The launch of service by Virgin America between Newark and both Los Angeles and San Francisco touched off a bit of a fare war. Most route launches do, especially when it is an upstart encroaching on a cash cow route of a legacy carrier. The fare war itself was not unexpected, really. Slightly less expected was the amount of capacity United Airlines has chosen to respond with. Not only did they match the fares but they are essentially running hourly shuttle service on both routes.
At least one person is willing to call the revised schedule out for being more than just a reasonable response to a sudden increase in demand in the markets. Sir Richard Branson, the outspoken head of the Virgin Group which owns a minority stake in Virgin America was at Newark this week to talk about the new service launch and he had a few words about United’s approach. Speaking to FlightGlobal at the event he was downright defiant:
It’s old-style American airline management. It won’t succeed. They will be the losers. They certainly won’t drive us out of Newark.
Branson also suggests that the move by United is going to cost roughly $150mm annually. I have no idea if those numbers are sound or not; my back of the napkin calculations based on CASM, the aircraft and the number of flights suggests that the operating costs will be a lot higher than that, though I suppose they’ll make some money selling the seats, even at the bargain $99 one-way rates they have on the market right now.
But Branson is also suggesting another tactic may come in to play as Virgin America tries to make it in the market: the government. Branson is suggesting that the carrier may file complaints to regulators regarding the inventory dumping that United has engaged in on these routes. Given that he’s not actually running the company it is hard to tell if either of these defiant stands is real. Saying you’re going to file a complaint is a lot different than actually doing so and it is not actually his position to do it so others will have to get involved before it actually happens. Still, it is always interesting to hear that approach discussed.
I get that Branson wants to see more service and lower fares in the market. That makes sense. So it is hard to use that same argument to say that United’s inventory dumping here is a bad thing. At the same time, history suggests that should United actually drive Virgin America out of the market the service and fares will rapidly return to the old levels. The question is whether the feds should be involved.
Thus far I’m happy with the fare sales; they’re going to be very useful for me, I’m sure. We’ll just have to see how long it all lasts.
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I sho’ do wish that UA was running larger aircraft on this route…
I don’t think the cheap fares (and I don’t mean the $99 fares) will last. When Virgin joined the PHL-LAX market fares plummeted…for a few months. Now they are higher than I’ve ever seen them before. Maybe the dynamics of the NYC market are different and I hope I am wrong, I just am not optimistic.
Another example…when both Virgin and Delta joined the LAX-SYD game I thought we would be in for a sustained battle for low fares. Nope. At least for the dates I am searching, fares are a lot higher than they were a few years ago. No more $999 low-season r/ts on United, even in N/G/K/L class.
@Blake: If there were bigger planes they’d lose WAY more money. Plus, I’m not sure why they should. No way the planes are going to be full so you’ll have space, even if the upgrade doesn’t clear.
@Matthew: Depends on what the capacity numbers do. If Virgin isn’t selling seats at all they’ll have to cut prices. And United will continue to match them with 3-4x the capacity. On PHL-LAX VX actually cut a frequency to be able to run the EWR flights. They’re competing, but only sortof. If they jack prices up so that United isn’t threatened then United will raise prices, too, and maybe even cut capacity. But with the current capacity numbers I doubt they’ll be able to raise prices much, certainly not on APEX fares.
Worth noting that a couple of those United 757s are the International versions with flat beds (ex-EWR), although upgrades are hard to snag.
Everyone (OK most?) loves a good fare war and $99 each way, EWR-SFO (and maybe LAX as well?) is a good price, it just cannot last. UA can probably make aa tiny profit with an 80% load factor, but hourly service (save 1900) from 0600 to 2000 strikes me as overkill. I cannot believe there is that much traffic. Some is probably connecting stuff to LAX, PDX and SEA and at least the LAX traffic will drop if the add EWR-LAX to the package. VX cannot come even close to matching that capacity – they simply do not have enough metal. That mouthful said, I’d still buy my seat from VX. Why? Even of the VX flight is >90% capacity, the service is so much better that I’d pay even more. OTOH, UA’s service is so terrible – on the ground, in the air and on-time, that I AVOID them when possible and would not fly UA, EWR-SFO in their metal, even at $79 each way. UA’s service is so truly awful that it is easily worth more bucks and slightly less schedule convenience (in theory) to fly with VX. And finally, let’s remember that VX is the one that has snapped UA into providing more capacity and dropping the price on the SFO route, especially designed for those fools willing to fly UA. US is now flying more than a dozen daily runs from EWR to SFO; my betting nickle says the screw up at least eight of them – every day. VA may fly three or four, but they get them right. For my flying, UA is toast. (Simple stuff lke CLEANING the airplane, test flushing and emptying the toilets at ALL turns and not forgetting to load the catering. (Oh, we did did not have time to load the peon-class beverage carts: No water, so soda, no booze. We’ll arrive in about six hours…” US can go to hell!
Make that last line read “UA (not US) can go to hell!
UA’s CFO John Rainey was just on CNBC and commented on Branson’s claims and flat out said with a straight face that Branson’s comments about cratering prices are bogus…. they see an increase in demand and are increasing supply to meet that demand.
Now I don’t know what the supply was prior to VX’s announcement nor prior to them starting service on the route but something tells me that it wasn’t 14x daily. It would be good to know this for sure to see whether or not UA is dumping supply on the route.
Prior to the VX announcement the service was ~5-6x daily depending on the route. I’m glad that the UA execs can keep a straight face when claiming that somehow demand on a route has suddenly tripled (including the VX capacity being added).
If demand really is that high then there is no need to induce purchases by selling so cheap. Demand will always be high on any route if the fare is low enough. That’s not actually a fair indication of the market at all.
If Virgin has low fares, United has to match those fares, and once they do, the prices are cheap enough to increase demand. And I think that some consideration has to be given to JFK flights, it’s not like EWR and JFK are in their own vacuums.
I don’t think United has any desire to lose $150m/year on two routes for the sake of attempting (and inevitably failing) to drive a minor competitor out of the market.
There is way too much capacity. I wouldn’t be surprised to see reduced mileage awards & we will probably see double miles offers soon as well.