Lately, Virgin Blue has been under fire for having weak profits as demand softened and capacity continued to grow. (Attention US airlines: profit is what you get when you actually bring in more money than you spend. Yes, it’s possible.) New CEO John Borghetti has come in pledging to shake things up. In fact, it appears that his version of shaking things up is to move closer to Qantas, his former employer.

John had been with Qantas for ages, and he left after he lost in the race to replace the last Qantas CEO. What better way to say “I love you” than go to your company’s nemesis? Nice move.

So now at Virgin Blue, John is trying to bring some Qantas over and that’s something of a gamble. John confirmed that he will be bringing a business class product onboard instead of just a premium economy. New 737s that are on order will get the upgrade first, it seems. They will be focusing on the business traveler now, which is an extension of what had been cautiously started awhile ago.

Why are they doing this? Well, he thinks there’s money to be had. I thought it strange when he suggested, “we must reduce our reliance on [the leisure] segment if we are to reduce the earnings volatility that goes with it.” Throughout this recession, it has been business travel that has seen the greatest volatility. Maybe things are, um, upside down in Australia.

But he’s not ignoring the leisure market which has strong competition from Jetstar and a lot less strong competition from Tiger. It really does sound like he wants to be all things to all people. That’s a strategy that has rarely worked well.

We do know that he’s hoping to rally around the Virgin Blue name. Thanks to an agreement around the Virgin name, the airline isn’t allowed to use it outside of Australia. That’s why South Pacific and New Zealand flights fall under the Pacific Blue name while long haul flights are as V Australia. John seems to be hoping to find a way to use the one Virgin Blue brand and created a unified presence.

We also know that the airline is trying to cozy up with Air New Zealand for Trans-Tasman flying. This could be their effort to harmonize products between the two.

In the end, I find myself wondering how this strategy is going to work. I understand that with earnings suffering, you have to do something. (Take note, American.) I don’t know enough about the market to know if this is the right thing to do, but it is a big change and it does carry some risk that instead of serving one segment well, they’ll serve all segments poorly.

Labor Issues Thwart Southwest’s Efforts to Buy Frontier – BNET
Southwest lost its chance to buy Frontier thanks to labor issues. It shouldn’t be a surprise, but it still is.

LAX Rent Increase Ruled Not Discriminatory, But Fight Continues – BNET
LAX tried to increase its rent for those airline not under long term lease, and they just won the first round of the battle. But there’s more to come.

In Search of the Elusive Power Port – NileGuide
I wrote this guest post for NileGuide about which airlines have power outlets and where you can find them. It ain’t easy.

Air Traffic Controller Union, FAA Agree on Labor Deal – BNET
It’s taken years, but the new administration has finally started working with the air traffic controllers. They have a tentative agreement.

June Premium Traffic Drops “Only” 21.3 Percent – BNET
It’s premium traffic monitor time again, and it’s ugly . . . again. But things are getting a bit less bad.

Delta’s Partnership with Virgin Blue Causes Pain for United in Australia – BNET
Virgin Blue is walking away from its United codeshare down under.

I actually touched on this possibility when I interviewed Virgin Blue CEO Brett Godfrey in February. When talking about Delta, he alluded to this . . .

You might say, well, does Delta want to put their traffic on Qantas in Australia? A lot of the market flies beyond Sydney, so maybe that’s an opportunity for us to say, well, quid pro quo . . . . There’s some opportunity there. No discussions held in that regard . . . but that’s an opportunity.

And here we are five months later with a deal in hand. This partnership will have frequent flier reciprocity, codesharing, and it will ask for antitrust immunity so they can discuss routes and fares. This seems like it should be an easy one for the DOT to approve, because up until this year, only 2 airlines flew the route. If this doesn’t get approved, my bet is that Delta’s days to Sydney are numbered, so there is a clear benefit to consumers to approving this deal.

It also allows Delta to feed people into Los Angeles from around the US and Virgin Blue to feed people into Sydney (and other gateways) from around Australia. I would hope that we’ll see some serious frequency cuts in order to try to get back to a more normal level of capacity on the route.

I was emailing with Dan Webb over at Things in the Sky last night about this, and he was very interested in what this means for Virgin America. This type of joint venture certainly diminishes Virgin America’s importance to V Australia. If it weren’t for space constraints, I wonder if V Australia would even rather move over to Delta’s terminal at LAX and leave Virgin America behind.

This also raises the question about what happens to the Virgin Blue/United partnership. Right now, Virgin Blue shares United’s code on flights beyond Sydney in Australia. I can’t imagine Virgin Blue would cancel this deal, but I wonder how United will feel about it. They may very well need the traffic, so it’s possible it could stay, but that would make for an odd arrangement.

I also find myself wondering if eventually Air France could join this agreement with its LAX to Tahiti flight. Virgin Blue subsidiary Pacific Blue doesn’t fly to Tahiti yet, but this could be another interesting twist.

I like this move. It should help to stabilize the routes between the US and Australia, though it should mean fares will rise for consumers. Considering that fares are too low to be sustainable right now, that’s a good thing.

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.

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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].