In Why an Airline That Travelers Love is Failing, Brad Tuttle of Time wonders why Virgin America is bleeding money (a net loss of $671 million since its inception). Many people in tech have wondered about Virgin America; it seems to be the airline of choice among many of them, myself included. I just flew them to New York for Christmas break, and their struggles puzzled me. I hadn't realized Virgin America was in such dire straits; the airline will be "cutting back flights and asking employees to take voluntary work leaves in early 2013."
Now, all of what follows is speculation on my part. For all we know this could be a temporary blip due to the natural costs of expansion in a hugely capital intensive business, and they'll be fine in a few years once they've locked in some stable market share. But my intuition about the air travel business senses other things at play here, and I thought I'd explore my thesis here and see if anyone else had more insight to add.
I know the airline industry is generally a terrible business, but as a fan of Virgin America I'd assumed they'd gotten on the road to break-even if not net profits like Southwest, often held up as the lone success story in the airline industry. Tuttle points out another airline in the U.S. that's even more profitable than Southwest: Spirit Airlines.
Along with its fellow fee-crazed cohort across the pond, Ryanair, Spirit has been an airline travelers love to hate for years. And yet, despite the common complaints about Spirit—customers have to pay even for water, and could get hit with $100 fees for carry-on bags—the airline is likely the most profitable of any in the U.S.
Virgin America regularly wins kudos from customers in surveys. The last published Zagat survey of frequent fliers rated it best midsize carrier in the economy and premium classes. Business travelers voted it best premium class among domestic airlines and Best U.S. Airline for the fifth year in a row (every year they've been in existence) in the latest Conde Nast traveler survey.
Meanwhile, Spirit Airlines was named the second worst airline in the world in the Zagat survey. When an unhappy customer complained to a Spirit employee, Ben Baldanza emailed that employee a response but mistakenly hit reply all, and the email leaked to the world:
Please respond...but we owe him nothing as far as I'm concerned. Let him tell the world how bad we are. He's never flown us before anyway and will be back when we save him a penny.
I like Virgin America enough to pay a slight price premium to fly them, but it appears that not enough customers agree. Without doing a deep dive into their economics which are hard to access because they aren't publicly traded, I'd hypothesize that Virgin is caught in-between the two profitable segments of customers in the airline world. They're stuck in the dreaded profitless middle of the airline industry.
At the top end is the business flier. Largely price indifferent, the business flier is someone airlines can gouge for last minute tickets and business or first class fares, and more importantly, someone who can be wooed with frequent traveler perks like express security lines, early boarding, and liberal flight upgrades. Until recently Virgin America didn't even have frequent flier tiers in their frequent flier program. Everyone earned points at the same rate. Without business fliers, many airlines that are bleeding today (which is just about all of them) would be in even worse shape.
The other profitable segment, comprising the vast majority of fliers, is the hyper price sensitive flier. They sit at the bottom end of the market, using price shopping engines to find the cheapest flight to get them from point A to B, and they will complain about yet endure any manner of indignity, including the long menu of surcharges imposed by an airline lie Spirit. Oh, you want a flight with an actual pilot? Well, that will add $30 to your ticket price. Seatbelt? $7.
Virgin doesn't really cater to either side on a consistent basis right now. Many of my business traveler friends don't fly Virgin because they've achieved elite status on some other airline with more flight coverage and are addicted to the perks. Say what you will about the silliness of celebrating rewards granted to you for wasting so much of your life cooped up in airplanes, but some of the benefits are of real value: express security lines, frequent upgrades, early boarding, waived baggage fees, mileage accumulation multipliers.
On the other end of the spectrum, it's amazing the extent to which most people treat flights as a commodity and will always seek out the lowest price. Virgin America isn't always the low-cost provider, so they don't sort to the top on many travel search engines which is how most modern travelers I know shop for plane tickets (that's if they show up at all; Virgin America and Southwest are among airlines whose results don't appear in most popular travel search engines like Kayak. It's one reason I use Hipmunk now as they include Virgin America and Jetblue).
Sifting among search results at these travel search engines, it's nearly impossible to tell one flight from another. The easiest tie-break factor is price, all other things in the consumer's mind being roughly equal, and the information on these sites essentially renders all other factors equal. There is no quality of flight sorter, no little badge next to Virgin America flights for their Conde Nast awards, no sign of how friendly the stewardesses are, how on-time they are, how comfortable the seats are, how new the plane is, etc.. Hipmunk has its agony sort as its default, but that's largely based on flight times and number of flight time, number of stops, and price.
