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.
The partnership between Virgin America and Singapore Air has deepened with the announcement this week of frequent flyer reciprocity between the two programs. Members in both programs will be able to earn and redeem points for flights on the partner. Virgin America is celebrating by offering 500 free points to all their members. Mostly great news, really, though the devil is in the details.
For Virgin America’s Elevate members the earning rates for Singapore Air-operated flights are pretty meager:
Yes, I get that Elevate is a revenue-based program rather than a distance-based one so the 1:1 ratio doesn’t necessarily line up perfectly. But a 70% earning rate for paid Suites cabin travel is pretty darn low. A paid business class ticket from San Francisco to Singapore will net 4,220 points or roughly $100 in Elevate credit. That same flight will earn between 10,000 and 17,000 points when credited to a Star Alliance partner of Singapore Air; it is hard to value that at less than the $100 Elevate is offering and quite easy to do better than the $100 level.
Redeeming Elevate points for travel on Singapore Air is similarly challenging. A return trip in business class on SFO-SIN rings in at 95,000 points. Just over 22 round trip flights will net you enough points to redeem for one. That’s roughly double the rate required from most other Singapore Air partners.
For short-haul redemptions in SE Asia, however, the Elevate option may be a reasonable one. Singapore to Bangkok is only 6,000 points and $46 in taxes/fees for a return trip in economy; it is 13,000 in business. That’s roughly $200-350 worth of points and fees. The next closest I can find is 20,000 from ANA or 25,000 points from a host of other carriers for an economy class ticket. Redeeming Elevate points would be a win there, at least compared to the other programs. Or you can look at is as a paid business class SFO-SIN gets you a free economy onward to Bangkok at some later point. Not necessarily the best deal but not completely awful either. And with 136 new routes now available plenty of opportunity to suss out the deals. Just don’t expect a lot of premium cabin inventory to show up, especially on long-haul routes.
For Singapore Air’s KrisFlyer members earning on Virgin American-operated flights actually looks like a pretty good deal. The accrual rates are a minimum of 100% of the miles flown with a 50% bonus for C, D and J class tickets. No bonus for Main Cabin Select but that’s not too surprising. The redemption rates on Virgin America metal are a bit complex, and not particularly great (40K for transcon return in economy) but there is an option for Main Cabin Select redemption if you’re in to that. It is not clear what fare bucket the awards come out of so access to the seats may be limited.
Overall this is a solid partnership, especially for KrisFlyer members. And there are even a few gems in there for the Elevate members, too.
The ability to legitimately earn points in more than one program for a single flight is a rare one; when such an opportunity comes up it is nearly universally worth looking in to in more detail. And so today I’m taking a look at the promotion offered by Singapore Air running through the end of February 2013 allowing for passengers to double dip when flying on certain Virgin America flights as part of a codeshare itinerary via Los Angeles or San Francisco.
For US residents booked on a Virgin America-operated flight under the Singapore Air code it will be possible to collect both KrisFlyer points and Elevate points on the same flight. Because the Elevate program earning is based on spending but there is no direct spending with the codeshare flights the companies have come up with a fixed earning table to cover the eligible flights:
Registration is required for this promotion.
This isn’t the sort of promotion which will revolutionize your earning potential. It covers a very narrow set of flights (who is buying VX codeshares as add-ons to a SQ flight??) and a relatively short window of dates. Still, not the worst thing ever published. And it always is nice to have the ability to double dip from time to time.
It turns out that I was wrong about how United Airlines would respond to Virgin America announcing 3x daily service from Newark to both San Francisco and Los Angeles in Spring 2013. I figured maybe an extra flight or two and possibly some promos for extra frequent flyer points. United apparently has a different plan in mind. First there was the announcement of a San Francisco – Ft. Lauderdale route by United. A minor retaliation, really, but there it was. More recently, however, United has updated their schedule for service between the coasts. If this isn’t dumping inventory I don’t know what is.
