At Virgin America, a Fine Line Between Pizazz and Profit; An airline whose sleek style rates highly with its passengers is still struggling to make money for its investors, and has lost $675 million since 2007

September 7, 2013

At Virgin America, a Fine Line Between Pizazz and Profit


ON Monday, June 17, at 6:30 a.m., Robin Wolaner boarded a flight from San Francisco to Seattle. An executive for a nonprofit organization, Ms. Wolaner was no mere traveler. She was bounty, the kind of frequent flier who makes or breaks airline profits, and she’d been snared by Virgin America. There were more convenient flights later that morning, but Ms. Wolaner’s affection for Virgin’s service, as well as for the Wi-Fi, leather seats and even what she called the “adorable” animated safety video, prompted her to get up earlier than was ideal. This despite the fact that she once flew American Airlines so often that she is “platinum for life.”She spoke wistfully of a night in 1987 when a blizzard pounded Albany, and American, rewarding her loyalty as a frequent flier, got her a seat on one of the last flights out. “I’ll never forget that night,” Ms. Wolaner said, as if reminiscing about an old friend. But in the years since, she felt that American’s service had declined, her elite status devalued.

“I’m a Virgin convert,” she said.

She’s not alone. Virgin works hard to convey an easy vibe — a flirty package of self-awareness and charisma bathed in purplish mood lighting that has earned glowing consumer reviews and challenged the idea that an airline can’t wow its passengers.

But if the airline has worked for consumers, it hasn’t worked for its investors. Since it started flying out of San Francisco in August 2007, Virgin has lost $675 million. Last November, foreseeing intensifying losses, the airline announced a sharp retrenchment, killing plans for 10 new airplanes each year and modestly cutting capacity on existing service. Already one of the smaller airlines — at 53 airplanes, it is not even a tenth the size of the big carriers — it seemed destined to remain boutique, if it survived at all.

History is not on Virgin’s side: since airline deregulation arrived in 1978, all but a handful of roughly 250 new airlines have failed.

Virgin’s combination of consumer popularity and lack of profitability raises a question: Can it make money and still be beloved? A few — like JetBlue and Southwest — have managed that. But the tried-and-true method of most United States carriers has been to cut back on customer service.

At Virgin, which recently celebrated its sixth anniversary, there’s a glimmer of progress for its investors, including Richard Branson, the founder and entrepreneur in chief of the Virgin Group, the investment company that owns 25 percent of Virgin America (which is distinct from Virgin Atlantic, the international carrier). Last month, Virgin America posted a profit of $8.8 million for the second quarter and forecast stronger results for the current quarter, reflecting typically heavy summer travel. But it also posted a loss of $37.5 million for the full first half of the year.

Still, it’s progress that the company’s chief executive, David Cush, said had come none too soon. Virgin has worked for its customers, he said, but now it has to work for investors, too.

“We’re 22 years old in the life of a human,” Mr. Cush said in a recent interview. “We’ve had a lot of fun in life, and now it’s time to join the real world.”

His ambitions are bold. He wants to take the airline public in 2014 or 2015. Such a move could well serve its major investors — including Mr. Branson’s Virgin Group and Cyrus Capital Partners, a hedge fund — who in May agreed to convert $290 million of the company’s $800 million in debt financing to an equity position. If the company goes public, they could cash in.

And yet, some industry analysts say a solid financial quarter hardly proves the company can go where few start-up airlines have gone before — into long-term profitability. “They’re nowhere near out of the woods yet,” said Henry Harteveldt, a veteran travel industry analyst. “If pizazz were profits, Virgin would be the most successful airline, but there are fundamentals.”

And there is another catch. Joining the real world means doing things that can frustrate travelers. For instance, Virgin is tweaking prices to try to bolster the number of passengers on each flight, which could make boarding and deplaning more frantic and risk delays. It is also trying to attract more business customers, which could create hierarchies that undercut the airline’s more democratic feel. And it is charging more than the industry average on some established routes.

The other airlines have responded by doing some of the things for which Virgin was a pioneer: upgrading airplanes with amenities like mood lighting, Wi-Fi and advanced in-seat entertainment. They, too, have made viral safety videos, including one from Delta that, among other things, featured a man politely declining to sit in the exit row.

