In the Trenches: Learning From My Team – Intuit Small Business Blog
It’s always good to learn something from the team.

United merger’s OK despite problems, experts say – Houston Chronicle
I was asked about how the United tech transition was going. You probably won’t be surprised by what I said.

We covered a lot of topics, so let’s dive right in to them.

Will Virgin Atlantic remain independent?
No use in starting off with fluff questions, right? With all the speculation about the future of Virgin Atlantic as an independent entity, I thought it best to just start there. Of course, there wasn’t much Chris could tell me. He said that it’s really business as usual. I asked if it was a distraction and he said that it was only a distraction in all the external coverage being focused on the airline. Internally, it’s no different.

He did drift into alliances a bit by saying “we’re one of those last few independent [airlines], and we happen to be in a very good position in terms of assets at Heathrow.” But that’s as much as I could get. Not a surprise, of course. We won’t know of a deal until it’s actually happening, if it happens at all.

Former Tail Slogan #1: No Way BA/AA
Virgin Atlantic spent a lot of time fighting the British Airways/American Airlines anti-trust immunity grant (that’s why that slogan was painted on the airplane), but the alliance has gone forward. I wanted to know if Virgin had seen any impact so far. The result? Nothing. “It’s too early stage to know. We haven’t seen any impact, negative or positive.”

His concern is about what will happen if AA and BA use their market power to pressure corporations and travel agencies into signing more restrictive deals. That’s a process that takes time, so Chris says Virgin Atlantic is still waiting to see where it goes. So far, nothing has changed.

Former Tail Slogan #2: 4 engines for long haul
We then spoke about the introduction of A330 service. I could only chuckle at the introduction of this airplane, because Virgin Atlantic used to have “4 engines 4 long haul” painted on its birds. Clearly, economics got the better of them. Chris said the A330 provides a 15 percent cost advantage over the A340, so it’s a very attractive airplane.

There are two in the fleet right now, and the first five will be dedicated to leisure routes with only economy and premium economy seats. Today, they’re flying Orlando to Manchester and London/Gatwick. Airplanes 6 through 10 will have Upper Class and could go on more business-oriented routes, but those are a little way down the line.

I asked if the A330s would open up new routes for the airline, but for now, the answer is no. The plan is to put these on existing routes. They can return some of the A340s if they want, but no plans have been made. If business is good, these can be used for expansion. I imagine with a 15 percent cost advantage, that could open up some routes that don’t make sense with the existing fleet today.

Swapping Spit with Other Virgins
Since Chris runs the show in the US, I was curious if there had been much traffic flowing between Virgin Atlantic and Virgin America. He said there hadn’t been a ton, but he anticipates that will change. Much of the hold-up has been with Virgin America’s systems since they couldn’t communicate properly with other airlines. Now that’s changing and he expects the next step in cooperation to be in the fall.

I wondered why there would be much traffic. After all, Virgin America only adds a few cities (San Diego, Seattle, and Los Cabos) that Virgin Atlantic doesn’t serve itself with legitimate connections. (Nobody is going to connect through LA to go to Dallas.) Chris said the bigger opportunity is in the UK-based passenger who wants to make multiple stops in the US. So they’ll be able to sell a single itinerary to the person who wants to fly into Vegas, up to SF, and then back to the UK.

I still don’t see this as a huge market. It seems to me that if there’s going to be real traffic flow, Virgin America would need to start serving more cities from eastern locations where connections make more sense. But it does seem that they should be sharing more traffic than they are today.

The Ever-Changing Livery
One thing that always bugs me about Virgin Atlantic is that it seems to change its colors every other week. And it’s never a big change. The airline just adds some silver or purple, changes the font, etc. So why the heck does the management team bother?

Chris laughed, and he said that the most recent livery change was really an internally-focused one. They refreshed their brand principles and had a big effort internally to get people re-dedicated to the airline. So the external face of that effort was the change in colors. I still don’t get it. I’m all for touchy-feely things, but this just seems like a huge exercise without a ton of benefit. If there are Virgin Atlantic folks out there, chime in and let me know what you think.