Check out the timetables for the first week of June:
United is basically running hourly shuttle service on transcon flights. That’s nuts. I’m looking forward to seeing what they do with pricing to try to fill those seats. There’s no way they’re going to be able fill them at their old price levels.
Welcome to the Loft, Virgin America‘s new lounge at Los Angeles International Airport. The airline opened their first lounge this week, offering an option for passengers looking to relax, snack or imbibe prior to departure. The lounge is open from 6am-11:30pm daily, covering the carrier’s schedule block.
The lounge will offer complimentary cocktails, food and internet connectivity to passengers who pay for access. The day pass is $40 so I suppose it isn’t really complimentary, but rather "included" for the services. The food menu actually looks pretty good:
The liquor list isn’t anything particularly impressive, but I wouldn’t expect top shelf at the price point they’re offering. There are also some specialty drinks suggested in addition to this list:
Keeping with the Virgin America design aesthetic is obviously a big value proposition to the carrier. And having a lounge available may help them attract higher yield customers. Plus, to be quite honest, it looks pretty cool.
Also, the Loft has been added to the collection in the Airport Lounge Guide section of Wandering Aramean Travel Tools.
Photo from Virgin Atlantic press kit
When was the last time you heard someone get excited about Newark? For Virgin America, however, there is a lot of excitement as the carrier looks to challenge United Airlines on two major routes, connecting Newark to San Francisco and Los Angeles.
The service starts in April 2013, with thrice daily service each to both San Francisco and Los Angeles. Given that Virgin America has been slowing its growth (and even cutting ASMs this winter) adding these long-haul flights is a big move for them. Not surprisingly, the introductory fare sale is obvious in the market. Here’s the lowest one-way fares between Newark and San Francisco chart for the two weeks before and after the service launches:
The numbers are similar out of LAX.
For the premium cabin seats and refundable fares, the markets where real money is made (at least in theory) the fares don’t appear to be changing all that much. It doesn’t appear that Virgin is pushing too hard against United and United has not – at least not yet – decided that they are looking to start a fare war. That said, I do expect that United will eventually respond in some way. After all, disparities like this make it hard to justify the higher fare:
The competition is good for consumers in that it should bring fares down a bit in the market. And it might be good for consumers in service levels or other experiences. A decent chance of a frequent flier promotion based on this, too. That said, it isn’t clear just how long Virgin America can afford to fight it out with other carriers based on fare alone, and their service frequencies are half of what United is offering. Virgin has challenged US Airways in Philadelphia and American in DFW. They’re still in both markets but it doesn’t appear that the legacies have taken much of a hit either.
It will certainly be interesting to watch.
I often enjoy reading economic analysis of the aviation industry. I usually feel like I’m learning something new and the nuance is generally interesting. I was quite surprised when reading an OpEd piece in the New York Times last week to uncover what would appear to be a rather ridiculous suggestion: Small and mid-size markets in the USA would benefit from foreign carriers being given permission to operate on wholly domestic routes. The basic claim is that there is insufficient competition in the market today, allowing fares to creep higher and planes to be more full. And service to small and mid-size markets is enduring the brunt of the pain; most of the "heartland hubs" (CLE, CVG, PIT, MEM, STL) have seen major capacity cuts in recent years, with their status as a hub in question. And the solution, according to Mr. Winston, is opening the skies over the USA to anyone who wants to operate here.
That is, unless policy makers do what they should have done a long time ago and allow foreign airlines, including discount carriers like Ryanair and global players like Qantas and British Airways, to serve domestic routes in the United States. Why, after all, should an industry that has ingeniously used free-market principles to squeeze the most revenue out of each middle seat be protected from competing in a real free market?
Well, we can start with the part about how that isn’t actually a "real free market" based on a lack of reciprocity in the other countries. And even if that were made available it still is an unlikely solution. Or at least not likely a good one. After all, what’s the value proposition being suggested? Apparently the key to improving the UA aviation market is to flood it with more capacity, driving down fares. But that increased supply will somehow also drive demand. Last I checked that’s not how the basic supply/demand curve works, though I will admit I dropped my Econ class after the first exam because I didn’t really like it.
