Virgin's Richard Branson Circles His Wagons
Stacy Perman / Houston
Just weeks after the airline troika of American Airlines, British Airways and Iberia gained antitrust immunity from U.S. and E.U. regulators to expand its transatlantic alliance on flights between the U.S. and Europe, it was Sir Richard Branson who was taking a victory lap around the George R. Brown Convention Center in Houston. A fierce critic of global coalitions and of American Airlines and British Airways in particular, Branson was attending the National Business Travel Association's conclave, where he made it clear that he had no intention of being trounced by what he called "these monster monopolies."
As usual, Branson had some new windmills at which to tilt. He announced that the Virgin Group is integrating its separate airlines into a "quality alliance." The coalition comprises Virgin Atlantic, Virgin America and the Virgin Blue Group, which includes subsidiary V Australia. Always ready to rumble, Branson also trumpeted that starting in December, Virgin America will touch down in American Airlines' own backyard: the Dallas-Fort Worth International Airport. Virgin American will fly to Los Angeles and San Francisco from Dallas, competing on routes long controlled by American.
The scene was classic Branson. Striding through the convention center flanked by a pair of glam Virgin flight attendants—and with Dallas Mayor Tom Leppert trailing him like an awed intern—Branson was swarmed by conventiongoers. He posed for pictures, kissed the ladies and celebrated by handing out vouchers for free flights on Virgin's new Dallas routes.
At 60, Branson remains the rebel mogul. He built his $17 billion Virgin empire by shaking up markets—everything from music to mobile phones to space travel—as the cool consumer's David taking on the world's corporate Goliaths. In 1984, Branson launched Virgin Atlantic with one leased jumbo jet and a mission: to reinvent the travel experience by offering fun, as well as competitive prices. The inaugural flight from London to Newark featured an onboard performance by cellist Julian Lloyd Webber and ushered in a host of amenities such as walk-up bars and seat-back entertainment systems.
(See pictures of the history of air communications and in-flight entertainment.)
Today, Virgin Atlantic is Britain's second largest long-haul carrier, behind British Airways, generating $3.66 billion in revenue and spanning 30 global destinations. It spawned Virgin Blue in 2000, Virgin America in 2003 and V Australia last February. Despite having different missions—domestic vs. international, short haul vs. long haul and low fare vs. traditional coach/upper class—each carries the Virgin DNA. Branson aims to challenge the global-airline alliances—One World, Sky and Star—by circling his wagons. In creating a fourth alliance, one differentiated by a passenger experience that is uniquely Virgin, Branson plans to transform the disparate Virgin airline brands into a seamless carrier that can compete with the big three. "Virgin is synonymous with taking on the big guys," he says. "The only way companies survive is to be miles ahead of the competition. That's what we do." Or attempt to do. As he cheerfully admits, "Sometimes we fall flat on our face."
In other words, this is a large and risky tactical shift for the company to make. Can Branson, a brilliant guerrilla fighter, directly engage the giant confederations that dominate the skies and win? Michael Boyd, president of the aviation consulting firm Boyd Group in Evergreen, Colo., is skeptical. "No question there is a role they can play," he says. "But as a threat to the three major alliances, I don't think so. I'm not saying Branson's wrong about the alliances reducing competition. But alliances are the way of the world. I can't stop it, and neither can he."
Legacy carriers have sought refuge from shrinking demand and rising fuel costs in ever grander unions. The linkups, they say, create efficiencies while enhancing customer benefits, like allowing travelers to earn and burn frequent-flyer miles across a broad network of destinations. The AA-BA-Iberia arrangement, which features more than 5,000 daily departures from over 400 cities in more than 100 countries, makes it the second largest transatlantic consortium behind the Delta-Northwest-Air France-KLM partnership.
It is also the closest thing under current law to a merger without actually being one. "This certainly opens up opportunities, for example, on fares and the ability to combine more places to shop," says Simon Talling-Smith, executive vice president of British Airways, Americas. Besides, he says, "our two main competitors are already doing these alliances. It lets us be more competitive with them."
That, says Branson, is a load of rubbish. For the past two years, Virgin has bitterly opposed the impending AA-BA venture on the grounds that it would reduce competition and push up fares, particularly on the busiest and most lucrative routes, like London—New York City. "As a group, we will fight back as a fourth alliance. It will be a lot smaller, but we will use our collective strength and use quality as a real alternative. As I've long argued with my wife, size isn't everything," Branson says.
