Cheap Frills

First came Southwest: no frills. Then JetBlue: a few more frills. Now Virgin America: low fares, deluxe service and a new approach to IT.

How many high-profile CIOs can say they got their job through a free ad on Craigslist? Probably not that many. But that’s exactly how Bill Maguire became vice president and CIO of Virgin America.

Which makes sense. Like any startup, Virgin America must do a lot with a little, including fishing for IT talent in Craigslist’s free pool. That said, Virgin’s resources—$177.3 million in funding and a license to use the Virgin brand name, purchased from investor Richard Branson’s Virgin Management Ltd.—are a bit bigger than Craig Newmark’s were when he began his eponymous community forum a decade ago.

But, again like Craigslist, the upside is big. Virgin America’s plan is to create a new kind of low-cost carrier. Its fares will be in line with the sub-$300 cross-country round-trips offered by the JetBlues of the industry, but it intends to deliver a customer experience more along the lines of Singapore Air, the first to offer such perks as in-flight high-speed Internet service.

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Virgin America executives say they want their airline to embody the next step in the evolution of bargain flying.

They’re a bit closed-mouthed about many of the details of what exactly that means, at least until they start selling seats early next year. But they have revealed the plans for their first route (San Francisco International to New York’s JFK), their fleet (34 brand-new, fuel-efficient Airbus A320s) and certain in-flight amenities (like seats built by Italian race car seat maker Recaro with thin backs to provide more legroom). They plan to create a simplified fare structure with just a handful of price points that consumers will understand, and they hope to sell 70 percent or more of their tickets through the Web.

And their IT strategy will be, of course, lean and mean.

The Virgin Vision: IT Is Key

Virgin America knows its ability to offer those differentiating amenities to a price-conscious public will depend in great part upon keeping IT costs low. Maguire, whose background features a flair for squeezing nickels until they beg for mercy, will have at his disposal a generation of technology that was not available even as recently as JetBlue’s 2001 launch. (See “The Virgin Tech Stack,” Page 70.) He plans to deploy a mix of lower-cost (and in some cases no-cost), efficient and agile systems to create the foundation for Virgin’s “low-cost, high value” business proposition.

“We’re coming along at a time when technology—if you understand how to use it—is a lot more lightweight, fast and flexible,” Maguire says. “You don’t have to put in a bunch of mainframes to run huge systems like United and American had to.”

Maguire, who became Virgin’s CIO in January, knows the risk in embracing emerging technologies. But, as his colleagues at the airline are quick to point out, launching Virgin America is itself a huge risk—160 air carriers have entered bankruptcy since the 1978 deregulation of the industry, and most never emerged. “The mortality rate is extremely high,” says Tim Sieber, VP and general manager of airline consultancy The Boyd Group. “I typically tell people, If you start an airline, use your ex-wife’s money.”

“This whole venture is a risk,” echoes Todd Pawlowski, Virgin’s VP for guest services and airports, who joined the Virgin executive team three years ago. “If you’re risk averse, you don’t come to work on this project and you certainly don’t work in the airline business. You have to be willing to push the envelope.” And that’s exactly what Maguire intends to do.

“As CIO, how often do you get an opportunity to build infrastructure from scratch?” Maguire asks. “I get to have a huge impact.”

Experience Required

English entrepreneur Sir Richard Branson has been trying to figure how to break into the U.S. airline industry since the mid-1990s. He founded the full-service transcontinental carrier Virgin Atlantic in London in 1984, but after seeing the success of Southwest Airlines he set his sights on new ways to exploit the low-cost carrier model. That led to his launch of Virgin Blue, a basic-service, Southwest-style carrier in Australia in August 2000. He also considered teaming up with David Neeleman (who in 1993 sold his first low-fare startup, Morris Air, to Southwest for $129 million) to license the Virgin brand in the United States. But those talks never bore fruit, and Neeleman went on to found JetBlue, which sought to keep fares low like Southwest but “bring the humanity” back into flying with creature comforts such as live TV, satellite radio and wider seats. Inspired by JetBlue’s success, Branson’s consultants began examining the prospects for a U.S. carrier that would combine cheap fares with high-end amenities.

The first executive to come aboard the as-yet-unnamed venture was CFO Bob Dana, an investment banker, followed soon after by Pawlowski, who came from Virgin Atlantic’s U.S. operations. They developed a bare-bones business plan that was promising enough to attract $177.3 million in startup capital. VAI Partners was created to become the majority owner of the company (the Department of Transportation has rules about foreign ownership, and so Branson maintains a minority interest, and no corporate role). Fred Reid, who previously oversaw operations at Lufthansa and who spearheaded the launch of low-cost Delta subsidiary Song before leaving his post as president and COO of the bankrupt carrier in early 2004, became Virgin America’s CEO later that year.

“It’s always helpful to have a seasoned airline executive at the helm,” says The Boyd Group’s Sieber. “[Reid] may not be able to run an airline, but he sure as hell knows how not to run one.”

Diverse experience is a hallmark of the Virgin team (see “Who’s Who at Virgin America,” Page 62), who are all working out of the airport’s official headquarters on Airport Boulevard in Burlingame, Calif.—thanks to more than $10 million in subsidies and incentives that California and San Francisco offered it to set up shop there.

“What we’re trying to do is create the next-generation airline,” says CIO Maguire. “We’re trying to create an experience where the passenger will say, This flight is going to be cool.

“Very early on, the perception was that we were going to be a no-frills airline [and] that low-cost equals low frills,” says Pawlowski. “But we’re trying to give people more for their money and elevate the guest experience...to the extent that’s feasible when you’re stuck in a tube at 30,000 feet. More full service. But we won’t make the customers pay more for it.”