There is a certain amount of discretionary travel demand which increases as fares drop below a certain threshold. I believe that number is roughly $100 each way these days. But just flooding the market with inventory to drive the fares down that low doesn’t mean that enough people will necessarily buy the seats in a volume which pays for the service. In fact, it is rare that flights operated at that discretionary demand point are profitable to the airlines at all.
Mr. Winston notes that passengers have likely saved $5bn annually thanks to Open Skies agreements between the US and Europe. Not surprisingly the airlines are trying to claw some of that revenue back, cutting service and striking joint ventures which allow them to cut costs and pool revenue and collude on prices. Are these agreements good or bad for passengers? If only measured by average fare paid then they are probably bad. But that’s not really the only metric. Look at the carriers who have gone bankrupt in the interim. For those customers – and those employees and creditors – the $5bn in annual savings means a lot of losses, not gains.
Mr. Winston also suggests that one upside of the competition is that it will help reduce unemployment:
Competition from foreign airlines would put downward pressure on wages, something that union workers may object to. But by reducing fares and expanding service, it would also increase the demand for air travel and related services — thus, presumably, creating additional jobs during a time of persistently high unemployment.
Can someone explain to me how cutting the salaries of US-based employees and creating an environment where the domestic airlines will struggle more to maintain their margins is actually going to increase the employment rates?
So if the fares are driven sufficiently low, to the point that they cannot cover the costs of operating the flights, then other airlines will want to jump in to the market, right? Certainly then Singapore Airlines will show up to operate on Sarasota – Cincinnati, making the service better and the price lower, right? That’s what is being claimed in the piece.
The reality is that opening up the US skies to foreign carriers would see those carriers do the same thing that pretty much every other start-up airline has done in recent years: cherry pick. JetBlue started by cherry picking routes between JFK and upstate New York or Florida. Virgin America has picked heavy business routes and seems to be losing a ton of capital doing so. Oh, and that’s with the fares higher now; things would be much, much worse for them were the fares depressed further.
So where can these foreign carriers make money operating in the USA? Certainly the grandmother trying to get from Sarasota to Cincinnati (his example, not mine) worried about fewer flights and higher fares won’t benefit from Qantas getting local traffic rights on their LAX-JFK flight. And even if Singapore Air could operate to Sarasota, why would they? The market demand there isn’t very high. So instead of the smaller markets getting more service the carriers who serve them today suffer from lower yields on their more profitable routes. That means they scale back the less profitable routes. So grandma gets even fewer options, not more.
Maybe easyJet or RyanAir could set up shop in the USA and make it work. But SkyBus certainly couldn’t. Maybe the others would actually serve the airports in the cities they advertise, but they often don’t in Europe. RyanAir’s idea of service Paris is an airport 60+ miles away. That’s like flying in to Trenton for service to New York City.
Competition is good. Monopolized markets are not very consumer friendly. But neither are unstable markets. A few people might win, playing in the margins, but the big picture effects of pursuing open skies on all domestic markets would be a disaster for the US economy. And for the passengers such a change supposes to help.
Members of Virgin America‘s Elevate program can redeem their frequent flyer points for travel to Hawaii and beyond under a partnership with Hawaiian Airlines announced last week. Similarly, members of the HawaiianMiles program can redeem their points on the Virgin America route network. The two carriers will also implement code-sharing on some routes and an interline agreement so passengers can check in once for travel across both carriers.
For HawaiianMiles members the redemption chart is based on the distance traveled and the cabin redeemed for. There will be three cabins available for redemption: Main Cabin, Main Cabin Select and First Class. Here’s the award chart:
The rates aren’t particularly attractive though it also isn’t clear if the seats are inventory-controlled or not. If not then the rates wouldn’t be quite as bad, but it seems unlikely that is actually the way it will be run.
