Virgin America designs a low-cost airline for business travelers

Most low-cost airlines begin life serving leisure destinations and budget-conscious consumers, but one recent start-up is bucking the trend. Two-year-old Virgin America was designed to appeal specifically to business travelers, according to the airline's chief executive officer, David Cush. Cush joined Virgin America shortly after the airline took flight after a 20-year career with American Airlines and I caught up with him at the recent National Business Travel Association annual conference.

Although it follows the successful low-cost airline model with a single aircraft type (the Airbus A320 family) and a point-to-point route network with few connections, Virgin America has constructed a premium product including 9" video touch screens with a full qwerty keyboard, 110-volt electrical power outlets, and USB and RJ-45 Ethernet jacks at every seat in the airplane. Passengers may access the Internet, live television channels, on-demand movies or 3,000 music MP3's. In addition, travelers may use the in-flight seat-back entertainment system to build their own playlists, engage in live seat-to-seat chat messaging with other passengers or order food and drinks on-demand. Virgin America also offers a luxurious first-class cabin that resembles international business class on most airlines.

Going beyond jetBlue

Some of the inspiration for Virgin America came from another low-cost airline that prospered by focusing on comfort and in-flight entertainment. Observing jetBlue "really opened my eyes when I was at American Airlines," says Cush. "They had a very high quality product, but were able to produce it at a low cost."

Cush attributes jetBlue's success to investing primarily in what is most visible to the customer, like new airplanes, live television and well-trained people, an example Cush practices at Virgin America. Beyond initial training, all 1,520 Virgin America employees go through a "Refresh" recurrent training session annually. Each two-day Refresh class brings together 70 employees from all parts of the airline and covers conflict resolution and similar customer service issues. "We'll go through real-life scenarios we've encountered in the last year and do a lot of role playing," says Cush.

Targeting D-I-Y travelers

Initially the airline focused on "unmanaged" or "self-managed" travelers – those business customers generally in smaller companies who book their own flights and aren't constrained by corporate travel policies. "It was a conscious decision to go after that market," says Cush, particularly with a small route network and frequent-flier program that can't compete with the global airlines and the alliances.

Though self-managed business travelers account for just half of the business travel market, Cush believes Virgin America's San Francisco home base is well-situated with so many smaller companies and start-ups in the area. Proximity to Silicon Valley also attracts computer-savvy business travelers interested in the airline's high-tech product offering.

Unlike most other airlines, Virgin America relies heavily on online marketing channels to reach prospective business travelers. "We don't spend a lot of money on traditional mass media," says Cush. "An image ad on 60 Minutes or 30 Rock is not going to have a big impact on the customer we're targeting." As much as 70% of Virgin America's marketing budget is spent online on social media or blogs where they believe their target audience goes for information.

Competing in turbulent times

Cush argues that technological advances and other market forces are eroding the competitive edge long held by major network or legacy airlines. Virgin America competes in the same travel agency distribution channels as the majors, but 70% of all Virgin America tickets are sold through the airline's website.

Cush also believes corporations are becoming more interested in "transactional" rather than "contractual" buying, wanting the lowest price on each transaction rather than the overall discounts offered by global airlines, which don't always reflect the lowest fares available in the market. "Large corporations are very simply interested in low fares and flexible travel times," says Cush, noting that Virgin America's fares don't have minimum stays, don't require Saturday night stays, and advance-purchase restrictions are minimal.

Although oil prices have declined significantly over the past year, $70 per barrel is still substantially much higher than oil in the $20 per barrel range when Virgin America was originally conceived. Like most other airlines, Virgin America took a loss in the second quarter, but the $15 million hit was substantially smaller than the loss reported for the same period in 2008.

Even with the losses, Virgin America grew by nearly 50% over the past year, while most airlines were shrinking, and the airline's load factor (percentage of seats occupied) improved by almost 8% while unit costs declined by more than 20%. "Our focus is really on growing our airline," says Cush, though continued rapid growth in this environment may prove challenging.

One major issue is the current route map, with service in California and the Northeast, but a gaping hole in the middle of the country. "The biggest complaint we hear from our best customers is 'you need to fly to more places.' They ask, 'When are you going to fly to Chicago or Texas?' "

Cush would like to add two or three cities and six to eight new aircraft per year for the next two years, but the question might be where those new airplanes will fly. Virgin America has been unable to gain access to Chicago O'Hare or expand at New York's JFK airport, as incumbent carriers hold all landing slots and gates and have shown little interest in relinquishing them.

So can Virgin America's unique business model and premium product survive in the face of so much adversity? Cush believes the company will succeed by keeping its focus. "There is an expectation that comes with having Virgin on your tail."

Posted via email from Supreme Clientele Travel