If that turns out to be the case, it will differentiate Virgin America sharply from much of the industry today. (See “Flying for Dollars,” Page 72.)

The Frugal CIO

To understand what Reid and his team saw in Maguire, one need only glance at the press release that announced his hiring, highlighting the millions he slashed from the IT budgets of various Silicon Valley software companies.

“When you’re a startup, you don’t have a lot of money to do a lot with,” says Forrester VP of Travel Research Henry Harteveldt. “You have to do a lot with a little. But airlines are incredibly complex, and you have to be extremely careful about where you put your money.”

Every dollar that Maguire doesn’t spend on back-end IT systems that don’t provide visible customer value can be funneled into things that do, like kiosks in the terminal (which Virgin America, unlike JetBlue, will have at launch).

Maguire is getting the most bang for his buck in the infrastructure area. “I’m an expert in designing networks,” he says. He started out “doodling with computers” in 1969 and worked his way up to managing the U.S. Postal Service’s IT center in San Mateo, where he was responsible for all aspects of computer operations and where he built his own SAN in 1998. “I can save money by the way I design a company’s network infrastructure or negotiate with telcos,” says Maguire. And while that may sound less than sexy, he gets as excited about the fact that he can run his data center more efficiently—by cooling the rack-mounted servers from the top with water-chilled AC units—as he does about the very early implementation of VoIP he oversaw at Legato Systems in 2001. And he’s as jazzed about being able to get Verizon to give the startup a one-year contract (which is less expensive up front than the multiyear norm) as he is about the digital flight deck Virgin will be building into its planes.

“We don’t have a ton of money,” Maguire explains. “So it’s great when the vendors can come to bat for us.” The one-year contract with Verizon, for example, will allow him to tie the network rollout to the airline rollout “and save considerable dollars.”

A huge financial burden for any IT shop is staffing, and Maguire’s tactic here is to rightsize his mix of full-time and contract workers. For example, when implementing an application called AIMS to manage flight operations, he brought on a contractor with AIMS expertise for six months and let him go once the implementation was complete. “To get the job done, you have to learn how to balance contractor support versus permanent staff,” says Maguire, who plans to operate with just 21 full-time IT employees when Virgin takes off.

A Hard Man with Software

Maguire is exploiting a mixed bag of tricks to cap his software costs—from creative licensing to making the most of open-source tools. Though he won’t give away all his secrets, “I try hard to develop licensing patterns that use concurrent users instead of named users, which is what the vendors would rather sell. I like to license by size of server or CPU power,” says Maguire, whose contracting savvy may be traced back to the three years he spent in law school before committing to an IT career. “I understand how to size systems and configure utilization so we’re not paying gobs more than we need to. That just gets down to knowing your environment.”

In fact, nothing gives Maguire more pleasure than exploiting lower-cost technologies. “We don’t typically do that in this country,” he says. “Take Microsoft or Oracle. They’ll spend millions to develop software that we only use 10 percent of. Look at Word. I use a couple of features and that’s it. For me, it’s always been about how we make this server do more, how we make this application do more.”

Virgin America is building its own spam filter, load-balancing solution and change management tools, all based on free open-source code. Maguire estimates he’d have to pay more than $80,000 for the traditional version of load-balancing software he now uses for free. “Some will argue that you can’t get immediate support for these tools if you have a major breakdown, but it’s amazing the support these [open-source] communities provide. We get updates to the spam filter every night from the community,” he says. “It’s way, way awesome.” (For more on support and other open-source issues, go to www.cio.com/specialreports/opensource.html.)

On the finance side, Maguire’s using Microsoft Dynamic GP (formerly Great Plains). The implementation cost him $500,000, versus the estimated $2 million to $3 million Oracle price tag. Timing, often, is everything. “A few years ago, Great Plains wouldn’t have been robust enough to support us,” Maguire says. “Today it is.” Maguire is also overseeing the custom construction of Virgin America’s Web-based booking engine, with a Web design company called Anomaly working on the front end and Indian software shop NIIT coding the back end. “It’s a cost-effective way to do it,” he says.

And Then There’s CRM...

In the CRM space—an area that most airlines have deemed to be cost-prohibitive—Virgin America has the advantage of starting from scratch, unlike most airlines. It plans to implement a hosted customer feedback system from RightNow and will build its own CRM system to manage all the data it collects. “We don’t care if this guy last Tuesday wanted a scotch neat with ice on the side,” VP of Guest Services Pawlowski explains, but he does care “if we messed the guest around in the past, losing their bags.” The attendants will know that, and the “guests will know we’re paying attention and we’re doing something to improve service. It’s pretty ambitious.”

To avoid the cost of either building a call center or managing its own work-at-home team the way JetBlue does, Virgin is outsourcing its call center to Willow, a provider of at-home agents. It’s a big cost saver, certainly, but for an airline hoping to differentiate itself through customer service, it’s also a big risk.

“It’s an issue that we debated long and hard,” Pawlowski says. The plan is to have Willow recruit specifically in Virgin’s operating markets so the company can invite family members to the airports, let them use the products and services, and “throw other swag at them” to get them on board, says Pawlowski.

White-Knuckle IT

There are risks associated with all of Virgin America’s IT choices—from outsourcing customer-facing roles to utilizing systems just robust enough to support the mission to implementing less-than-proven technologies. Maguire knows all this. When, for example, he first implemented a VoIP system at Legato, he lost power and saw his whole telecom system go down. “You stub your toes every now and then,” Maguire admits. “But you learn. And overall, [taking risks] can make a huge difference.”

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