Things in the Sky

Last week the DOT released March traffic data, and I figured it’d be worth doing a quick check of Virgin’s load factors at DFW:

Virgin’s loads were pretty weak at the beginning, but the trend is good. The increases seen in March are probably due to Virgin becoming a bit more established along with seasonality. And any sale activity (remember the Groupon deal?) by Virgin may have helped as well.

Which brings me to my next point – we have no idea what fares people were buying until the first quarter DB1B data comes out in a few months. (There is fourth quarter data available, but since Virgin was only in Dallas for a couple weeks of December, I don’t think it’s worth examining.)

It will be very interesting to check out the April numbers when they are released next month. Virgin added a third frequency from both LAX and SFO, so it will be interesting to see what that capacity boost did to loads.

(P.S. – Obviously JetBlue’s order is the big US news today…I hope to have some thoughts tomorrow or Thursday.)

When I was on Virgin America’s inaugural flight to Chicago last week, I had a chance to catch up with their CEO David Cush for about a half hour. One of the topics I was wondering about was if Virgin is looking at adding some form of an elite tier to its Elevate loyalty program.

“We’re putting a lot of thought into that, and you’ll see something on that soon,” said David.

I then asked if Virgin was considering first class upgrades to elites. He replied that “in the coming weeks, you will hear more on this, but what I will say is any elite program that we do will not include upgrades to first class. We’re very protective of our first class…we want everyone to know who buys a ticket in our first class that the person sitting next to them also bought their ticket.”

He later added that, even with no upgrades, “we’ve got some very interesting things that will come along with an elite program.”

I’m sure some might be disappointed to hear that Virgin won’t be doing upgrades to first, but it makes sense. David told me that “we have 90% load factors in first class,” so there’s not much upgrade space to give in the place. Part of that, I’m sure is that Virgin has a small cabin up front – only eight seats on both the A319 and the A320. United and US Airways have 12 first seats on their A320s, while Delta has 16.

The other reasons Virgin has a good load factor in the pointy end? First, I think they have a compelling offering. Second, I’d argue that Virgin advertises first class upgrades pretty heavily. It’s now even possible to purchase an upgrade onboard.

In the future, I should ask David a bit more about that load factor. How many are purchases of first class fares, and how many are upgrades?

Anyway, it will be interesting to see what Virgin offers here in the next few weeks.

A few weeks ago (April 27), I had the opportunity to chat with Virgin America’s CEO, David Cush. Unfortunately, final exams happened and I got way behind on writing up this piece. Better late than never, I suppose.

In the past with executive interviews I’ve bounced between posting them or installments or going in one shot. This time I’ve selected the latter. The post below is pretty lengthy, but I think you’ll find some of the topics covered, such as hedging, growth plans, fleet moves, and distribution pretty interesting.

The interview was prompted by Virgin’s fourth quarter results, though we didn’t talk about those much. The carrier did not achieve a full-year operating profit as it had predicted in the past, though its operating and net income for 2010 improved compared to a year prior. Results for the fourth quarter, however, were slightly worse than a year prior. Virgin’s net loss for the quarter was $25.1 million, compared to $18.8 million one year ago, for example.

Anyway, on to the interview.

My first question for David was on Virgin’s fuel hedging efforts. Virgin’s earnings release mentioned that the airline had hedged for roughly half of its 2011 fuel consumption. The day before I interviewed David, Delta said when it announced its first quarter results that it would be shifting many of its hedging positions away from West Texas Intermediate to Brent crude (and heating oil), saying that it “repositioned its fuel hedge portfolio in response to the dislocation in price of West Texas Intermediate crude oil (“WTI”) to jet fuel.”

David said that Virgin has no plans for a similar move, saying that “the spread is already…pretty wide given its historical averages. Basically, if we moved into Brent now, we would be buying that spread. I certainly wish I had moved into Brent six months ago, but doing it now in our view is essentially…betting on a widening spread between WTI and Brent, and we don’t anticipate that happening, the $12-14 right now we think is about as wide as it will go.”

