Note to Virgin America: Successful Startups Make Money Fast

Cranky is on vacation, but I’ve lined up some excellent guest bloggers for you while I’m gone. Today I have a guest who prefers to go only by “The Cardinal.” The Cardinal doesn’t pull punches, so hopefully this will generate some good discussion on both sides.

We take as our point of inspiration (or exasperation) Ted Reed’s recent article on Virgin America from The Street.com. There are a lot of annoying things about this article, such as the idea that what Virgin America is doing amounts to innovation. What a crock that is. But that’s not what this blog entry is about. We’ll get to that after a bit of history.

The list of stupid airline startups since US deregulation in 1979 is very, very long, but Virgin America surely ranks high on that list.

Start with Richard Branson’s alleged brilliance as an airline entrepreneur. The man’s record is uneven at best. The flagship Virgin Atlantic airline is certainly high profile, but a look at its financials (the company is private but provides some summary data at the end of this document) shows it to be not excitingly profitable. And note this is an airline that for much of its history was one of only four airlines that was permitted to fly from London’s Heathrow airport to the US — you would think that would be a license to mint money.

But then think of the late, unlamented Virgin Express, Branson’s flop of a European low cost carrier. Among Branson’s mistakes: picking a Belgian carrier as the foundation of Virgin Express (Belgium has some of the highest social charges and toughest labor laws in Europe) and putting Mesa’s Jonathan Ornstein in charge of it (whatever Jonathan’s virtues, he’s a distinctly American phenomenon who was out of place in Europe). It’s no surprise that Branson ultimately threw in the towel in 2004.

But what about Australia’s Virgin Blue? Clearly a success, no? Well, yes, but it’s actually a great example of how it’s better to be lucky than smart.

Virgin Blue started flying roughly a year before Australian carrier Ansett collapsed (for complex reasons but related to the financial trouble of its then partial parent, Air New Zealand. As a rough guide as to the approximate effect that had on the Australian air travel market, imagine if American Airlines and United suddenly went out of business — not just bankrupt, but completely out of business. How difficult would it be for any US air carrier to make money in the wake of such an event? It would be cake. Heck, even Spirit, Mesa and Frontier would make money in large quantities in such an event. So yeah, Virgin Blue was successful, it would have been very difficult for them not to be very profitable in the wake of Ansett’s collapse.

You have to hand it to Branson, he has a reality distortion field around him that rivals that of Steve Jobs. Let’s think about Virgin America. What exactly is the unfilled niche that Virgin occupies in the US?

Virgin America is largely going after long-haul domestic flying between major US cities. Is there a lack of capacity in such markets? No. In fact there’s even an existing not-quite-a-startup that does many of the same things, JetBlue, on many of the same routes. Arguably JetBlue is better at it than Virgin. JetBlue doesn’t have the mood lighting that Virgin has, and JetBlue’s IFE isn’t quite as snazzy as that of Virgin America’s, but JetBlue’s seat-pitch is a heck of a lot better than that of Virgin America (at least Virgin America’s economy-class pitch — JetBlue obviously doesn’t do a first class, but then its single class product is already pretty dang comfy) and JetBlue’s in-flight service is really quite good.

Yet Branson convinced a bunch of financiers to throw money at him to start Virgin America. Chalk it up, perhaps, to a minor moment of wretched excess — minor at least relative to the rest of the financial crisis. Yeah, so a bunch of financiers ponied up some hundreds of millions for a dumb airline concept. Big deal. This was at the same time that Swiss bank UBS was doing real estate deals that ultimately cost it $38bn in writeoffs. So much, much dumber things were being done at the same time. It could have been worse. And the Virgin America backers weren’t alone — there were the folks who lost their shirts with Skybus at about the same time.

Just how poor was Virgin Amerca’s concept is apparent from its appalling financial results. Cranky did a good job covering their dismal historic financials here and Ted Reed covers the 4th quarter of 2008 in his piece referred to above.

And now we’re getting to what this blog entry is about. The most exasperating thing in Ted Reed’s piece is the ill-advised statement by Virgin America CEO David Cush at the end:

“We are not profitable, and you would not expect a new airline to be profitable,” he said. “But we have no debt to be renegotiated, no need to go to the capital markets and we continue to believe we will be profitable in 2011.”