At stake are travelers like Ms. Wolaner. She is infatuated with Virgin but is open to the idea that it may not last, having been let down by airlines before. On the Monday when she was traveling to Seattle, executives from Virgin were involved in two important meetings — one about a new safety video and another about ticket prices — very different sessions representing the cultural and financial sides of Virgin, both trying to help marry popularity and profit. It is a razor’s edge that few airlines have been able to navigate.

JESSE McMILLIN, Virgin’s 38-year-old creative director with the requisite groomed, scruffy beard, picked the blue-framed Buddy Holly glasses from his collection of seven. It felt right for his meeting that Monday in the offices of Jon Chu, a Hollywood director fresh off “G.I. Joe Retaliation” and various music videos.

The meeting was aimed at deciding whether Mr. Chu was the right director to refresh Virgin’s first safety video. That animated short, featuring a techie nun and a matador traveling with his bull, made fliers laugh. Moreover, it cemented Virgin’s reputation as a surprising company, one that could see creative opportunity in a federally regulated reminder to wear seat belts.

In the lead-up to the meeting, Luanne Calvert, Virgin’s vice president for marketing and communications, was nervous. “I never expected to lose so much sleep over a safety video,” she said. Formerly the creative director at Google, Ms. Calvert feared that the reception for a new video wouldn’t match that for the first one, adding of the new effort: “It’s a key initiative for the year.”

The origin of Virgin’s culture is easy to pinpoint. It’s the spirit of Mr. Branson and his many brands, from music to space travel. But he makes no day-to-day marketing decisions at Virgin America, and so the job of channeling his distant DNA seems to fall mostly to three people: Ms. Calvert, Mr. McMillin and Ken Bieler, the company’s director of engineering. Within Virgin, Mr. Bieler is referred to as a “mad scientist” because of his penchant for spending hours in a scale-model plane, thinking of new ways to create comfort and entertainment.

For instance, he recently came up with a mood lighting system that has 14 million color combinations, and he has pitched Mr. McMillin on glow-in-the-dark stars for the cabin ceiling that would twinkle during night flights. And he has something close to an obsession about making the middle seat more comfortable.

Virgin’s culture is meant to express excitement, but beneath that, Ms. Calvert said, it should also give passengers a feeling of control — what they eat and when they eat, what and when they watch — during an experience that is for the most part out of their control.

It has worked. In the latest Consumer Reports rankings, based on 16,663 reader responses, Virgin ranked first among 11 airlines with a score of 89 out of a possible 100, followed by Southwest and JetBlue (85). At the bottom was the low-cost carrier Spirit (50). Hovering in the middle were United (63), American and US Airways (66) and Delta (71).

For each of the last five years, Virgin has won the designation of best domestic airline from Travel & Leisure magazine, whose editor in chief, Nancy Novograd, described the airline as returning some of the fun and excitement to flying but also observed that it “profited from the disappointment and distaste for the other airlines.”

Bigger airlines face the challenges of operating larger networks. If a storm delays a United or American plane in Chicago, there can be reverberations for flights all over the country. Those airlines have older fleets than the upstarts, as well as the baggage of past expectations. (Remember, for example, when they served food?)

But recent merger deals — United with Continental, and American’s proposed combination with US Airways, a move that has been challenged by the Justice Department — have the big airlines starting to invest more in service. Of Southwest’s 696 planes, for example, about 430 have Wi-Fi, the airline said. United said it plans to have Wi-Fi in just over 200 planes by year-end, up from 13 at the beginning of this year.

Jeff Foland, executive vice president for marketing, technology and strategy at United, said that after a tumultuous decade, the industry had reached a “turning point” and, for his company and others, “a customer-experience and consumer-loyalty renaissance.”

Mr. Cush agreed that amenities were improving on other airlines. “If we stand still,” he said, “they’ll catch us.”

Enter the new safety video, window dressing to some but deeply symbolic to Virgin. To refresh its original video, it initially worked with another Branson brand, Virgin Produced in Los Angeles, to select possible directors. It ultimately homed in on Mr. Chu, who embraced Virgin’s notion to find a creative way to use sound, maybe music, in its video.

