Across the Aisle From Virgin America’s CEO on His Plan to Force Legacy Carriers to Let Him Use Their Feeder Networks

Government Regulation, Virgin America

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.

Planeline

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].

Planeline

Cranky: Just to be clear, you’re looking for some sort of prorate, and I assume a ticketing and baggage agreement?

David: Absolutely.

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.

Planeline

Cranky: It would be a prorate basis, but you would be the one filing fares on their flights. So there would Across the Aisle Virgin Americahave 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.

Planeline

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.

Planeline

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.

Planeline

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.

Planeline

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.]

Planeline

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.

Planeline

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.

Planeline

Cranky: It will be an interesting fight.

David: Yeah, I don’t think the doors will be thrown open.

Planeline

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?

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41 comments on “Across the Aisle From Virgin America’s CEO on His Plan to Force Legacy Carriers to Let Him Use Their Feeder Networks

  1. I think I love the idea, but it is just never going to occur (as it would amount to a new regulation of the industry).
    From a passenger point of view, it means routing and destinations that were inexistent in the past. From an airline point of view, it should mean more seats filled on feeder flights, but also means that there is no premium in building a network, and much of it would simply disappear : why run a feeder route if it is mainly going to provide your competitors with passengers ?!!!

  2. Yeah right. Are you sure you were not talking to Bernie Sanders? Less regulation, not more. #Socialism

  3. The question to really ask is whether air transport has become a utility essential to normal life – similiar to gas, electric, water and telecom. Furthermore do any of the 3 major airlines have de facto monopoly power, eg is United the only game in town in Peoria with no hope of a competitor being profitable ?

    Air transport may well be a utility for cities more than 90 mins drive from another airport. For cities which can support regional flying from one of the big 3 carriers, then Virgin’s CEO may have a point, but these cities tend to be small and probably not the cities he wants access to. If access is to be made compulsory then as a competitor Virgin should be required to pay a minimum fee to a big 3 carrier, just to ensure Virgin don’t file ruinous fares

  4. Is he high? Seriously, legacies have worked over years to build their relationships with feeders. Why shouldn’t Virgin have to do the same? Also, we don’t need more legislation in this “deregulated” industry. If Virgin can’t prosper as a stand alone carrier, they shouldn’t expect the gov’t to just step in and fix it.

  5. The only place this has actually happened is that VS has some right to put carriers on BA short-haul flights due to the BMI merger, but under highly regulated terms, and I’m pretty sure VS has no right to dictate prices to BA — that is insanity.

  6. What I don’t get, is all he seems to be advocating for is the right to sell existing seats at lower prices while letting someone else handle all of the costs that go with running the operation. He makes the argument about AA and its partners, but BA does not, and more importantly cannot, operate domestic flights, so it is a false comparison. Not sure how that is good for the operating carrier, it means even less transparency for the consumer, and from a pricing perspective, just doesn’t make sense.
    The telecom analogy makes more sense, but there the wire is truly a commodity, and there is a fixed fee to be paid to use the wire. Transportation is much more difficult with capacity, scheduling, network and IROP challenges, etc. Would the regionals become more independent and just codeshare with everyone?
    My guess is VX really could start a codeshare or interline with a US3, but they want favorable terms they simply won’t get.
    No one forced VX to build a product / service / operation that only works in large markets. I get Cush’s point about reactionary / predatory competition, and maybe that is worth talking about to regulate and encourage new route entrants but this extreme measure is downright silly and not well thought out.

    1. Noah – A couple thoughts here. First, BA might not be the perfect example, but you could put Alaska in there instead and your foreign vs domestic comparison goes away. And you could use other airlines if you’re just talking about interline. Regarding interline, the big carriers are really freezing out the low cost carriers. It’s not an economic issue. American canceled the agreement with JetBlue. Frontier has lost everything. This is definitely a decision being made proactively by the big carriers because it’s to their advantage to do so.

      1. I can definitely see DOT creating a situation where interline agreements are regulated as far as cost/price, but I still have a hard time seeing how this would work in regards to the more extensive code-sharing he is arguing for. Unlike utilities, whose cables and lines are a relative fixed cost and exist on a very small easement of land that is difficult to negotiate access to. Airlines outside of major airports have a relatively low barrier for entry as far as actually accessing the airport, and airplanes themselves are movable and aren’t really comparable to wiring.