[Ed. Note – over the past month the spread has roughly stayed in that range.]

Photo Credit: Brandon Farris

Virgin has decided to slow its growth plans, and will be taking six fewer aircraft in 2012 and seven fewer in 2013 than originally planned. I asked David what that meant in terms of new Virgin cities. “What that probably means is two destinations fewer in 2012 and one or two in 2013,” he replied.

The decision to take on thirteen less aircraft does not, however, affect Virgin’s recent order with Airbus for 60 aircraft (30 A320s with sharklets and 30 A320neos). “We’re taking the full orderbook as scheduled from Airbus,” said David. If Virgin was planning to take on those thirteen aircraft in the 2012-2013 time period, it would have reached out to lessors.

Despite slower-than-planned fleet growth in the near-term, Virgin still aims to expand its route map during this time period. David told me it is “highly likely” will add one more destination this year, “likely in the fourth quarter” and “given the aircraft we have coming next year I would imagine we would add one or two destinations in 2012 and one or two destinations in 2013,” he added.

I was wondering what Virgin’s needs for financing in the future would be. David said that “with current fuel prices and current ticket prices, essentially the entire industry is going to be running big operating losses so that will drive some capital needs. But what we expect to happen is either fuel prices will come down or either ticket prices will come up to balance with fuel prices. Assuming we get that balance…in some reasonable amount of time…then at that point we have no additional capital needs going forward, that we’ve arraigned for the capital that we need.”

“The only capital we will end up needing, off course, is for the aircraft coming beginning in 2013,” David added.

Since David mentioned ticket prices, I decided to ask how much of Virgin’s higher fuel prices the airline as able recover. “We think we’ve captured about half of it. The unfortunate thing, of course, is given how rapidly fuel prices have gone up, only capturing half of isn’t great…we’re hopeful that if fuel prices stabilize where they are today or drop, that we’ll still see some pricing traction going forward,” he said.

Photo Credit: Adam Schofield

With that, I moved on to some individual markets. I was very interested in David’s thoughts on Dallas-Fort Worth, especially. DOT traffic data has shown that flights in January were roughly half-full. Granted, it’s a new market that’s a fortress hub, but that seemed low. David told me that DFW is “a tough market. We knew it would be going in. First quarter’s not a great quarter for DFW. What we saw was traffic growth throughout the quarter. We were quite happy with the way March turned out.” (Virgin later told me they had achieved a 71% load factor on DFW-LAX in March.) David also mentioned that Virgin had added a third frequency on both of its DFW routes in April, and that it would “take us a little while to fill the loads backup with that extra frequency.”

I then moved on to Chicago, where Virgin will launch service next week. David told me that Virgin is “quite happy with the way Chicago’s going” and that “it’s booked at about the same level as the rest of our long-haul network, which is unusual for a new market.”

As we approached the end of the interview, I asked about Virgin’s plans to codeshare with V Australia/Virgin Australia. Originally there was talk of a filing with the DOT for that partnership at the end of last year. According to David, however, the deal has been delayed because Virgin America has all “internal resources focused on a successful and uneventful transition” to Sabre, which is slated to be completed by October 2011. This upgrade will make it easier for Virgin America to participate in codeshare partnerships, and “by [the] first quarter of 2012, you’ll see us doing a number of these codeshares,” said David.

Speaking of Sabre, I chatted quickly with David about distribution and why Virgin was pursuing the upgrade earlier in its history than, say, JetBlue. “Knowing the power of distribution, that’s really motivated us to go forward with this…I know what this…can do on the revenue side,” he said.

Since David mentioned the revenue benefits, I figured I’d ask about the distribution issues going on at American, where that carrier is focusing on the costs of using the GDS system. “What they’re doing makes a lot of sense for them, what’s we’re doing makes a lot of sense for us,” said David. He proposed that if you compare the two carriers, a far greater share of Virgin’s tickets are sold by the airline directly when compared to American.

