I was at the International Aviation Forecast Summit (more commonly called the Boyd conference) earlier this week and had the chance to sit down with several airline execs. One that I hadn’t planned at all was a sit down with Virgin America CEO David Cush. On stage, he spoke about his idea to have the Department of Transportation (DOT) force legacy airlines into allowing other carriers like Virgin America access to their feeder networks. Crazy? Maybe. Likely to happen? Probably not. But he’s ready to start pushing for this, and I thought it was certainly worth sitting down to learn more about his plan. Below you’ll find our interview, edited to improve clarity.
Cranky: What are you really thinking with this? What should it look like?
David Cush, Virgin America CEO: I think in the perfect world, which is not where we live of course, [legacy carriers] would provide us access to their feeder networks beyond their hubs at the same commercial terms they provide to their other partners. As an example, American Airlines provides British Airways BA* flights beyond Chicago and they do it on a prorate basis [meaning they split the revenue based on a set percentage of the fare sold].
Cranky: Just to be clear, you’re looking for some sort of prorate, and I assume a ticketing and baggage agreement?
Cranky: You’re not looking for codeshare… or are you?
David: I would say that for the purest competition we’d be looking for codeshare.
Cranky: So you’d want to see VX* on all these markets?
David: In a perfect world, we’d like to put our code on it, but in the end the key thing we need is interline agreements and prorates that are neutral with the rest of their partners and neutral with their internal accounting.
Cranky: It would be a prorate basis, but you would be the one filing fares on their flights. So there would have to be the tacit agreement that you’re not gonna throw a crazy fare in that market.
David: That would not be the tacit agreement. The key thing is if I’m willing to fly someone from San Francisco to Chicago to Peoria for $200 and by the virtue of the prorate agreement I’m giving American 25% of that, then I’ve got as much skin in the game as they do. I may have more skin in the game.
Cranky: But they can’t have control over what you’re selling, so how would that work as a mechanism? How does it work from a regulatory standpoint?
David: It would be the DOT, who’s in charge of making sure there’s competition in the marketplace, coming out and saying [it]. And what I will say is this isn’t unprecedented. Hawaiian made the same argument in the American/Qantas joint venture case saying they wanted access into the feeder network for Qantas. I think what’s different now, Brett, is that when you had 6 or 7 carriers feeding these places, that was fine. There was enough competition. Now with only 3, maybe 4 if you include Southwest, how do we ensure there’s competition there? I think this is the most efficient way to ensure there’s competition there. Just like the last mile in telecom, when we had landlines, everyone has access.
Cranky: How do you define the feeder network? I mean, you could take someone to Chicago and say you want to put them on another airline from there to LaGuardia but that’s not the feeder network. What do you really want access to?
David: In general, we should have access to anything they provide to their partners. But I think in reality what it means is not LaGuardia access. LaGuardia has plenty of competition. It’s Peoria, it’s Springfield, places that currently don’t have access to low cost carriers. The fact that I’m willing to price this maybe 25% lower, as an example, than a legacy carrier because my costs are lower and because we’re now breaking an oligopoly… Essentially what that means is that there are dozens and dozens of airports that have access to low cost fares. And it’s not just us. It’s JetBlue from the east coast, and it’s Spirit, and it’s anyone else who wants to tap into what has become a constrictive monopoly due to consolidation.
Cranky: So in this plan, Southwest isn’t a part of it because they don’t have partners?
David: Yeah, I think that’s probably a fair way of looking at it. I haven’t thought about it in those terms, but if they’re a closed loop network maybe that’s fine. But the fact that American, Delta, and United have dozens and dozens of airlines selling into their system and they exclude low cost carriers in the US, that’s really the issue here. So you’re probably right, maybe Southwest is outside of this.
Cranky: Looking at my crystal ball, I assume the other airlines are going to come in and say “well, look, these guys are coming in and selling fares too low so we can’t make money to support the operation. We’ll have to cancel all our flights to these cities.”
David: First of all, we won’t put ruinous fares in there. We’ll put fares that can support our own revenue and cost structure is my gut feel and my gut feel of what others will do. The second thing is from a small airport and consumer standpoint, by dropping fares significantly we will stimulate so much traffic that they actually can do fine. We’ve seen this in a number of markets, everyone does fine when you stimulate traffic. From an airport standpoint, what they’re about is passengers. Dropping fares to stimulate traffic is key to them.
Cranky: Is this something that, obviously you said Hawaiian has pitched this before, but have you seen this elsewhere?
David: We’ve seen it in the Europe, the same argument in Europe.
Cranky: But is anyone doing it?
David: No, not yet. It’s a bit of a new issue in terms of consolidation. But we’ve seen the same thing in Europe with Ryanair and others wanting more access to feeder networks. We’ve seen it in Australia which probably has the most aggressive competition regime there. Much more so than anywhere else. I think we’re just starting to raise the issue here in the US. With a consolidated industry, we want to make sure that people who live in 90 percent of the airports that aren’t hub airports can get low fares. This is a way to solve it. [Editor’s note: After thinking further, I believe when British Airways took over bmi they were required to continue to allow other airlines to access the network.]
Cranky: Why can’t you go get your own regional aircraft? I know we talked about this earlier.
David: Given the current structure of the industry, that’s economically infeasible. Perhaps if the four biggest guys controlled 50 percent of the traffic that would be feasible, but not with 80 to 90 percent. This goes back to the argument the telcom industry made in the 1990s. Laying copper doesn’t make any sense given the concentration of the industry. Could we do it? Yes. Would it make economic sense? No. That’s why nobody is going to do it.
Cranky: Is it just that there would be too much capacity in the market for you to run it profitably?
David: I think the other thing is what the competitive reaction would be. We’ve seen this already. These guys are flexing their muscles a little.
Cranky: But you see that in your markets today anyway. Look at Dallas.
David: But these are big thick markets. It’s different when you have a thin market and when you’re buying capacity.
Cranky: So are you going to take this to Washington tomorrow? Where does this fall on your priorities?
David: In terms of strategic importance, airport access is our #1 thing. Always has been, always will be. Even though we’re in most of the airports we want to be in, getting increased access is still difficult and expensive. even though guys that are the incumbents received all their slots for free. But I would say second to that is access to the small communities that have born the brunt of consolidation.
Cranky: Have you had these discussions with DOT yet?
David: We had them in lofty non-specific terms during the American/US Airways merger. You can do the numbers and what you see is that there are a number of airports that have lost one or two carriers since consolidation started and have lost competition. Yeah, so we’ve had maybe less defined conversations on this with DOT, or actually DOJ [because it was during the merger review] with what our concerns are for the traveling public. We’re going to get much more specific, much more pointed, and much more aggressive in terms of what we think are the proper remedies remedies for DOT. DOT has a standing authority and a responsibility to ensure competition in aviation so they’re the guys that will solve this.
Cranky: It will be an interesting fight.
David: Yeah, I don’t think the doors will be thrown open.
There you have it. While the legacy carriers clearly won’t do this without some kind of regulation, presumably DOT would have the authority to do this if it so decreed. Do you like the idea? And if you do, do you think there’s more than a snowball’s chance in hell of it actually happening?