  7. I don’t see this happening though I definitely see the value for flyers in smaller markets. It is more expensive to fly to smaller markets with the smaller aircraft requirements but I think it’s safe to say that the Big 3 definitely overprices those markets. The cynic might say they use their monopoly in smaller markets to subsidize those $200 6 hours transcons.

    All that said, this proposed scenario is a pipe dream. It’s not going to happen. As Dave mentioned above, why should the Big 3 be forced to share their system with an upstart until all other options are extinguished? Granted, a valid point can be argued that with consolidation, the Big 3 are so dominant that no company in their right mind would try to grow a new feeder network alone.

    Which leads to something I think the government can do to help the situation in these smaller markets. VX should be asking the government for the ability to collaborate on schedules with other non-Big 3 carriers like B6, F9, and AS for the sole purpose of setting up a series of shared regional hubs where they would connect to a regional carrier that is codesharing with everyone. I doubt NK, G4 and WN would be interested. Once this is granted, they select two or three regional hub airports centrally located with a lot of existing capacity. CVG would be a perfect example as it would also provide some O&D demand. Once the hubs are in place, regional airlines like Skywest could be recruited to hub at CVG flying Skywest flagged aircraft to places like PEO and FTW and codeshare with any interested parties. I think that has a better chance of happening than DL/AA/UA being forced to put VX passengers on their regional flights.

    1. “…flying Skywest flagged aircraft to places like PEO and FTW…”

      I think you mean PIA (Peoria) and FWA (Fort Wayne).

      PEO is a general aviation airport in Penn Yan, NY.

      FTW is the close-in Meacham Field (oops, I mean Meacham International Airport!) in Fort Worth. It was the city’s commercial airport before GSW/ACF.

  8. Wow, I would not have expected an airline CEO to be talking like this. Sounds very much like a big step back into the world or regulation. I just don’t see how this could work, as if the gov’t implemented such a thing my guess is a lot of those “thin” routes would be dropped by the “Big 3.” Let’s be honest here, most of those routes are flown by regionals anyway, and if they aren’t getting on legacy metal at the hubs what’s the incentive for AA, UA or DL to maintain the route?

  9. Sounds like he just wants routing fares where VX is part of the through fare routing. That’s what airline life used to be like when I started working for one. It’s just the pre-alliance/pre-express way of life he wants to return to.

  10. So Cush is saying he wants the DOT to compel “feeder” carriers to do business with his company whether they want to or not? Even if they’re subsidiaries of a Big 3 carrier? He wants all the benefits of feed with none of the start-up costs or investments in the networks that have taken place over time? Wow, why not just ask DOT to force the big carriers to train his employees in their facilities so he doesn’t have to build any and make their purchasing departments handle his purchases so he can get the economies of scale without any investment on VX’s part.

    There are a few examples of similar situations in the past, but always as part of a larger event where one airline has proposed a merger, JV, codeshare, etc. and regulators have made such an agreement part of the conditions of approval to mitigate specific losses in competition that existed pre-event. The airline proposing the merger has always had the option of accepting the terms or walking away. But this is taking it to another level: he wants DOT to legally compel his competitors, or third parties who have signed agreements to provide services to his competitors, to sell VX the same services.

    If he wants access to feeder services, he can buy lift from an independent carrier today, just like the Big 3. Or he can start his own feeder services like Alaska has with Horizon. Another idea would be for VX to get together with a few of the smaller carriers and starting a jointly-owned lift provider. To work, this might require DOT to relax some rules so participants could coordinate schedules (but not prices) to some degree so they could better utilize the feeder service.

    But I just can’t see DOT telling, for example, SkyWest that they have to allow VX access to AA- or UA-branded service at SFO so VX can sell tickets from, say, New York to Eureka/Arcata or Fresno. Not going to happen.

    1. cblock2 – Just a point of clarification. Most of the agreements that the big airlines have with regionals these days are capacity purchase agreements. In other words, they’re paying the regionals to provide the service. There is no risk to the regional and the regional has no ability to sell seats on those flights to anyone else. So this really wouldn’t be a relationship with the regional at all, just as BA has no relationship with AA’s regionals today. And the regionals themselves don’t care who sits on the airplane. So this is really about forcing the legacy carriers themselves. (This doesn’t make it any more likely…)

      1. Thanks for the clarification, but (to me, at least) that’s even more indefensible since that means all the “feeder” seats made available to VX would come straight from the inventory of a Big 3 airline, not just those from their wholly-owned subsidiaries. Great business model, make your competitors supply you with inventory.