As the meeting started, Mr. Chu offered ideas for music and choreography. They talked about using the natural sounds of the aircraft — the click of the seat belt, the closing of the overhead bin — and having the action move from the airplane to a more theatrical setting. Mr. McMillin took it all in, intrigued — liking the chemistry and ambition and trying to figure out the line between excitement and propriety.

ON the same Monday, back at company headquarters in Burlingame, Calif., two highway exits south of the San Francisco airport, another meeting was taking place. In a conference room with no pizazz whatsoever, Mr. Cush held his weekly ticket-price session with his pricing and revenue management team. A former American Airlines executive, Mr. Cush has a style that tends toward the traditional — black Ferragamo loafers and a crisp blue shirt — and a manner that is easygoing but hints at formality.

The conversation focused on a route between Austin, Tex., and San Francisco. The competition, United and JetBlue, seemed to be playing how-low-can-you-go — by dropping one-way coach fares to around $150. Virgin, which entered the route only a month earlier, was charging around $180. Already unprofitable, it could ill afford price cuts. The competition for techie, entrepreneurial travelers in both cities was going to be fierce.

Virgin was at a disadvantage in another way: United had six daily flights on the route and JetBlue two, compared with one for Virgin. And if bigger airlines have disadvantages, like vulnerability to regional bad weather, they also have huge advantages, like the ability to take a traveler almost anywhere, from small cities to overseas.

Generally in such ticket-price quandaries, Virgin has gambled that its service can command a better price, and, to an extent, it has won. In some of its more established markets, it consistently posts ticket prices that are higher than the industry average. For instance, Virgin passengers from Kennedy Airport in New York to Los Angeles paid an average of $305 a ticket, one way, in the fourth quarter of 2012, compared with an industry average of $263.

There’s a catch here, too. Higher prices can mean fewer passengers. Consider the Kennedy-to-Los Angeles route, where Virgin’s passenger load was 96 percent of the industry average in the fourth quarter. In most markets, Virgin is slightly below or even.

Complicating the situation, Virgin is scrambling to court business travelers, the frequent fliers who can make or break an airline. All airlines talk about the extreme value of corporate fliers. Virgin notes that its most frequent travelers, 1 percent of its total, account for 11 percent of revenue. “Those are the guys responsible for the profits of the airline, ultimately,” Mr. Cush said.

These passengers are not easy to poach. Consider Monica Rohleder, a public relations consultant in Los Angeles who traverses the country for business and pleasure in business class on American Airlines. She has lifetime platinum status in its frequent-flier program and describes her pride in that relationship: “I earned my status.”

Ms. Rohleder has flown Virgin a couple of times and says she “wasn’t blown away.” But she did love the cleanliness of the plane and “little touches” like the chance to order food whenever she wanted. It just hasn’t been enough to persuade her to give up the perks of elite status.

To reward and attract these passengers, Virgin has taken a few steps, including the addition of “silver” and “gold” tiers last year to what had been a very basic loyalty rewards program. The new tiers create priority access to security and boarding, among other perks. Then Virgin announced that it would allow people with elite status on other airlines to temporarily “swap” their status with an equal level at Virgin — in a trial period of perks that the passenger would eventually have to earn through frequent travel. The airline is considering building elite seating areas at check-in to serve those fliers.

Virgin says it has built its system to reward only the most frequent travelers, in the hope of avoiding an oversupply of awards and a confusing system of multiple tiers that has plagued other airlines. But there’s a risk, too, of creating bad feelings among coach travelers, said Bryan Pearson, C.E.O. of LoyaltyOne, a company that researches loyalty programs. He said airlines like Southwest and JetBlue, which have fewer offerings and tiers than bigger airlines, also have consistently good reviews as well as profitability.

Virgin is also taking steps to increase the number of passengers on its flights, something that can be achieved by playing around with ticket prices. (In the second quarter, its number of passengers was up from a year earlier, but the average ticket price was down.) There’s another risk, Mr. Cush said: adding more passengers can mean about 10 more minutes at the gate for passenger loading and six more minutes for deplaning, leading to the prospect that an aircraft won’t be as thoroughly clean for the next load of passengers, or that it could be late.

