Virgin America grows as rivals cut back
George Raine, Chronicle Staff Writer
Saturday, May 24, 2008
In March, about the time that Frontier Airlines sought bankruptcy protection and Aloha Airlines and ATA Airlines went out of business, the investors in Virgin America poured an additional $100 million into the only airline based in California.
Is the price of oil about to tumble back to Earth? Can Virgin America see a turnaround in the soft economy that is not coming up on the rest of the airline industry's radar?
The answer is no to both of those questions. In fact, it may have been the worst of times to be a startup, with jet fuel prices chewing up more marginal carriers and deflating the legacy carriers, but, notwithstanding the crude oil bill reaching nearly $135 per barrel this week, the 9-month-old airline with offices in Burlingame is in a growth spurt and likes its chances.
With the rest of the industry staggering under the burden of rising costs - American Airlines saying this week it will cut domestic capacity by 12 percent and shed jobs in the fourth quarter - here's the view from Burlingame:
"I would rather be growing in this environment than shrinking in this environment," said C. David Cush, 48, the president and chief executive officer, who arrived in December after 20 years of senior management experience at American Airlines.
"Growing cautiously and opportunistically feels pretty good" compared with the alternative of downsizing, said Cush. "Shrinking is very inefficient."
Apparently, the airline's investors felt the same way. In March, the original investors poured in round two of funding. The investors are VAI Partners LLC, a group funded by private investment firms Black Canyon Capital in Los Angeles and Cyrus Capital Partners in New York, which are separate entities, and Virgin Group.
The $100 million infusion gives the privately held company $400 million in shareholder-contributed capital, although some of that is going toward buying Airbus airplanes.
"These guys are long-term investors," said Cush. "They certainly understand what they are getting into."
He added, "The fuel cost is certainly a bigger mountain than any of us had anticipated six months ago or two years ago when this investor group came together. But it's something that everyone in the industry has to deal with."
Anchor SFO tenant
Today, Virgin America has 17 airplanes in the air and one standby. It has 1,500 employees and serves seven U.S. cities, just a tiny fraction of what Cush formerly helped manage at American Airlines - more than 4,000 daily flights and 1,000 aircraft.
The carrier will become the anchor tenant at SFO Terminal 2 after it is renovated in late 2010. It currently operates out of the new international terminal.
Virgin America is sized to operate 50 to 60 airplanes, said Cush, so the sooner it has them in the inventory, the better off the company is, because it can leverage fixed costs against a bigger revenue base.
Niche as a hip airline
It certainly has a name with brand equity - it licenses the Virgin brand from minority investor Sir Richard Branson's Virgin Group - and a business plan with which it wants to carve out a comfortable niche for a hip airline.
"I think the last 20 years of evidence in the marketplace has shown that U.S. consumers are increasingly interested in low-cost carriers and in new entrants, whether they be low cost or not," said Cush.
Long before Virgin America was off the ground, the carrier said it likely would be serving 30 cities within five years. That may have been a little ambitious, said Cush.
He added that he sees a ceiling for the airline. "In all honesty, I would not be surprised if 30 cities are the most we ever fly to, maybe a few more than that." He also said he thinks the business model "tops out at 125 to 150 airplanes," serving large urban centers.
Virgin America has routes from San Francisco to Los Angeles, New York, Washington, San Diego and Seattle. It also flies from New York to Los Angeles, from Los Angeles to Washington and from Seattle to Los Angeles.
Henry Harteveldt, a former airline executive and industry analyst at Forrester Research in San Francisco, said he thinks a Virgin America ceiling, if one truly is in place, is adjustable. "If they detect an opportunity for prudent growth, smart growth, they and their investors will explore it," he said.
But the more immediate issue for Virgin America, Harteveldt said, is to add destinations, like Chicago, Atlanta, Boston, Dallas and Miami, "and then start knitting cities together to provide more utility to business travelers."
Its service to Seattle elicited a prompt response from Alaska Airlines, which began its Seattle-San Francisco service in 1979 and is protective of its California franchise, which vice president of sales Steve Jarvis said represents 40 percent of its revenue. Alaska Airlines increased its schedule as soon as Virgin America announced its flights, and has since increased it a second time. "We will continue to serve (California) and make sure everyone knows how important it is to us," said Alaska Airlines' Jarvis.