[The Ted Reed story initially said 2011, which I know because I saved a copy. Checking it recently, it now says 2010, but there’s no notice of a change, which is poor practice on the part of Ted and The Street — the kind of thing the media is not supposed to do. It doesn’t matter much whether it’s 2010 or 2011, the same point applies, but don’t be surprised when you click thru and see 2010 rather than 2011.]

Huh? I suppose you can chalk some of Cush’s nonchalance up to the fact that he previously worked for American Airlines. With that background he probably thinks that you wouldn’t expect any airline to be profitable, period. But Virgin America started flying, finally (after a year or two of delay) in 2007 — it’s highly unlikely Virgin America’s long-suffering investors were sold this puppy on the basis of no profits until 2011. Over five years from investment to break-even? That’s a joke.

Yeah, lots of startups are unprofitable — but then most startups fail, and they primarily fail because . . . they don’t make money. Whereas successful startups do the opposite. They make money (what a concept). JetBlue started in 2000 — it was profitable in 2001, and that, as you will recall, was a really bad year for airlines. Then-tiny (and still, today, small) Allegiant came out of bankruptcy in 2002 — in 2003 it was profitable (and has not had an unprofitable year since). ValuJet (now AirTran) was immediately and spectacularly profitable, going public within a year of startup in 1994. In other words, there’s a strong record of good airline startups making money more or less out of the box.

About the only two startups that weren’t immediately successful that are still on the scene are Frontier and Spirit. Frontier limped along for years before making money, and of course is now bankrupt. Spirit has absorbed (in the form of awesome losses) hundreds of millions of dollars in private equity over the last five or more years and may finally become profitable this year. Neither Spirit nor Frontier have evolved in a manner an investor would appreciate.

There’s no worse position to be in than to be a startup airline with cash remaining and a concept that doesn’t work. Skybus found itself in the same position about a year ago, and to the great credit of its board, they had the sense to shut it down. They didn’t have to, they could have kept floundering around and for all we know they might still be with us today (airlines being notoriously hard to kill). But in an all-too-rare (in the airline biz) moment of responsibility, they faced reality squarely in the face and did the right thing.

Unfortunately there are a lot of big egos on the line at Virgin America, and big egos are highly susceptible to believing their own bullsh*t. There’s a good chance that the unfilled market niche Virgin America is really in is that of stroking the aforementioned egos.


The Cardinal is a long time industry observer, who is currently a [redacted] at [redacted]. Prior to working at [redacted], he worked at [redacted], [redacted] and [redacted]. He resides in [redacted] and in his spare time enjoys [redacted with extreme prejudice].

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29 Comments on "Note to Virgin America: Successful Startups Make Money Fast"

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Zack Rules
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Here Here!
Great Post!

eponymous coward
Guest

Out of curiosity, how many airlines had to have their jets sit on the tarmac for close to a year because a bunch of other airlines sued to prevent a DOT operating certificate from being issued? How many airlines had to have their CEO removed as a condition of having an operating certificate issued?

Dave
Guest
What does it matter if Virgin America is making money yet or not? They have launched during one of the most challenging periods in air travel history. Airfares are plunging along with demand, and just as late as last summer, fuel prices were astronomical. The company remains on track towards profitability according to their business plan (albeit it has been revised). With the company’s revenues increasing, solid load factors, and decreasing losses where is the bad news here? As a customer, I fail to see why I personally care when the carrier is offering me superior service at a bargain… Read more »
A
Guest
Interesting post. I’ve always thought the “investors” in Virgin America must be insane since airlines are #1, not the best investment opportunity, and #2, VA’s business plan put them right into an already well serviced field, and that was before the current economic tumble. Catering to business travelers has always intrigued me because most business isn’t limited to major cities on just the east or west coasts. What about the major business centers like Chicago, Dallas, Houston, Atlanta, etc.? Even if I did live in NYC or LA it would be doubtful I’d ever fly VA because my work takes… Read more »
Scott
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I think what makes Virgin Atlantic and Virgin Blue stand out is not necessarily profitability, but rather the fact that they both entered markets in which monolithic, aggressively competitive carriers were already firmly entrenched. The dirty tricks campaign brought against Virgin Atlantic by BA is part of company lore, and I’m sure VX would be only too happy to stumble across the same PR gold. They’re trying to paint the Alaska case in a similar light, but Alaska’s claims are valid, and Virgin America’s response not the most helpful: Alaska: “It sounds like you’re not a US citizen anymore. Prove… Read more »
SLAM
Guest
My local airport is SFO. My parents live in NY and wife’s family in DC, LA, and Seattle. Coincidentally, VA flies to all these locations and has since became my airline of choice domestically. I used to fly the United PS on my flights to NY, but now I’ll pay more just to fly VA (and I’m cheap). The “premium service” route on UA, imho, lacks far behind in terms of service, amenities, and overall condition of the planes. Talk to people on the street (the regular street, not the capitalized one) and you’ll hear the rave reviews people are… Read more »
Allan
Guest

