Delays are death to any airline, and Virgin America has been facing a big one. Executives at the startup had hoped they’d already be celebrating their inaugural flight, but they’ve yet to receive final approval from the Department of Transportation—thanks to a concerted lobbying effort by a group of legacy carriers.
Virgin America submitted nearly 1,000 pages of corporate formation documents to the DoT last December, and within a week Continental, Delta, United and American filed motions to stay Virgin America’s application based largely on laws that prohibit a foreign investor from owning 50 percent or more of an airline or more than 25 percent of its voting rights.
“Virgin America’s application raised concerns about the ownership issue,” says Ashley R. Miller, a spokeswoman for Delta, “and we expressed our concerns to the DoT.” Virgin maintains that it’s in compliance with the rules.
“You can sense the fear of the incumbent airlines,” says Henry Harteveldt, vice president of travel research for Forrester. “They saw what happened when JetBlue entered the market, and they’re terrified of this company that will try to ‘out-JetBlue’ JetBlue.”
The challenge to Virgin’s application is not without precedent. The legacy carriers filed motions against the startup of Legend Airlines in the late 1990s. Legend ultimately got DoT approval, but not before spending much of its funding defending itself. It flew only a few months in 2000 before declaring bankruptcy. Harteveldt, however, does not think much of this tactic.
“If [the legacy carriers] took the money they’ve spent on legal costs associated with this and invested that into their product offerings—on-board TV, in-flight Internet, CRM—or if they’d taken the past 12 months and built up their customer relationships or their loyalty marketing programs, they’d be in much better shape to compete with Virgin,” he says.
Not everyone agrees with Harteveldt. “It’s a very competitive industry, and one more greased pig in the race doesn’t do the competition any good,” says Tim Sieber, vice president and general manager of aviation consultancy The Boyd Group. “If I were [a legacy carrier], I’d send a pack of lawyers out to trip up the competition too. It’s cheaper than trying to compete with them. Worst-case scenario, they’ve pushed Virgin America back four to five months.”
Every day an airline isn’t flying, it’s losing money but, in fact, this extra time on the ground could be beneficial for Virgin—at least for its IT. While Virgin is grounded (it now expects to take off in early 2007), other airlines, like Calgary-based WestJet, are going into production with the new Aires reservation system Virgin purchased.
“The vendor can learn from their real-world experience with the application and take steps to make sure things go better for Virgin America,” says Harteveldt.