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.