Unlike Lady Branson, presumably, airline passengers have considerably more options. But by aligning its carriers, Virgin aims to create an interalliance airline under one broad banner that can offer passengers a network covering Europe, the U.S. and the Pacific. Boasts Branson: "Only on Virgin can passengers fly around the world on one plane." Significantly, the company is linking its loyalty programs so that passengers can earn and redeem miles or points under any of Virgin's frequent-flyer programs.
Because the ownership of the carriers is still separate, Branson has to establish interline agreements to enable flyers to use one ticket and one baggage claim. Last year Virgin America established such an arrangement with Virgin Blue. Further demonstrating the brand's linkages, a swanky new Virgin terminal for its carriers is in the planning stages at Los Angeles International Airport. It will feature the kind of innovative and luxe clubhouse lounges Virgin is known for, with separate tiers for upper class, celebrities, economy class—and even one for children.
Virgin is also embarking on an ambitious expansion plan. Virgin America recently announced a $4 billion deal with Airbus for 60 of its 150-seat A320 jets, effectively doubling the fleet's size. This year Virgin America launched service to Toronto and plans to expand further into Canada and Mexico. "We need new routes to put the planes somewhere," says Branson with a laugh. He hopes Honolulu will not be too far behind. The company says Virgin America will become profitable this year. Branson thinks that within four to five years he can grab 7% to 8% of the domestic U.S. market (about the size of Continental before its recently approved merger with United). "Our experience has been that wherever we put a plane in the U.S., we get load factors to be profitable," he says.
At the same time, Virgin is implementing a number of initiatives to create a consistent passenger experience across the airlines. For instance, a one-year crew cabin exchange between Virgin Blue and Virgin America starts in October. In-flight programming and entertainment are also being coordinated to emphasize uniformity. In essence, the hallmarks of Virgin, like the creature comforts it offers (onboard wi-fi, limousine pickup, high-quality food on demand, flat beds, decent legroom, mood lighting), will be translated into a more seamless flying experience. Looking One World, Sky and Star, Virgin Atlantic's CEO Steve Ridgway says, "They'll be powerful. But they won't be popular."
That's something the Virgin honchos are betting on. Flyers love Virgin's irreverence and its position as a 26-year-old upstart as much as they enjoy the neck rubs and in-flight Internet—and on-time departures. It's something that Virgin Blue CEO John Borghetti says gave him pause when he was executive general manager at Qantas. "What made me nervous about Virgin when I was at Qantas was that they didn't know the meaning of the word impossible," he says. "That was dangerous."
Indeed, Virgin remains committed to pushing the outer bounds. A proponent of renewable energy, the carrier experimented last year with running jets on biofuels. Then there is Virgin Galactic. While many may view Virgin's pioneering suborbital travel as simply the whimsy of an eccentric billionaire, "space is our first monopoly," cracks Ridgway. Branson warns, "Don't underestimate the halo effect it will have on the brand" or its potential for everyday traveling. Virgin's engineers are working on leveraging Galactic's technology for use in intercontinental flights between the U.K. and Australia, which would shorten the flight time considerably, from 24 to 2.5 hours.
In the hand-to-hand combat that now constitutes airline travel, Virgin sees an advantage in disarming the customer with groovy planes and unexpectedly good service. Virgin's aircraft have been called everything from "multimillion-dollar flying iPods" to "boutique hotels in the air." In June, Virgin Atlantic announced a $70 million partnership with Panasonic to install an in-flight avionics system that will allow passengers the same range of connectivity they have on the ground, not to mention access to live broadcasts of sports and news.
On the service front, Virgin America is sending all its employees through a two-day Refresh course every year. Characterized as a "brand bath," Refresh reinforces the company's service standards but also teaches employees about passengers' emotional triggers and how to react appropriately. (Virgin Atlantic and V Australia have similar programs.) The aim at Virgin, as at most other great service companies, is to equip employees to take the initiative to satisfy customers, going beyond corporate guidelines if necessary.
And that, says Virgin, is how it will beat the biggies. "The key is that people want to fly us, and not because they have to," says David Cush, the CEO of Virgin America and an American Airlines alum. "Anybody can buy a plane and buy what we have on the inside. But what they can't do is reinvent or re-create our culture."
The question then becomes, How far can the Virgin brand carry Virgin the airline? "The brand will go only so far," says Dean Crutchfield, the chief engagement officer at Method, a marketing agency in New York City. "But they can go a long way if they maintain who they are as opposed to what they are."
And who they are is Branson and crew—cheeky, creative and combatively competitive—in squadron formation.