Virgin America causing turbulence in airline industry
NEW YORK (Reuters) -- Start-up U.S. air carrier Virgin America Inc. has not flown a plane or even gotten a license to operate, but it is already creating turbulence in the U.S. airline industry.
Incumbent carriers, led by Continental Airlines Inc., have lobbied hard to keep Virgin America from getting off the ground.
Those efforts, which have slowed Virgin America's efforts to gain U.S. government approval to start flying, show how intense competition is in the U.S. airline industry and how fragile its recent recovery may be.
"For the first time in six years roughly, the airlines are starting to experience some profitability, and the last thing that the domestic carriers want to see is new competition," said Dan Petree, dean of the college of business at Embry-Riddle Aeronautical University.
Virgin America has until Wednesday to respond to industry objections to its application for an airline license, which was initially filed last December. The U.S. Department of Transportation then has up to 180 days to make a decision on whether to allow the airline to operate.
Continental and others have attacked Virgin America's links to British-based Virgin Group, which holds a 25 percent stake in the company, lends the airline its brand and has promised to provide financing.
The airlines say that Richard Branson's Virgin Group, which has stakes in airlines in Europe, Australia and Nigeria, effectively controls the U.S. airline in violation of U.S. law, which restricts foreign control of domestic airlines.
"We have absolutely no opposition to start-up discount airlines," said Continental spokesman Dave Messing. "Our only concern is that, since we abide by U.S. laws, our competitors also abide by U.S. laws."
Virgin America says it's controlled by U.S. citizens and conforms with U.S. law. It says rival airlines are using the foreign control argument to limit competition.
U.S. law prohibits a foreign equity stake in a U.S. airline of more than 25 percent, ostensibly for the sake of national security.
A new JetBlue?
Six years ago, JetBlue Airways Corp. breezed through the approval process without the big airlines putting up much of a fuss, but that was before the September 11, 2001 attacks pushed the airline industry into a recession that led to billions of dollars in losses. And JetBlue's rapid growth, despite the industry's malaise, showed that new competitors needed to be taken seriously.
Virgin America plans to enter the market armed with $177 million in start-up capital, with the majority coming from private equity investors Black Canyon Capital and Cyrus Capital Partners. This funding represents the largest seed capital of any start-up U.S. airline, surpassing the $130 million initially raised by JetBlue.
"About three-quarters of capacity is dominated by incumbents who have a cost structure that is 25 to 50 percent higher than new-generation companies," said Fred Reid, chief executive of Virgin America and a former president and chief operating officer at Delta Air Lines Inc.. "It's a massive business opportunity."
But it will take the airline time to build up momentum. "In the first 24 to 36 months, I don't think they will be large enough to make much of a measurable impact," said Tim Sieber, general manager of airline consultancy The Boyd Group.
Virgin America, which says it could start flying within weeks of receiving its license, plans to position itself as a low-cost, high-perks airline. It says it will have in-flight entertainment features that go beyond JetBlue's satellite television offering.
Virgin America has 33 Airbus planes on order, but plans to start operation with just two to four aircraft. Reid says that the airline has the ability to grow its fleet at a rate of one to two planes a month indefinitely.
The airline intends to first fly between San Francisco and New York. Brian Clark, Virgin America's vice president of planning and sales, says the airline is aiming for 20 routes in two years.
Good news for other airlines is that Virgin America has profits, rather than growth, as its top priority, which means starting a ticket price war is not its most likely strategy.
"Our goal is to be financially successful," says Reid. "I don't care if I'm a mega-airline or a boutique airline."