For Elevate members looking to redeem on Hawaiian Airlines flights the award rates aren’t quite as easy. Awards range from 3,000 points for a one-way inter-island trip in economy up to 150,000 points between Manila and some mainland US destinations round-trip in first class. In most cases the one way rates are half price of a round trip, plus 10-20%. Similarly, first class awards are generally double the coach award, plus 10-20%. You can look up the rates using their tool here.
There are more than 450 city pairs in the partner chart for Elevate members redeeming on Hawaiian metal and I’m not entirely convinced that there aren’t a few bugs in the chart. It probably shouldn’t be fewer points to get from the mainland to parts of Japan via Honolulu than just the Honolulu-Japan segment, for example. That said, I’m pretty sure that is actually a case where the one-way rate is loaded as a round-trip into HNL, not that the mainland destinations are especially discounted. And there are a couple other places where the round trip price is loaded at the same price as the one way rate, too. Oh, and the destinations in the South Pacific look particularly attractive to me in terms of points required.
Not all city pairs can be mixed on awards, so you cannot fly from JFK anywhere beyond Hawaii, for example. And if you want to fly in First Class from JFK to Maui you have to book JFK-Honolulu plus Honolulu-Maui. Likely the same number of points because of the way they are calculating connecting trips versus non-stops but still strange. Suffice it to say, there are a lot of quirks in this award chart.
A couple months ago Virgin America‘s Elevate program officially launched Silver and Gold status tiers within the program. This week the carrier announced a challenge/match program as they look to attract elites from both United Airlines and American Airlines to their operation. The match is free and will last through April 30, 2013. Here’s how the legacy tiers will map to the Elevate program:
It is somewhat interesting to see that US Airways, Delta and especially Alaska Airlines are absent from the list. It is also interesting that Virgin America sees their Gold status as more valuable than the second tier levels from the other two.
This status match offer is more of a challenge than an outright match; in order to keep the status after April 30, 2013 members will have to reach certain earning thresholds in the program:
Based on the 5 points/dollar earn rate that means a $2400 spend in the next 5.5 months to keep Gold status through the rest of the 2013 year. That’s not cheap, though also not completely unreasonable. And it is quite a discount off the normal $10,000 annual spend required.
Overall, I think that this move will open up access to the Virgin America program to some customers who wouldn’t have otherwise considered it. I’m not sure how many given the high spend thresholds, but I’m sure there will be a few.
Following an announcement from their CEO that Virgin America will be cutting roughly 3% of its capacity in Q1 2013 and also that the company is offering employees voluntary short-term leave to reduce costs at least one analyst says the outlook is grim for the carrier. The company had a reported $82mm on hand as of the end of Q2 ’12 following a loss of nearly $32mm in that quarter. The capacity cuts will be focused on redeye transcons and mid-week flights, the operations which tend to not fill up very well in periods of lower demand.
As to why the carrier is struggling, analyst Hunter Keay is suggesting that the company has made some critical errors in their growth plans. Their attempts to fight with legacy carriers on routes where the latter are firmly entrenched has left the upstart with a limited foundation on which they can stabilize their efforts. Or, as Keay said in the Bloomberg interview:
They had an assumption that consumers would choose product quality over price and convenience and network carriers responded with force.
Also of interest is that one of the main reasons cited for cutting the capacity is uncertainty in the market and the expected softening of demand. That softening is based on recent PRASM results from United Airlines and Southwest. Both carriers reported 2-3% drops in the most recent month versus the prior year. Other carries reported growth in their PRASM numbers so it isn’t entirely clear if these two are somehow more representative than the others or more important for some reason, but they are the reference Cush cited in breaking the news to Virgin America employees.
Just competing on product quality is very, very hard to do in the US aviation market; the pressure to compete on fare is incredibly strong. Companies like RouteHappy are doing yeoman’s work in helping customers to identify the more comfortable or more enjoyable travel experience. Seems most customers either don’t know or aren’t willing to pay for those experiences. And just competing on price is a good way to go out of business, especially as costs grow over time.