Is the centrality of price in travel search engine sorts the right relevance because these sites made price the default sort in the beginning and users grew accustomed to it? I doubt it. I suspect it's the primary sort criterion of choice because that's what users have asked for. Fliers are treating flights as commodities.
In an ideal world for them, Virgin America could charge a bit more than airlines who compete solely on price. To do so, they'd have to convince customers who normally only consider price to also consider value. Unfortunately for Virgin America, many of the areas in which they offer value aren't conveyed by travel search engines and probably never will be. The advantages they offer are mentally difficult to assign monetary value to because there are no simple price references.
Take for example the availability of satellite TV at your seat. I love being able to watch ESPN and their other selection of Dish Network channels on flights. How much is that worth? I like Virgin's food ordering system which is self-serve. When you're hungry, you order from the touchscreen menu and a few minutes later a flight attendant drops off the order. The selection of sandwiches is not half bad for airline cuisine. I enjoy the option of using GoGo Inflight wifi which is available on most of their flights. I love having outlets to keep my laptop, iPhone, or iPad charged on my long cross country flights from San Francisco to Chicago or New York.
Virgin America's airplanes tend to be newer, a bit cleaner. There is reddish-purple mood lighting in the cabin at night which, even if you don't love the color scheme, conveys a sense of class that's not common in the typical aesthetically ascetic legacy airplane cabin.
How do you attach a dollar value to these benefits, and how would you even split a Virgin America price premium among those factors? In December I fired off a travel query in Hipmunk for a roundtrip flight between SFO and JFK for the holidays, and I saw that Virgin America's flight would cost me $90 more than a similar flight on Delta. Would you pay a $90 premium? I suspect many flyers without any particular frequent flier allegiance would just opt for the Delta flight. The narrative simplicity of low price is a powerful one, and the search engines give little to no information to help me assess airline quality. The only information on the page was the flight time and the price.
As a point of comparison, try doing a search for "food processor" on Amazon.com in their Home and Kitchen store. The first choice to pop up is the Cuisinart DLC-10S. It's not the cheapest blender, it's about $64 more expensive than the next blender. But it has an average customer review of roughly 4.5 out of 5 stars across 446 customer reviews, while the 2nd blender in the search results has just a 3.5 out of 5 star average rating across 228 customer reviews. I can see a picture of each blender as well. So right away I have two pieces of information in addition to price that are turning in my mind as I contemplate my purchase decision: a photograph and average customer reviews. What is Amazon's sort criteria? It's default is simply titled "relevance" which is intentionally cryptic (Amazon has a lot of flexbility to adjust how this sort works behind the scenes and no one will be any wiser; it's Amazon's analog of GoogleRank). I suspect it's based on some mix of keyword scoring match, sales velocity of each SKU for that particular search term, average customer reviews, clicks, and purchase conversion, but again, it's at Amazon's discretion.
That's a gadget, though, and not a travel service, so let's take one of the latter for a more fair comparison. I did a search on TripAdvisor for hotels in NYC for two days over the holidays, and my first sort was based on "Ranking", or TripAdvisor customer's rankings of all hotels in NYC. It wasn't sorted by price. After I logged in, I saw my results sorted by hotels reviewed by my friends first. For each hotel listed in search results, there's a photo, the hotel's ranking among all hotels in NYC on TripAdvisor, some capsule customer reviews, and the average customer ranking and total number of rankings.
Imagine if flight search engines had some of this type of information in addition to price. A photo of Virgin America's mood-lit cabins. An average customer ranking for Virgin America, along with the rank of Virgin America among all airlines with flights between the two cities you're traveling between. A list of amenities like Wi-Fi and satellite TV. The width and legroom of the seats in the class you're searching for tickets on. On-time flight performance for that route. What if you could enter some flight parameters like the number of bags you'd check in and get an all-in price for the ticket, including surcharges like baggage fees or some of the crazy add-ons Spirit Airlines or RyanAir charge for, like boarding passes or water. Imagine that all these things were listed in the same type size as base airfare. Suddenly, as with food processors on Amazon, you might not leap at the lowest price flight. It might feel like a bit of a fool's bargain.
