Forbes: "Virgin: 'Let Me Fly'"

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Airlines

Claire Cain Miller 01.11.07, 6:00 AM ET

SAN FRANCISCO - =

Virgin America, a new low-fare airline, is set to take off. Its shiny =

new red and white plane, christened Jefferson Airplane, is idling at =

San Francisco Airport. Its champagne-soaked launch party drew =

California luminaries like Governor Arnold Schwarzenegger and rock =

star Grace Slick. Its pilots and flight attendants are hired, trained =

and ready to fly. =


There's just one problem: America won't let them. After a 13-month =

delay, on Dec. 27 the U.S. Department of Transportation rejected =

Virgin's application on foreign ownership grounds, citing its =

connections to Richard Branson's Virgin Atlantic after a lobbying =

campaign by Continental, Delta and American. Virgin America says the =

airline is technically independent and meets U.S. guidelines =

(foreigners provided less than 25% equity and fill fewer than 1/3 of =

board and management positions). =


"They don't have a highfalutin problem with foreign equity," chief =

executive Fred Reid says of the big airlines. "They're =

opportunistically killing the competition."

So Virgin America is planning to take the fight to the passengers. =

The linchpin of the campaign: letVAfly.com, where people can sign =

petitions urging Congress and the DOT to give Virgin its wings, is =

expected to launch next week. The airline will push people there =

through cheap viral marketing on social media sites Digg, YouTube and =

Boing Boing, along with a few pricier newspaper ads. To seduce the =

American public, on Jan. 17 Virgin will invite TV cameras on its =

planes to show off their interiors, closely guarded until now. =


The campaign goes hand in hand with Virgin's people-centric =

philosophy. Most Americans despise airlines, Reid says. "Try to go to =

a cocktail party and say you work for an airline. You'll never be =

able to get another drink because you=92ll be peppered with hate =

stories." He=92s trying to fix that by giving the people what they =

want, starting with the chance to name Virgin's planes on its Web =

site. But first, he needs the people to help him get off the ground.

Reid says his airline will have costs 30% to 50% less than those of =

the legacy carriers while offering passengers more frills. Had Virgin =

been up and running the last two years, it estimates the low fares =

would have saved U.S. consumers $780 million. How will it afford to =

offer more for less? That=92s the beauty of starting from scratch.

No one knows the difficulties of the airline business better than =

Reid, who was president of Delta until 2004. Burdened by terror =

threats and fuel costs, the six so-called legacy airlines have been =

in and out of bankruptcy. Meanwhile, low-cost carriers like Southwest =

and Jet Blue steal their passengers. The low-fare carriers have grown =

their market share from 5% to 30% in 15 years and that figure is =

projected to reach 50% in the next decade. =


They keep their costs lower than the legacies by hiring less =

experienced employees without pensions, flying point-to-point instead =

of inefficient hub-and-spoke routes, and using one or two jet models =

so they don't have to train pilots and mechanics on a dozen different =

varieties of planes. =


But simply following the low-cost business model is not enough, as =

Reid learned at Delta when he was chairman of its low-fare airline =

Song. It ultimately flopped because it was still burdened by the =

budget, corporate culture and toxic management-labor relations of old-
timer Delta, says Richard Gritta, University of Portland finance =

professor who studies the aviation business. "Song was a smash hit =

with the customers, but it was not sustainable because it didn't =

start from scratch," Reid says. =


His first mark on the clean slate at Virgin America: The airline =

bought 34 new jets, Airbus 320s and 319s that run about $50 million =

apiece. They burn fuel more efficiently and break down less often =

than older planes. The bigger airlines can't afford a new fleet. =

Virgin will also save by outsourcing ground and baggage crews and =

partnering with work-from-home call center provider Willow. =


Virgin will use newer and cheaper technology than even six-year-old =

Jet Blue had when it launched. That will start with digitizing the =

crews' manuals, so they're wirelessly updated each time the plane =

lands. This mundane step will save a lot of money. It's tedious for =

airlines to replace all the paper books each time a manual gets =

changed, and the number-one source of FAA fines is manuals that =

aren't up-to-date. =


Reid is also using cheap technology to give customers perks and try =

to win over the eight of 10 fliers who dislike their experiences on =

the legacy airlines. =


This will start with a simpler, uncluttered Web site that lists =

lowest fares first. Passengers will be able to order food and drinks--
whatever they want, whenever they want it--on the screens at their =

seats. =


Virgin aims to offer more in-flight entertainment than any other =

airline, including personal screens 50% bigger than Jet Blue's and =

will include all-digital live TV, movies and video games, and =

keyboards, electrical outlets, and game controllers at each seat. It =

will add broadband Internet as soon as it's available for aircraft. =


The Virgin brand will also help--unlike most startups, it already has =

name recognition and a good reputation, says Edward Faberman, =

director of the Air Carrier Association of low-fare airlines.

The legacies don't have a chance of catching up. "The legacy carriers =

have the most to lose. That's why they=92re trying to keep Virgin out," =
=

Gritta says. Tearing out all their old systems and replacing them =

with new ones would be prohibitively expensive. "Trying to retrofit =

everything is a disaster. Virgin is buying modern equipment and has =

the capital to do it." =


Of course, Virgin's employees, planes and technology will eventually =

grow old and start costing more. The risks start even earlier. Some =

150 airlines have gone bankrupt since 1982, according to Gritta's =

research, and almost all have been startups. =


But Virgin America won't even be able to try if the federal =

government won't let it fly. =






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