More slots are essential
Virgin America's success hangs on access to airport slots.
"That's one of the biggest issues we have in front of us - how are we going to make sure that we can get into the airports that we need to get into at the times we need to get into them in order to remain competitive with the big boys," said Cush.
The case he made to the Department of Transportation in October 2007 for slots at New York's JFK International Airport and New Jersey's Newark International Airport demonstrates his point:
Virgin America asked for 28 slots at Kennedy and was given 20 - or 10 departures and 10 arrivals. The carrier felt it was treated fairly. At Newark, Virgin America asked for 16 slots, eight departures and eight arrivals, and got nothing. Actually, it was offered time and space, but it would have required a departure from San Francisco at 3 or 4 a.m. - "not commercially viable times, I would say," said Cush.
In February, Virgin America sought authority to fly from Los Angeles to San Jose del Cabo, Mexico, and the government awarded the route to United Airlines, with Delta Air Lines the backup.
Virgin starved for gates
Cush understood the Department of Transportation's rationale. The government questioned Virgin America's ability to begin operating the route in 90 days and was certain of United Airlines' ability.
But the allotment of routes and slots raises the question about whether incumbents are favored. Cush argues airport slots turn on basic usage rights, not ownership rights, "and our view is that simply having been there first is not a license for using those things in an inefficient manner for all of eternity."
Virgin America now has an application to serve O'Hare International Airport but is in a good position in Chicago: The airport is opening another runway in November and wants new airline capacity.
But the rub for the new entrant from Burlingame is capacity restraints, already seen at Kennedy and Newark, and that potentially may limit Virgin America's opportunities.
"What is going on is you have an air traffic control system that is out of date. It is overloaded. You've got a limited amount of concrete that has been poured in this country over the last couple of decades," he said.
Meantime, competition is vigorous, particularly in an anemic economy featuring sky-high fuel prices. Virgin America's charge is to create a product, said Cush, that "people are going to be willing to pay $20 or $30 more to fly Virgin America just because it is going to be worth it."
E-mail George Raine at [email protected].
George Raine, Chronicle Staff Writer
Saturday, May 24, 2008
In March, about the time that Frontier Airlines sought bankruptcy protection and Aloha Airlines and ATA Airlines went out of business, the investors in Virgin America poured an additional $100 million into the only airline based in California.
Is the price of oil about to tumble back to Earth? Can Virgin America see a turnaround in the soft economy that is not coming up on the rest of the airline industry's radar?
The answer is no to both of those questions. In fact, it may have been the worst of times to be a startup, with jet fuel prices chewing up more marginal carriers and deflating the legacy carriers, but, notwithstanding the crude oil bill reaching nearly $135 per barrel this week, the 9-month-old airline with offices in Burlingame is in a growth spurt and likes its chances.
With the rest of the industry staggering under the burden of rising costs - American Airlines saying this week it will cut domestic capacity by 12 percent and shed jobs in the fourth quarter - here's the view from Burlingame:
"I would rather be growing in this environment than shrinking in this environment," said C. David Cush, 48, the president and chief executive officer, who arrived in December after 20 years of senior management experience at American Airlines.
"Growing cautiously and opportunistically feels pretty good" compared with the alternative of downsizing, said Cush. "Shrinking is very inefficient."
Apparently, the airline's investors felt the same way. In March, the original investors poured in round two of funding. The investors are VAI Partners LLC, a group funded by private investment firms Black Canyon Capital in Los Angeles and Cyrus Capital Partners in New York, which are separate entities, and Virgin Group.
The $100 million infusion gives the privately held company $400 million in shareholder-contributed capital, although some of that is going toward buying Airbus airplanes.
"These guys are long-term investors," said Cush. "They certainly understand what they are getting into."
He added, "The fuel cost is certainly a bigger mountain than any of us had anticipated six months ago or two years ago when this investor group came together. But it's something that everyone in the industry has to deal with."
Anchor SFO tenant
Today, Virgin America has 17 airplanes in the air and one standby. It has 1,500 employees and serves seven U.S. cities, just a tiny fraction of what Cush formerly helped manage at American Airlines - more than 4,000 daily flights and 1,000 aircraft.