Virgin America doesn't control these third party travel search engines, though, so what can they do that is in their control?
At a minimum, they should ensure they show up in the search results of all major travel search engines. If nothing else, it's good branding for them, and often I find they do have competitive if not the lowest fares.
They should also improve the reliability and speed of their website. For a company that prides itself on being a more advanced airline, their website has been shockingly unstable. At least four times last year their website went down, meaning I could not book a flight or check-in online or edit an existing flight. What's worse is that calling them didn't help since their agents relied on the same system. That's table stakes in this game, and it's not acceptable to mess up so badly here. Ever.
They've taken one smart step to woo business travelers. Through April 30 of 2013, they're matching your status on United and American Airlines in the new Virgin America frequent flier program which finally has tiers with their own respective bonuses and perks. This is a quick way to try to steal some of those profitable business fliers who don't want to lose airline status in a switch from their current airline of choice. Given the extensive network of flights United and American operate, they're airlines of choice for many business travelers. Virgin America cannot match those airlines networks for business travelers who have to hit many of the non-major U.S. cities, but for those doing frequent travel between hub cities, Virgin America is a credible alternative. Matching frequent flier status lowers switching costs.
That Virgin America even has frequent flier tiers is helpful. They didn't when they first launched, but they launched two tiers in August 2012, with the requisite benefits that frequent fliers have grown accustomed to. That will help, though the article I linked notes that Virgin America faces some inherent challenges in wooing travelers from the legacy airlines with this program.
[Incidentally, if you earn the most status points by August 7, 2013, you earn Galactic status and win a suborbital space flight on Virgin Galactic. That must be worth a lot, it's probably worth some frequent business traveler's time to switch over just to spear that big fish.]
They continued to expand their flight destinations in 2012, and that will help to increase their viability as a network, but they announced that the rapid growth caused margin pressure and thus they'll cut back severely on expansion in 2013. They've finally locked down a solid network of the major cities: Chicago, New York, Los Angeles, San Francisco, Boston, Washington D.C., San Diego, Seattle, Newark, Orlando, Dallas, Portland, Philadelphia, and Las Vegas, along with some nearby vacation destinations like Cancun, Los Cabos, and Puerto Vallarta. It's up to them to hold costs down so that they can drive that network to profitability. They remind me a lot of Jetblue, which has positive operating margins, so there is hope.
Even bolder, though perhaps beyond their reach: I wonder if they could shift the conversation on air travel to one of value over price? Is air travel so expensive on an absolute basis that the average traveler will lock in on price above all else, meaning the only airlines that can both be profitable and popular are those who can make a price leadership model profitable like Southwest or Spirit? Or could an airline come along and command a price premium and profit and sizeable market share?
Computing hardware once seemed to be a space where the only configuration of high market share winner seemed to be price leaders with good cost control built into the supply chain. Dell was the equivalent of a Southwest. But Apple came along and has changed the paradigm of a computing leader, with its ability to command a price premium, make a generous profit, and command healthy market share all at once. Can Virgin America shift consumer thinking on air travel in a similar fashion?
I suspect it will be challenging. The incremental benefits of flying Virgin America don't yet equal the user experience superiority of the Apple hardware/software ecosystem over its competitors. I suspect Virgin America will need to be both competitive on price and offer a superior experience to be viable.
They've done some ads that attempt to highlight some of their benefits like this one, though I haven't seen it widely aired. Also, it's an ad that seems to be trying too hard with its rock music, and what's up with the archer and baseball player? They've tried to brand themselves as the airline of choice of trendy folks like Pandora CEO Tim Westergren and Gilt Group founders Alexis Maybank and Alexandra Wilson, among others. But those ads teach me more about those people than the airline itself. I would love to see Virgin America simplify these ads and drill in on shifting travelers to feeling more self-respect, to feeling deserving of a superior experience. Then they can position themselves as the airline that fulfills on that base expectation versus all the legacy airlines. Think about those "I'm a Mac" ads in terms of narrative focus.
If they're failing thus far, maybe the blame is shared. Perhaps the superior experience of Virgin America is worth some loyalty or even a small price premium, but not one that travelers are willing to pay. We hate air travel, but we won't pay to improve the experience. And so, as they say, we get the airlines we deserve.