        (Actually, given the bad blood between VX and Alaska I’d expect VX to want this extended to their Horizon subsidiary as well.)

  11. This idea is completely insane. I found it especially revealing that he had no good answer to Cranky’s question about pricing. Basically, his proposal would either amount to a massive antitrust violation (i.e., collusion on pricing), or creating an unfair regulatory scheme that would force legacies to accept VX’s pricing no matter what (which would no doubt devolve into all sorts of tit-for-tat retaliations).

    I found his seeming complete ignorance of antitrust and competition law shocking, and he really needs to go have a long chat with his general counsel.

  12. Funny, Alaska didn’t have to go crying to the Feds to force extensive codesharing and partnerships…

    1. eponymous coward – The difference is that Alaska has something that the other airlines want. They have a long-established operation in Seattle and up and down the west coast that’s attractive for partnering. It’s why American’s in it. It’s why Delta WAS in it, but now that Delta has established its own hub to replace Alaska, the partnership is unwinding.
      Virgin America, on the other hand, has nothing that the other airlines want in return.

    2. Alaska is not in the same boat as VS,F9,G4,ect… Although much smaller then the big three, Alaska is a legacy carrier, and was able to maintain and build on their existing relationships that were created with government support when the industry was regulated. .

  13. I don’t think his proposal is crazy…. I think the price he wants to pay is crazy.

    I’d make a guess that on a stand alone basis the regional operations at most majors are at best break even, and they probably lose money for the parent airline. The reason they are around is they contribute to the network as a whole.

    So with that in mind, I’d at least seriously entertain his proposal if it looked more like this:
    1. VX would commit to buying a certain total dollar value of seats on the regional from the major.
    2. Seats would be priced at what the major pays the regional for it, plus a reasonable administration fee.
    3. VX would commit to buying a certain percentage of the seats on any given flight whether or not the seats are filled.
    4. VX could buy additional seats from the major at the same per seat rate. The major may opt to reserve a reasonable portion of the plane for their own last minute sales.

    How this would work in practice, as an example lets say BigAirline contracts with SmallAirline to run 10 airplanes of 10 seats each, with each plane flying 10 legs per day, for a total of 1000 flight seats per day. (Yes the numbers don’t quite make sense, but I’m picking nice easy round ones.)

    So in this scenario WhinyLCC would commit to buying 200 flight seats per day from BigAirline, and would pay 20% plus a 1% admin fee to the BigAirline for this. So WhinyLCC would end up paying 21% of what BigAirline pays to SmallAirline. If WhinyLCC didn’t sell a single seat on the SmallAirline flights on a given day they’d still be on the hook to BigAirline for that 21%. If WhinyLCC sold 50% of the seats on the SmallAirline flights on that day, they’d be on the hook for 51% of what BigAirline pays to SmallAirline. BigAirline could then reserve 40% of the seats for their own use, so WhinyLCC could only sell 60% of the seats on SmallAirline’s flights…

    I’m not really sure I like this scenario, but I don’t expect Cush and VX to agree to it as it would be far too expensive for their cheap-ass tastes. This would at least be something reasonable to consider instead of VX just getting a prorate and being able to undercut their competitors on the metal that they’ve paid for.

  14. Basically asking to elbow their way into all alliances (UA, AA). Virgin, you’re already in alliance with Delta Sky Team. Why should competitors just give up their part of the pie because you want it ?

      1. So what’s stopping VA and VS from trying to add VX to the Skyteam Alliance? Isn’t VA a minority partner of VX? It wouldn’t hurt to have multiple airlines in the USA in the same alliance. I think premerger US and premerger UA were both members of Star Alliance and that allowed a lot of code shares within the US.

        1. TC99 – Neither Virgin Australia nor Virgin Atlantic are part of SkyTeam.
          They are just Delta partners separately from the alliance. And I’m pretty sure if Delta says it doesn’t want Virgin America in the alliance, it ain’t going to happen. US Airways came into the Star Alliance when it was going to merge with United.

          1. Sure but US Airways came into the alliance then they stayed didn’t they?

            Wasn’t there also a time when Delta, Northwest and Continental were all part of Skyteam?

            1. Nick – Yep, I think it’s a lot harder to kick someone out than it is to block their entry. There was benefit to being part of Star (or any alliance), so there was no effort to walk away.