The carrier will become the anchor tenant at SFO Terminal 2 after it is renovated in late 2010. It currently operates out of the new international terminal.
Virgin America is sized to operate 50 to 60 airplanes, said Cush, so the sooner it has them in the inventory, the better off the company is, because it can leverage fixed costs against a bigger revenue base.
Niche as a hip airline
It certainly has a name with brand equity - it licenses the Virgin brand from minority investor Sir Richard Branson's Virgin Group - and a business plan with which it wants to carve out a comfortable niche for a hip airline.
"I think the last 20 years of evidence in the marketplace has shown that U.S. consumers are increasingly interested in low-cost carriers and in new entrants, whether they be low cost or not," said Cush.
Long before Virgin America was off the ground, the carrier said it likely would be serving 30 cities within five years. That may have been a little ambitious, said Cush.
He added that he sees a ceiling for the airline. "In all honesty, I would not be surprised if 30 cities are the most we ever fly to, maybe a few more than that." He also said he thinks the business model "tops out at 125 to 150 airplanes," serving large urban centers.
Virgin America has routes from San Francisco to Los Angeles, New York, Washington, San Diego and Seattle. It also flies from New York to Los Angeles, from Los Angeles to Washington and from Seattle to Los Angeles.
Henry Harteveldt, a former airline executive and industry analyst at Forrester Research in San Francisco, said he thinks a Virgin America ceiling, if one truly is in place, is adjustable. "If they detect an opportunity for prudent growth, smart growth, they and their investors will explore it," he said.
But the more immediate issue for Virgin America, Harteveldt said, is to add destinations, like Chicago, Atlanta, Boston, Dallas and Miami, "and then start knitting cities together to provide more utility to business travelers."
Its service to Seattle elicited a prompt response from Alaska Airlines, which began its Seattle-San Francisco service in 1979 and is protective of its California franchise, which vice president of sales Steve Jarvis said represents 40 percent of its revenue. Alaska Airlines increased its schedule as soon as Virgin America announced its flights, and has since increased it a second time. "We will continue to serve (California) and make sure everyone knows how important it is to us," said Alaska Airlines' Jarvis.
More slots are essential
Virgin America's success hangs on access to airport slots.
"That's one of the biggest issues we have in front of us - how are we going to make sure that we can get into the airports that we need to get into at the times we need to get into them in order to remain competitive with the big boys," said Cush.
The case he made to the Department of Transportation in October 2007 for slots at New York's JFK International Airport and New Jersey's Newark International Airport demonstrates his point:
Virgin America asked for 28 slots at Kennedy and was given 20 - or 10 departures and 10 arrivals. The carrier felt it was treated fairly. At Newark, Virgin America asked for 16 slots, eight departures and eight arrivals, and got nothing. Actually, it was offered time and space, but it would have required a departure from San Francisco at 3 or 4 a.m. - "not commercially viable times, I would say," said Cush.
In February, Virgin America sought authority to fly from Los Angeles to San Jose del Cabo, Mexico, and the government awarded the route to United Airlines, with Delta Air Lines the backup.
Virgin starved for gates
Cush understood the Department of Transportation's rationale. The government questioned Virgin America's ability to begin operating the route in 90 days and was certain of United Airlines' ability.
But the allotment of routes and slots raises the question about whether incumbents are favored. Cush argues airport slots turn on basic usage rights, not ownership rights, "and our view is that simply having been there first is not a license for using those things in an inefficient manner for all of eternity."
Virgin America now has an application to serve O'Hare International Airport but is in a good position in Chicago: The airport is opening another runway in November and wants new airline capacity.
But the rub for the new entrant from Burlingame is capacity restraints, already seen at Kennedy and Newark, and that potentially may limit Virgin America's opportunities.
"What is going on is you have an air traffic control system that is out of date. It is overloaded. You've got a limited amount of concrete that has been poured in this country over the last couple of decades," he said.
Meantime, competition is vigorous, particularly in an anemic economy featuring sky-high fuel prices. Virgin America's charge is to create a product, said Cush, that "people are going to be willing to pay $20 or $30 more to fly Virgin America just because it is going to be worth it."
E-mail George Raine at [email protected].
