fleet as measured by average age: 18 years, according to the company. Continental has the youngest by that measure: nine years.

Good maintenance can keep planes flying safely for 30 years or more, but after a point, the upkeep is more expensive” “than buying new ones, says Randy Baseler, who earlier this year retired as Boeing’s chief airplane salesman. The big U.S. airlines, he says, “are starting to get themselves in a bind. If they don’t start taking deliveries now, they’re never going to get caught up. They could end up with an even larger fleet that needs replacement in an even more desperate way.”

Had Baseler not stayed so busy selling Boeing airplanes to foreign airlines in the years before his retirement, his argument that U.S. airlines are falling behind could be dismissed as an empty sales pitch.

But all those foreign sales in recent years are pushing the U.S. carriers further back in the delivery line when they do get around to placing orders.

Twenty years ago, U.S. carriers could be counted on to absorb nearly half the world’s commercial aircraft production. Today, Boeing and Airbus expect U.S. carriers to buy a quarter to a third of their future output, giving them less clout with the plane makers.

Wall Street expects U.S. airlines this year to register a second year of profitability since the post-9/11 industry crash: $6 billion before taxes, interest and accounting items. But that pales in the face of the estimated $715 billion to $950 billion worth of new planes that the manufacturers estimate U.S. carriers will need to enlarge their fleets to meet travel demand. The government forecasts that the number of air travelers in the United States will double in the next two decades.

Other looming capital costs could easily push the airlines’ essential capital outlays above $1 trillion in the next two decades. The expected increase in passengers will, for example, require more spending on terminals, training facilities and other essential infrastructure.

In addition, the Federal Aviation Administration says airlines will have to spend $20 billion to $25 billion in coming years to equip cockpits for the coming “NextGen” air traffic control system. It’s money the airlines simply don’t have.

Lingering impact
Industry troubles that started with the recession and terrorism of 2001 severely limited the ability of the big U.S. carriers to update fleets, their largest capital investment” “and heart of their business.

Most U.S. airlines remained on the sidelines the past few years while global sales of commercial jetliners boomed. They focused on restructuring and cost cutting, with four of the six large traditional carriers — United, Delta, Northwest and US Airways — going through Chapter 11 bankruptcy since 9/11.

But because of the worldwide scramble for new airliners, waiting to begin the fleet replacement and expansion process is a fast-expiring option for U.S. carriers. Boeing and Airbus are already mostly sold out through 2010, with some models effectively sold out into 2013.

Any carrier that fails to get in line soon could end up flying lots of old, fuel-guzzling, maintenance-intensive planes. Boeing’s Baseler points out that with a typical delivery rate of two per month, American would need 15 years to completely replace its 300 MD-80s, 1980s-era jetliners that comprise about 45 percent of its fleet.

American provides perhaps the best example of the pressure that carriers are under to begin fleet renewal and expansion. Executives are loath to spend money on new planes because they don’t believe the industry’s economics currently justify such investments. But at 14 years average age, their fleet of 672 big jets is getting long in the tooth”.

“In March, American decided it couldn’t wait any longer on replacing the oldest planes its fleet and said it will move forward the delivery dates of 47 previously ordered Boeing 737s that it had delayed almost indefinitely after the 9/11 terrorist attacks.

That’s “the first bite at replacing the MD-80s,” says CFO Horton. The first nine of those new Boeing 737s are scheduled to join the fleet in early 2009.

Horton said American would prefer to wait until Boeing offers a more fuel-efficient, mostly composite replacement for the 737 design. But Boeing President Scott Carson said at the Paris Air Show that the 737′s replacement won’t fly for at least another seven years.

The trick for American, Horton says, will be to “find the sweet spot” between ordering more 737s and ordering copies of the 737′s eventual replacement. At the same time, it likely will have to decide soon whether it can afford to begin replacing its aging Boeing 767 fleet with Boeing’s popular and futuristic 787 Dreamliner.

Not all big carriers face the same challenge. Continental continued to take deliveries of new planes in the post-9/11 era, and has the youngest fleet of the bunch. Average age: less than 10 years. It has orders for 85 more Boeing planes. Still, it needed to secure its place in the already long delivery line for Dreamliners to avoid being stuck 15 years from now with uncompetitive old planes. That’s why it ordered 20 Dreamliners in late 2004, and raised that order to 25 in May.

The 787 is scheduled to fly for the first time later this year, and enter commercial service in 2008. The first three won’t join the Continental fleet until 2009; the last five won’t show up until 2013. That’s an unusually long delivery window for the Houston-based carrier.

“Normally, we wouldn’t commit to aircraft as far out into the future as we committed to those last five 787s. But when we saw the demand being what it had become, we decided to go ahead,” says Gerry Laderman, Continental’s treasurer and vice president of finance.

