Cheap Frills

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.”

All told, Maguire estimates he’s saved the company $500,000 in his first six months on the job and says he “will” save the company $2 million a year “with the way we’re building, managing and operating our systems.”

But, cautions Forrester’s Harteveldt, “[Virgin America] will have to make sure that [these technologies] will support them—not just when they start up with a handful of planes, but in theory when they have 100 or more airplanes. You don’t date technology in the airline industry; you marry it.”

Next-Gen Reservations

One of the most important systems Virgin America will be walking down the aisle with is its reservations system. These systems are the central nervous system of any air carrier. Despite the name, they handle not only passenger reservations but also inventory control, fares and ticketing, schedules, baggage and interface with departure control functions. And they touch every other system an airline runs on, from flight operations to Web-based booking engines. “[Reservations] can have an impact on everything from what you pay your pilots to FAA-mandated maintenance,” Harteveldt says.

Established carriers tend to operate on robust legacy systems such as Sabre or Shares (both supported today by EDS).

But these feature-rich systems run on mainframes and are expensive to maintain and difficult to customize. Younger, low-cost carriers, such as Airtran and JetBlue, have opted for Open Skies from Navitaire, a less expensive and much more basic Web-based reservations system. What both systems have in common is that, like all software that’s been around for a while, the airlines that run on them face the challenge of upgrades or switching to new systems.

“Advances in tech have given the new airlines the ability to provide as robust a reservation system as something that previously would have been only available through a Sabre,” says The Boyd Group’s Sieber. “And as these newer systems become more evolved, they also give management the ability to do some incredible data mining that will enable them to make better business decisions.”

Virgin’s new reservations system is called Aires. Development was funded by travel giant Cendant and is being developed by Indian software developer IBS. The system is built on open architecture standards with a database layer, an application layer and a Web services layer. “It’s fast, flexible and amazingly configurable,” says Maguire. “We can run the business the way we want to instead of being dictated to by Sabre or Navitaire.” In essence, Aires offers Virgin a hybrid solution—one with the extended functionalities available in a Sabre system on a lower-cost platform. “If an airline wants to install an extra premium economy section, they can easily make those changes. It’s designed to interface well with kiosks and Web booking engines,” says Harteveldt. “It’s easy to operate, easy to train on and easy to manage.”

Brian Clark, vice president of planning and sales, led the deal with Aires before Maguire joined the team. “When I was at US Airways, I was involved in the cutover from an old reservations system to Sabre, and I have a huge amount of respect for what technology can do for us,” Clark says. “From a business perspective, new systems like this are fantastic because [they] allow us more flexibility than older systems. We can grow without limitation.” Down the road, Aires could allow Virgin to integrate with travel partners, offering customers the ability to check in for a flight when they check out of a hotel or reserve a rental car when they check in for a flight.

The only other customers signed on with Aires are Virgin Blue in Australia and WestJet, a low-cost Canadian carrier, so Virgin America will have a first-mover advantage stateside. Of course, it will also assume first-mover disadvantages.

“You’ve heard the old saying, no CIO ever got fired for buying IBM? Well, no airline CIO would ever be dismissed for going with Sabre,” says Harteveldt. “There’s always risk with a new product that’s just proving itself. There will be hiccups,” he predicts.

No one knows that better than Maguire. “If [Aires] doesn’t work, we don’t fly,” he says, just back from a late summer trip to Delhi, India, to check on the system’s progress. His mission there was twofold. “First off, I wanted to build a relationship with the developers, let them know who I am, how I think, what my expectations are. I wanted to meet them face-to-face and talk to them about how critical this is to us,” Maguire says. “I also went over there to talk to their VPs about where we were with the implementation and changes we’d like to see before going into production. And how they will support us on a 24/7 basis once we’re in production.” It went well, he says.

But everyone’s expecting some turbulence with the implementation. “The reservation system presents the highest risk to the business,” says Maguire. The Aires system infrastructure has multiple layers of redundancy to minimize unscheduled outages. But to minimize risk overall, Maguire’s team is working closely with Cendant to ensure that performance, stability and scalability are more than adequate to meet Virgin America’s load requirements.

“Sabre is a great product, and they’ve spent millions of dollars putting lots of makeup on that old technology,” says Pawlowski. “But they’ve pushed it as far as they can, and it’s time to start thinking about what’s next.”

Ready for Takeoff?

As of September, Maguire and his team had turned on the first big piece of the network and had the data center and its monitoring tools up and running. HR, finance and flight operations applications were live. “The only thing left is the reservations system and our production website,” Maguire says, knowing those are two critical pieces of the puzzle. The goal was to have them both in production by the end of this year.

Virgin America is planning to begin flying early next year, after it receives approval from both the Department of Transportation and the Federal Aviation Administration (see “Flight Delays,” Page 68), and most industry watchers expect a successful takeoff. “They’re flying a very competitive route, and it’ll be stiff competition,” says John Kasarda, director of The Frank Hawkins Kenan Institute of Private Enterprise at the University of North Carolina. “But Virgin America will come off the blocks capturing a portion of the market and doing very well.”

“Virgin America has an advantage right out of the gate because of the brand, which will get people on the first time,” says The Boyd Group’s Sieber. “The question is, do they have a product that can compete long term? That remains to be seen. At one time Pan Am had the most recognized brand in the industry, and that didn’t keep them out of trouble.

“Don’t get me wrong,” Sieber continues, “if I were starting an airline, I’d certainly want to have that brand advantage.

“But I’d still use my ex-wife’s money.”

What’s also up in the air is how the competition will respond. Legacy carriers, which have finally figured out that they can’t compete on price, may be forced to improve the service that they’ve whittled away over the past five years. Some, like Delta, may put their emphasis elsewhere, like the Chinese market, leaving the domestic routes largely to the low-cost carriers.

JetBlue, no longer the new kid on the block, may invest further in the customer experience. Its wholly owned subsidiary recently won a Federal Communications Commission auction for a very hot commodity—a slice of radio airwaves devoted to air-to-ground communication—that, if it gains approval by the FAA, could enable the company to provide Wi-Fi in the sky.

“It’ll be interesting to see how JetBlue responds,” says Harteveldt. “If Virgin sells meals on board, will JetBlue sell meals on board? If they go to a two-class service offering, will JetBlue go to a two-class service offering? JetBlue has marched to its own drum for six years, but you can’t ignore the competition.”

In fact, Virgin America has gotten many of its best ideas from its soon-to-be rivals, including what Pawlowski insists must be a guiding principle if the airline is to succeed: “Don’t over-promise or under-deliver. You look at Southwest, they under-promise and over-deliver. Or look at JetBlue—there are a lot of fans here of JetBlue. We can learn from those airlines.

“It’s a bit of a challenge because there are going to be expectations with a Virgin brand. But we hope to compete on value, the ability to customize the customer experience, and the bells and whistles of the more established airlines. Hopefully that adds up to a differentiated product that people will embrace.”

Senior Editor Stephanie Overby can be reached at soverby@cio.com.