This post came off more sour grapes than informative. I travel LAX to SFO a lot for business, usually on Southwest. I can honestly say flying Virgin American is head and shoulders above any other LCC. The author of this post might not enjoy mood lighting, a nice atmosphere or attendants who don’t out right resent you (looking at you Southwest), but after a 10 hour meeting, those little extras make all the difference. God forbid if an airline tried to make airline travel enjoyable and maybe even fun again. How dare they!!!

Trent880
Guest
No one doubts they have a great product, but the problem is no one is willing to pay a premium for that product. Don’t tell me “but I would gladly pay more for good service”. On average, people don’t. And you probably don’t either. Passengers are famous for voting with the wallets in direct contrast to what they say in surveys or on message boards. This airline exists solely to steal traffic from entrenched carriers, rather than stimulating traffic like Jetblue, Allegiant, even Spirit and Southwest, and that is the hardest way to make money in this industry. This is… Read more »
somchai
Guest

Agreed. The OP sounds like he’s been sucking on too many lemons.

Lose the sour grapes, dude. VA is a fantastic airline and please don’t make JetBlue out to be the savior here–need we revisit their stellar on-time performance record and/or slew of f*ups they’ve had recently?

Nobody is perfect–and the fact that VA has managed to eke out ANY existence at the time they joined the fray is very, very impressive.

If your post hadn’t sounded like someone with a grudge, it may have passed muster.

Cranky, this is who you let sub on posts for you?!?

ilikedng
Guest

@Trent880. I don’t see how people are paying for a premium for Virgin America. Their prices are mostly inline, if not cheaper, than other airlines on identical routes.

Wayne
Guest
Wow dude that was intense. Where you hoping to come that bitter and twisted? Having flown domestically in the U.S, I would sell my grandmother off just to fly VA. American carriers are some of the worst in the world so you need to be thanking your lucky stars you have someone like VA coming in and showing you how good the flying experience really can be. As it has been pointed out, it takes time to build up something like this and they have the model for the long term. As for your comments about Virgin Blue I would… Read more »
Alex
Guest
I have to say my first reaction when reading this was that it reads like something thats come directly out of the JetBlue PR department. The fact that whoever wrote it doesn’t have the courage to put his/her name on it makes it even more suspicious. If your going to write such a one sided piece at least have the balls to put your name to it. I’ve been wondering for a while now why so many people are so desperate to see Virgin America fail. I mean everyone understands why Alaska et al aren’t keen on Branson’s newest airline,… Read more »
The Traveling Optimist
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The Traveling Optimist
Danged if there aren’t sharks in these waters! But to be fair, what’s with all the redactions? I’ve said a few times that customers don’t care if the airline they fly/choose is profitable or not (BN, PA, EA, SR, AZ) so long as the price is right and the onboard product (at the very least) convenient. Airlines cannot blame customers for losing money or for failing if their business plan cannot sustain slow economies or protracted fare wars. Mr. Cush seems right down the line in terms of start-up profitability: huge capital and sunk costs at the beginning for a… Read more »
Ryan
Guest
While “The Cardinal’s” tone was perhaps not the most conducive to level-headed discussion, I can’t help but notice that many critiques of the article are based on praise of VX’s service. The issue here is not if VX is revolutionizing the market, but rather if it stands a chance of being profitable. I think the article’s point is that VX is flying on a heavily-served route network (overlapping AA, UA, and US on several routes, and perhaps more dangerously DL and B6) with airlines that already offer comparable amentities. B6 serves many of the transcontinental routes with a comparable (and… Read more »
John
Guest

There is a rumor out there he is going for US citizenship, that would change the game. Even uncle sam would be happy, will all that tax money coming in.

eponymous coward
Guest

That’s probably a better argument to be making, Ryan, and one Cranky has made. I tend to think VX’s Magic 8- Ball is still in “Reply hazy: try again” when it comes to their future.