Low-Cost Airlines: Increasingly Flying to a Major Airport Near You – BNET Headwinds
Secondary airports used to be the place to find low cost carriers, but they’re now increasingly moving toward primary airports.

Why airline fees are good for travelers – CNN.com Out of the Office
I’m now writing a new weekly CNN.com column entitled Out of the Office. I started off with a very controversial topic, and the reaction was, um, stiff. People aren’t nearly as civilized with their comments on CNN.com, that’s for sure.

US Airways: Why We Don’t Bother Hedging Jet-Fuel Prices – BNET Headwinds
US Airways doesn’t hedge, and so far it’s paying dividends. See why the strategy makes sense for the airline today.

Google-ITA Rewards Orbitz and Undercuts Merger Opposition at the Same Time – BNET Headwinds
ITA signed a renewal with Orbitz and that might have some impact on whether or not Google’s effort to buy ITA gets approved.

In the Trenches: Getting Help with Hiring – Intuit Small Business Blog
After realizing that hiring on my own wasn’t going to work well, I looked elsewhere for help.

Heathrow-Virgin Spat: Virgin Caves, but Wins the PR Battle – BNET Headwinds
Virgin Atlantic’s effort to withhold funds from BAA has failed, but the war is still ongoing.

Delta ranks near bottom in on-time performance – Atlanta Journal-Constitution
I was asked whether a poor on time performance record would make fliers consider alternatives. Yep.

Making Your Travel Agenda More Efficient – Intuit Small Business Blog
One way to save money is by being smart with your travel budget, but you can also save money be just being more efficient with how you spend your time traveling.

Airlines vs. Airports: Virgin Atlantic Stiffs Heathrow After Icy Shutdown – BNET Headwinds
Virgin Atlantic is withholding all landing fees from Heathrow until it knows the result of the inquiry into what happened during the snow storm in December. This is not a great plan.

In the Trenches: Going Corporate – Intuit Small Business Blog
We’ve ramped up our small business efforts at Cranky Concierge, and it’s already paying off.

Southwest Keeps ‘Em Happy, but Its Late Flights Are Starting to Stack Up – BNET Headwinds
Southwest is not running the best operation these days, but its reputation keeps people happy anyway. I don’t know how long that can continue if things don’t improve.

Cranky Flier Radio Interview With Brett Snyder – Ask Mr Credit Card
I spent 90 minutes doing an interview with Ask Mr Credit Card about the industry. We talked a lot about current events and some of my personal background. If you’ve got time to kill . . .

JetBlue Blames Airport Construction for Late Flights. Um, No – BNET Headwinds
JetBlue is another airline that’s been struggling to run on time, and the excuse has been airport delays. I’m not so convinced.

The secret rumors of a change in control at Virgin America proved true. Let’s see if I can make this make sense, because it’s somewhat complicated. Richard Branson’s Virgin Group will continue to own the maximum 25 percent of voting shares in the airline that’s permitted for international investors. The rest is owned by VAI, as it was before. Before, the shares of VAI were owned primarily by Black Canyon Capital and Cyrus Capital Partners funds, but they cashed out with the guaranteed return that was promised to them.

Now, the new owners are in four groups. The biggest is a familiar name, Cyrus Capital. They’re back with 42% of the airline. Another 12.5% of the airline is owned by a group set up for distribution to employees if they sell or go public. A very tiny 0.2% is saved for management. But it’s the last group that I find most interesting.

VAI MBO Investors was formed to own just over 20%. Who is behind this? Five Virgin America board members. Actually, it’s four current members, including CEO David Cush, alongside a new guy. Robert Nickell will become a board member as soon as the deal closes. So why is this so interesting? While they were able to get Cyrus back onboard, it looks like they had to get their board members to pony up the rest of the cash. The DOT actually likes this move, because it makes the American management team more invested, but it also makes me wonder if they couldn’t find anyone else to give them money.

But simply replacing the existing equity wasn’t enough for Virgin America. They’re low on cash, so they’re pulling in some more loans. Cyrus will loan the airline $5 million in new money and $15 million to replace some existing Virgin Group debt. Meanwhile, Virgin Group will loan another $63.4 million to the airline. The amount of money they’ve poured into this airline is just amazing.