              And yes, all 3 of those guys were part of SkyTeam. Continental did what Northwest said since Northwest used to own the golden share of the airline preventing any deals without its own approval.

        2. I can’t imagine any reason Delta would want VX in SkyTeam – what’s the benefit to them? AA had a deal with JetBlue because there were some East Coast markets where AA was either very weak or had no coverage at all (e.g. Sarasota-Bradenton) before the US acquisition, and AA kicked B6 to the curb once that deal was done. The only thing VX has that DL might want are gates at Dallas Love.

          1. Ah, that’d be a fine ending to the DAL saga.

            DL gets kicked out of DAL, then goes after buying VX. VX’s market cap is currently $1.4B, so I think DL could get VX for say $600 million in cash and another billion in stock. They’d also get ninety some A320s which they can use for fleet refreshing and expansion if needed.

            The only conundrum comes when the DAL gates revert back from VX/DL to AA…

  15. Urgh…I like VX allot. I like their product and have friends that work there. But please…..for the love of all things Holy…tell me this scheme is not their business plan going forward. The fees from lawsuits alone will drive them under.

  16. I’m surprised nobody has mentioned SPA so I will. “Special Prorate Agreement”. If it’s to their mutual advantage, any two airlines can agree to anything in prorating a fare. So if Virgin and American wanted to offer a $200 fare from San Francisco to Peoria, it’s up to them how to split it and that split is known only to them, it’s not published. American could say I need $97 for the short haul and you can sell the ticket and charge the passenger what you like, I get my $97. Which gives Virgin freedom to charge the passenger anywhere from $98 to $398, American doesn’t care. If American is not interested, too bad. They should be forced to? I don’t think so, Terrible idea.

    1. I think the problem is that there’s really no advantage to American for this. Sure, American would get $97 for the ORD-PIA leg, but they’d get even more if the passenger flew the SFO-ORD leg on American rather than Virgin.

      Where an SPA makes sense is a situation like JetBlue and Hawaiian. JetBlue can provide feed and reach for Hawaiian into markets they don’t serve (and many cases couldn’t support an A330 to HNL), and JetBlue can add Hawaii to its offerings without having to get their A320s ETOPS certified. But I think it’s more common these days do do a full blown codeshare and sell the partner flight under your own flight number rather than have just an SPA and sell the flight with the partner’s flight number.

  17. I don’t see this happening. There just isn’t a route out there that VX flies that none of the big 4 airlines don’t fly. VX offers nothing to the table.

  18. Allowing an airline to set fares on a separate airlines flights is non starter. What would be a more realistic goal is to require interlining. Then smaller airlines could sell tickets to anywhere, but only at the fares the larger airlines are willing to sell to their own costumers.

  19. Virgin has a nice product. But suppose an ULCC wants this deal. They send someone across the Atlantic on a 28 inch seat pitch really crappy economy seat and they can’t charge much and now they want, say Delta, to carry the Pax the rest of the way in a better, somewhat more spacious seat, and pro-rate the ticket price. No way would that be fair to Delta.

  20. Didn’t DL do this with American Eagle out of LAX for a while? I seem to recall DL-coded flights operated by Eagle LAX-SJC, LAX-FAT, etc. So I guess it’s not totally without precedent, although that was not regulator-induced…

    1. QP – They did indeed. American was much weaker in LA back then, so this was a good way for AA to help fill them up a little more.

  21. This proposal actually makes sense, and might work out well if implemented properly.

    However, we all know it has zero chance of passing, because.. FREE MARKETS, DEREGULATION, FREEDOM!!

  22. So in other words, when US carriers face the ME3 it’s always “compete with their fabulous product!” But when VX can’t grow its way out of a paper bag, suddenly life is unfair. Too bad so sad. Every other LCC has managed to grow and make a handsome profit while VX has been stagnant for years. VX needs to grow a pair and “compete!”

  23. VX’s “#1 biggest thing” is airport access? There are tons of gates, routes, etc. that can be added at will all across the continent. How about fleet size? VX is beginning to fail because they are stagnant, and will be roughly so until after 2020. Cush’s argument comes across as whiny and entitled. Not to mention irrelevant with so many bigger fish to fry.

    I think I can now see why they seem a bit rudderless; they are focusing on all the wrong things and don’t have a realistic CEO. After no one listens to the “feeder network” plan and Hawaii fails, I wonder what they will try to do then… I guess it would be too simple to 1. buy planes and 2. add cities. Then they could have both a decent route network AND superior service.

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