Overall, I was pleased with the interview. I wish I had focused a bit more on financial results, but fortunately I’ll have another chance to catch up with Virgin this week (hopefully).

One of the most distinguishing features of Virgin America’s current onboard product is the airline’s Red system, which offers live television, movies, music, and more. The system is also utilized for ordering of drinks, food, and other onboard shopping.

I would argue that Virgin’s entertainment offerings are far ahead of other airlines in the domestic market, but that doesn’t mean the airline is stopping. In fact, Virgin is currently planning on launching an upgraded IFE system next year.

Virgin America CEO David Cush wouldn’t share all the specifics with me when I spoke with him last week, but he still mentioned a few very interesting features.

David said Virgin passengers will find “more entertainment options than you have today” on a “bigger, clearer screen.” He also mentioned new “interactive features” that will allow users to “interact with other guests on the aircraft as well as guests on other flights while you’re in the air.”

Virgin’s current system already has some features to allow passengers to interact with each other, like seat-to-seat chat, but interaction with people on multiple flights is new. “It may be gaming with the person who’s flying on a different airplane than you are,” said David.

Now, obviously interactive features with other aircraft would require some form of connectivity. Virgin America’s fleet is already equipped with Gogo, but I was wondering if Virgin was willing to look elsewhere. David told me that Virgin is “we’re looking…at Row 44 and the satellite providers,” but noted the airline “quite happy with Gogo right now.” He also said that Gogo is “aware that bandwidth requirements expand quite rapidly…they’re aware of that, they’re working hard on it. That having been said, we’re looking at other options in the future.”

Anyway, I’m really looking forward to seeing these changes. I find it very interesting that Virgin is looking at upgrading its system after being around for a few years, but then again Red is one of the airline’s most distinguishing features – might as well enhance a feature that differentiates them from the competition, I guess. (How many of Virgin’s passengers select them because of IFE?  I wonder.) One item I’d love to see added (in addition to what David said) is a new remote – right now the keyboard is a little tough to use. Obviously, space is limited, but I found that the keys weren’t all that responsive.

Virgin America just announced a few network changes occurring in April…let’s take a look.

First, the airline is boosting its still-new service to Dallas-Fort Worth. The airline will add a third frequency from LAX and SFO. Here’s how the new schedule looks, with the new flights highlighted:

I like this change. Virgin America certainly has a much better product than American, but is a little weak in the schedule department, so this helps. I still think if the first LAX-DFW departure was earlier in the morning it’d be a bit more preferable for travelers looking to maximize their time in Dallas.

Some other routes are getting a boost as well. On April 6, San Francisco – Las Vegas will get an additional flight, so six roundtrips will operate during the week.

SFO-San Diego was recently cut to three roundtrips, but on April 6 the route will be restored to four flights. (For historical context, Virgin launched that route with three daily flights in 2008 but it was boosted to five a few weeks later.)

Right now SFO-Dulles is served with two daily flights, though a few times each week there’s a third in each direction. On April 28, a  daily mid-morning IAD depature is added along with a daily SFO departure in the mid-afternoon. So on some days there will be four SFO-IAD flights.

So, where is this capacity coming from? Well, Virgin is still growing its fleet, of course, but Toronto service is going away. It’s always sad to see an airline eliminate a destination, but this make sense. In July the airline’s load factor was just about 70%, and I’m guessing it hasn’t been much better this winter.

Virgin had a great product on its first international route, but its biggest competitor, Air Canada comes much closer to Virgin than other airlines in terms of hard product. I mean, Air Canada has one LAX-YYZ flight with flat-beds! Also, with only one flight each from LAX and SFO, Virgin didn’t have the greatest schedule when compared to Air Canada.

So the Toronto cut makes sense. Personally, I think one of Virgin’s weaknesses is its schedule on some routes, so one would imagine that additional frequencies should make them a stronger competitor in these existing markets.

Updated at 10:39 PM to fix my DFW schedule.