Southwest, the industry’s profit leader, never stopped ordering planes. It has orders for 494 Boeing 737s, although in June, it announced plans to defer delivery of 15 of the 34 it previously expected to pick up in 2008.

But the rest remain, for now, mostly on the sidelines.

Northwest ordered 18 Dreamliners two years ago, and expects to take delivery later this year of the last of 32 new Airbus A330 wide bodies. But it still has, by far, the oldest fleet in the industry, with an average age of about 18 years.

United, with an average fleet age of 12 years, has no planes on order. Delta, with planes averaging 11 years old, has 55 planes on order, but doesn’t want them and already has lined up buyers to take them off its hands once they’re delivered.

Big airlines blocked?
Based on their cyclical history of modest profits followed by huge losses, big airlines would seem boxed in by a need for new planes and an inability to pay for them.

But Roach, the industry consultant, says that it would be “idiotic” to think that all the nation’s carriers will disappear as their current planes wear out. “There will always be an air transportation system. It is too vital to the country’s interest for it to be otherwise,” he says. The more apt question, he says, is “Where will the money come from” to acquire those planes?

Southwest, with the deepest financial resources in the industry and strong annual cash flows, expects to continue buying most of its planes with cash generated by its operations, says CFO Laura Wright.

For many U.S. carriers, that’s not an option they can rely on. Now, they’ll have to get by with a little help from their friends: leasing companies.

It used to be that when the big U.S. airlines leased planes — typically via long-term deals that were nothing more than alternate ways of purchasing planes — they did so mainly for tax savings. Today, they increasingly are turning to leasing because they lack the cash or the strong credit ratings to finance conventional plane purchases.

And thanks to the strong worldwide demand for popular models from Boeing and Airbus, there’s no shortage of companies willing to finance them for carriers, even those whose bottom line profits are unimpressive or non-existent. Aircraft lessors are confident that should a customer default on a lease, they’ll have no trouble finding other carriers to lease their planes.

“There’re plenty of people out there willing to finance airplanes,” Baseler says. “Actually, at Boeing, we’re amazed at just how easy it is to finance new planes.

American’s Horton says, “Some people marvel that the airline industry has access to as much capital as it does, given its capacity to reduce value for investors.”

But he disagrees with the notion that bottom-line profits don’t matter much. “There’s a whole lot of reasons you can finance planes today without being profitable. But, in the long run, I still think our industry is going to have to have profits if it’s going to make its way.”

For the fourth-straight day Tuesday Northwest Airlines cancelled more than 10 percent of its flights because of a pilot shortage, fueling concerns that the situation could be repeated in late July and late August.

Joe Brancatelli, who runs the business travel advice Web site JoeSentMe.com and is a freelance USATODAY.com columnist, is advising readers not to book flights on Northwest in the latter half of July or August, heavy summer travel months when Northwest crews can again be expected to run up against monthly limits on their work hours.

A new clock for Northwest pilots begins Monday, presumably giving the carrier greater ability to fly its full schedule for awhile. The Federal Aviation Administration limits pilots to 1,000 flight hours a year and, in most cases, 100 hours a month. But Northwest’s labor contract allows pilots to schedule up to 90 hours a month, with some additional voluntary overtime.

Northwest on Tuesday issued a statement repeating its explanation from Monday, blaming the high cancellation rates on bad weather in the East and Midwest earlier this month.

That bad weather disrupted flight operations and pushed many pilots over their monthly duty time limits, the airline says.

Through 5 p.m. ET Tuesday, Northwest canceled 12.3 percent of its 1,408 scheduled flights tracked by FlightStats.com. Cancellation rates for the previous three days ranged from about 12 percent to about 14 percent. The industry norm is less than 2 percent in good weather.

Northwest is relaxing ticket restrictions, increasing reservations staffing and contacting consumers about their flights’ status.

Kit Darby, who operates Air Inc., an aviation careers placement and advisory firm, says bad weather can affect carriers differently. But Darby also says Northwest management’s decisions to keep pilot staffing thin when it recently emerged from Chapter 11 bankruptcy has left it vulnerable.

“I don’t know if it’s really weather, or bad schedule planning, or pilots sending a message to management, that’s causing this,” Darby says.

The Air Line Pilots Association, which represents Northwest pilots, says it warned Northwest management for months that pilot staffing was too thin and that pilot shortage was likely late each month this summer because of peak travel demand.

Terry Trippler, the owner of Minneapolis-based TripplerTravel.com, who closely follows Northwest, questions management’s explanation for the cancellations.

“Northwest doesn’t even fly much in the East, where this supposed bad weather was,” says Trippler.

Conversely, Trippler questions why the same pilots who adequately staffed all of Northwest’s May flights without a hitch are now too tired to fly overtime hours on a voluntary basis.