Creating an airline that’s profitable and popular is much harder than it looks, said Robert Mann Jr., an industry analyst. “Everyone in their heart of hearts thinks they’ve solved the Rubik’s Cube or built a better mousetrap,” he said.

As for Virgin, Mr. Mann says it has “a nice boutique following” and a “legitimately great product.” But history may not bode well. David Robinson, a senior lecturer in the Haas School of Business at the University of California, Berkeley, who studies airline marketing, points out that Virgin is still very small. “Can it scale?” he said. “At some point, you stop playing rugby and start playing American football.”

In the fare-war meeting that Monday, Mr. Cush decided to continue the airline’s rugby game against the football players, at least on the Austin-San Francisco route. “We won’t get into a fare war,” he said, deciding to keep Virgin’s fare above the competition’s, adding: “Our product is good; we’ve got good loyalty. People will be willing to pay $20 or $30 more.”

MS. WOLANER’S flight left from San Francisco’s Terminal 2, a modern facility that Virgin shares with American. Opened in 2011, it has features like a yoga studio, an organic food outlet and a mini-market, as well as open spaces and high-backed red chairs that have a nightclub feel.

The terminal, and San Francisco, are hubs for Virgin, which does more business there than any other domestic airline. Virgin was consulted on the terminal’s design, and many of its touches are on view. Employees of Virgin wear gray outfits with red sweaters designed by Banana Republic, and the club music and low countertops at check-in aim to tell customers that there is no big wall between them and the airline.

A few days later, Mr. Cush was there. One of Virgin’s sales representatives walked by with a group from Charles Schwab, a company that Virgin hoped to attract into a corporate relationship. “They’ve got money,” Mr. Cush chirped happily of Schwab, then joked: “They’ve got everybody’s money.”

A flight attendant walked by. “Hi, David,” she said. He greeted her by name and asked, “Where are you in from?”

Mr. Cush acknowledged that Virgin was embarking on a balancing act as it tried to move into “the real world.”

“At what point do you lose the personal connection?” he asked. He said he thought that the airline could become consistently profitable and then grow — to perhaps double its size, to 100 planes — in the next 10 years, without losing its character. “I’m not sure how you do it,” he said, “but you do it.”

One of Virgin’s early investors, Donald J. Carty, who is its chairman, said he thought that the company had hit a point of relative stability. He also said that the “profitability results have been far less than satisfactory,” but that he believed the investors, himself included, were not looking for a quick exit — even if the company goes public.

“I suspect the investors would stay heavily invested,” said Mr. Carty, who once led AMR, American Airlines’ parent. “There’s no rush to see a liquidity.”

In the meantime, underscoring how quickly things can change, the Austin-to-San Francisco fares of United, JetBlue and Virgin were close to even last week. Whatever brief advantage Virgin felt it could press had been erased.

At least Virgin will have a new safety video. After his trip to Los Angeles, Mr. McMillin and the creative team made their decision: they were going with Mr. Chu. Mr. McMillin said he had been hooked by Mr. Chu’s passion and brainstorming ideas, including one that he doubted would be used but that nonetheless excited him.

Mr. Chu had mentioned that Paramount Studios, with whom he had a relationship, had a studio where you could shoot scenes underwater.

“Imagine,” Mr. McMillin recounted Mr. Chu saying, “if we shot the thing underwater and when we get to the part about using the life raft, it’s actually in the water. And then we could have synchronized swimmers… .”

Mr. McMillin said he didn’t think that the airline would use that exact concept — showing passengers in the water might cross the boundary from edgy to anxiety-provoking. But he said he loved “that level of creativity and fun.”

“It totally got us,” he added.

They are planning the video, they hope, for later this year.

FOR her part, Ms. Wolaner said she had a great trip, solidifying for now her loyalty to Virgin. When she boarded that morning, she said, the flight attendant complimented her green overnight bag.

“I’ll be a regular on this route,” she recalled telling him. “He said: ‘I’ll look out for you,’ and I kind of think he will.”

But because of her past experiences with airlines, she’s not holding her breath. “Over time, companies lose what makes them special,” she said. “Virgin will probably lose it, too.”

She added: “I will be a happy customer until I’m not.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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