In return, they’re getting a bunch of warrants. Virgin America will issue 60 million warrants to Virgin Group and 62 million to Cyrus and the board members. Isn’t that problematic for ownership percentages? Nope. These aren’t considered voting interests unless they’re exercised. And if they’re exercised, they have to alert the DOT.

But this structure alone wasn’t enough to get the DOT to sign off. They had to make some more changes. The biggest is that no guaranteed return is allowed for these investors. That’s a good thing since it keeps it more like equity and less like debt.

Virgin America will also add a ninth board member to its roster. CEO David Cush will now be a full-fledged voting member, probably something he wanted as a new investor. The DOT also likes this because it dilutes the say that the Virgin Group has on the board.

There are also a ton of additional restrictions being put out there to restrict Virgin Group’s ability to control the airline. Virgin America will now be able to make more decisions without asking for Virgin Group’s approval. A host of other provisions have been added that you can read in the letter from the DOT if you care.

To me, this looks like Virgin America needed new investors and it needed money. Virgin Group had to give up a lot here and the board members had to throw in some cash, but in the end, Virgin America seems to have a new lease on life. Let’s see if they can keep up the improved financial performance they showed in the last quarter. If so, they’re in a decent place right now.

I remember back in my college days flying into Washington/Dulles airport dreading the long Washington Flyer bus ride into town. Sure, I wanted to take a cab, but those were expensive, so I always wanted to find someone to share. Fortunately, I flew Western Pacific once or twice and those guys didn’t care what you did onboard. (Heck, the flight attendants all wore different t-shirts, so you couldn’t even tell who worked for the airline.)

On one flight, they made an announcement on my behalf asking if anybody was going to GW and wanted to share a cab. Sure enough, there was a very cute girl who lived in the same building as I. Excellent. You would think this service would have been moved online about 5 minutes after the internet began, but that apparently wasn’t the case.

So now Virgin Atlantic is working with Taxi2 to do it. Go to taxi.to, sign up, and it’ll try to make a love connection for you. While I’m glad to see an airline moving in the right direction (especially an airline with its main base at an airport that has very expensive taxi rides to the city center), this isn’t enough.

This service just matches you up with anyone going around your time. What happens if you’re late? They tell people to only wait 15 minutes beyond your scheduled time and then just go. That’s helpful. This service is also only online, so it doesn’t help you once you’re in the air.

If Virgin Atlantic wanted to do this right, they’d create an application that ran on their airplanes in-seat video screen. Think about it. You have several hundred people flying into London with very few connections beyond London. What’s the chance someone on that flight will want to share a cab with you? Pretty good.

And if you’re delayed, who cares? You’re all delayed together. Most importantly, they already have the ability to put this together. You can chat with people at other seats, so they are all networked. Why not allow you to put out a taxi request? Seems like a no-brainer.

So while this new partnership is a decent start, it needs a lot of work to be a killer application.

Those of you familiar with London have probably already spotted the problem here. Heathrow and Eurostar’s London-terminus at St Pancras are nowhere near each other. Were Eurostar to operate out of Heathrow, it would be an incredibly credible way to get to Brussels and Paris from anywhere in the world, but that’s not the case.

Once you land at Heathrow, you can hop on the Piccadilly line to Cockfosters (heh, heh) and about 45 minutes later you’ll be at King’s Cross. St Pancras is basically right next door, but you will need to walk. You could also take Heathrow Express to Paddington and then a cab or the tube to St Pancras, but that will add a transfer and only save you 10 to 15 minutes or so. Either way, you can imagine how little fun this would be if you have a bunch of bags with you.

So is this partnership really anything special? Well, yes and no. It’s not special for those looking to connect to a train, but if you have business in London and Brussels or Paris, it’s a nice step toward seamless booking. We have a long way to go before planes and trains are better connected, but I suppose you have to start somewhere. It’s not like they can just will the train stations to move closer to airports.

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].