To be honest, though, VX is aimed much more at AA and UA than DL/NW- every destination VX has chosen so far is served by UA, most are served by AA, and UA’s PS service is centered around JFK, SFO and LAX (and is very clearly what VX F is aiming at stealing, PS customers).

Ned Denney
Guest
For the record, the Skybus business model was initially very successful, and racked up some impressive load factor numbers. Especially on their initial routes, where they had taken the time to carefully study and plan-for (e.g. the Portsmouth routes were very full and profitable especially PSM-Punta Gorda). You are correct that their downfall was due to the fact that they believed too much in their own initial success (or BS as you call it) and rather than proceeding on a cautious route-by-route approach, decided to bet the entire ranch on a massive entrée into Greensboro as a new Gateway City,… Read more »
Chris
Guest
I feel that I must reply to some of the comments here: eponymous coward wrote: Out of curiosity, how many airlines had to have their jets sit on the tarmac for close to a year because a bunch of other airlines sued to prevent a DOT operating certificate from being issued? How many airlines had to have their CEO removed as a condition of having an operating certificate issued? The answer here is none to my knowledge as the rules are written to ensure that US ownership exists for American Carriers just like it does with the Jones Act for… Read more »
Kevin
Guest
It’s funny I’ve seen mention of cross marketing between the different Virgin Brands, but nobody has given mention to Virgin Galactic. This is where it is at people. Soon, should people take hold and embrace the concept, you will be able to get from point A to B anywhere on earth in a fraction of the time. Imagine the selling power of Space! I don’t know a whole lot about any financial history of any airline, but I have flown with VA and I personally liked it. I may not fly them again because they only have the Airbus. You… Read more »
H2
Guest

WOW, i don’t know where to begin.
This author, the “Cardinal [redacted]” ????, is really a [redacted] !!!

One of the dumbest [redacted] articles I have ever seen !!!

????!!!! [redacted] …LOL

low cost flights to London
Guest

I flew Virgin America airlines three times and their service each time was perfect. The new jets had great comfort in the coach section which was nice for such a long flight on a low budget. They are better when compared to other flights.

Make Money in Minutes
Guest

You are correct that their downfall was due to the fact that they believed too much in their own initial success (or BS as you call it) and rather than proceeding on a cautious route-by-route approach, decided to bet the entire ranch on a massive entrée into Greensboro as a new Gateway City, opening 11 routes in one month, on completely un-proven and untested routes. Skybus was alive and well (and had some very compelling aspects about their business model) until the Greensboro blitzkrieg where they got completely routed their complete lack of planning,

bankruptcy
Guest
Yeah, lots of startups are unprofitable — but then most startups fail, and they primarily fail because . . . they don’t make money. Whereas successful startups do the opposite. They make money (what a concept). JetBlue started in 2000 — it was profitable in 2001, and that, as you will recall, was a really bad year for airlines. Then-tiny (and still, today, small) Allegiant came out of bankruptcy in 2002 — in 2003 it was profitable (and has not had an unprofitable year since). ValuJet (now AirTran) was immediately and spectacularly profitable, going public within a year of startup… Read more »
des
Guest

@John When you reach this level of wealth you’ve got a whole football team of accountants that can save you tax on most levels. If Branson is looking for citizenship, I doubt he’s losing sleep over tax charges.

With regards to his several enterprises. The fact that he diversifies so much means he can offset losses on one enterprise with a more profitable venture. Also, if you look at his dealings close enough, he actually sells quite a huge chunk of shares to plough back into another venture with more scope and more opportunities.

Acid
Guest

Had the opportunity to fly Virgin once and to be frank, I was pretty impressed. Have heard some pretty bad review from my colleagues before.

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[…] we last saw “The Cardinal” he commented on Virgin America, stirring up a lot of emotions in the process. This time he tackles something I bet will be less […]

Boris
Guest
I travel often on business between my home in Boston and Los Angeles. Until three years ago, I usually flew on jetBlue (B6), and also tried American Airlines as I?ve got a lot of miles in BA Executive Club. Then, in an effort to save my client money, I tried Virgin America (VX) and since then have only used any other airline on the route once (B6; I then resolved not to do this again). I still use B6 (and Acela for shorter trips) in preference on routes where VX is not available, so I can continuously compare the two.… Read more »
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