Farewell SAS, Welcome Icelandair - One Year Later

Today, July 31, 2010 marks the one year anniversary of the departure of SAS from the Seattle market after 43 years of service. Eight days ago on July 23, Icelandair celebrated their one year anniversary in the Seattle-Keflavik market. This article is to discuss the changes in the market after the departure of SAS and how Icelandair has performed in the year since they entered the market.

First, a bit of history. SAS started nonstop service between Copenhagen (CPH) and Seattle in 1966, first with a DC-8, then as they introduced larger aircraft into their fleet, the 747 in the 1970s, the DC-10 in the 1980s, the 767-300 in the 1990s, and finally the A340-300 in the 2001-2009 period. They were the first airline to offer a true Business Class product in the Seattle market and eventually, the first airline to offer a two cabin service, eliminating First Class in 1990. The rise of SAS in this market is largely due to the large Scandinavian home community here in the Seattle area as well as excellent connections beyond Copenhagen to points in Europe; more favorable than its competition, which for many years was only Pan Am and later British Airways over Heathrow.

The beginning of the demise of SAS in Seattle happened with Star Alliance came into existence in 1997, in which United, Lufthansa, SAS, Varig and Air Canada launched into a joint venture which has ultimately turned into the largest airline alliance in terms of airline participants. The concept of "code sharing", in which an airline puts their code on another airline's flight allowed greater visibility in the distribution computers of travel agents and later, the Internet as it became used for direct booking of airline travel. When SAS joined Star Alliance and began code sharing on United's flights, it lost one ally in the Pacific Northwest - Alaska Airlines.

As Alaska Airlines began to grow in dominance in the Pacific Northwest, it began to make selective code share marketing agreements with Northwest and Delta, as well as American Airlines. When Northwest began SEA-Amsterdam service, Alaska was there to provide them feed, and the NW/KLM agreement provided feed on the other side of the "pond". This began to seriously hurt SAS's ability to serve markets beyond Seattle; markets which it desperately needed in order to maintain the profitability of the flight.

Additionally, the move from the smaller 767-300 to the larger A340-300 seriously hurt the profitability of the route as a result of the A340s higher operating cost. The additional 140 seats in the market with less traffic meant more discounting by the carrier. The flights were indeed full (SAS never averaged an annual load factor less than 80%), but the flights were not profitable since the move to the A340. In 2007, Lufthansa entered the market in response to Air France's entry into the Seattle-Paris market. The combination of Lufthansa's strategic position in the middle of Europe and access to a far larger number of destinations beyond, as well as their presence in Portland and Vancouver and Air France and Northwest/Delta who had their code sharing agreements with Alaska Airlines, crippled SAS's ability to compete in the European market south of Copenhagen. With the operating costs of the A340 and the need to house at least two crews here, the losses SAS was incurring on the route could no longer be justified to maintain a Scandinavian presence in the Seattle market. In February 2009, SAS announced their withdrawal from the Seattle market.

Within three weeks of SAS's announcement, Icelandair (FI) announced 4x/week service between Keflavik and Seattle with a 757-200ER. As a result of the nature of the operation, FI would bring the aircraft to SEA, overnight it here, then fly the aircraft back the following day with the same crew that brought the aircraft in the day before. This action, while seemingly odd (having an aircraft sit anywhere for 26 hours is costly) was a smart move as it did not require the housing of a crew in Seattle for more than one night and the ancillary costs of maintaining a block of hotel rooms on a daily basis for crews. Maintenance on the aircraft is done in Seattle while it is here.

So what has been the result over the last year?
In June, FI posted a 93.3% load factor on 44 flight operations (22 arrivals and departures). Their average load factor for the past 12 months has been an impressive 81% and as a result, they have added a fifth flight for the summer period which is planned to operate beyond the 2010 summer season. While load factor alone is not a barometer for the profitability of a route, the likelihood that they are succeeding on a profitability basis are actually quite high.

Why is FI doing so well? Three reasons:

1. The 757 is an extremely efficient aircraft over long distances. With only 186 seats, FI's capacity is only about 2/3 that of its competition. Fuel burn is about 60,000lbs to KEF while fuel burn to European destinations with larger aircraft is about 2-3x that figure. Fewer passengers means fewer crew (the fact that the flight is less than eight hours means that the operation can be flown with two pilots instead of three and six cabin attendants vs. 10-14 depending upon the aircraft.
   
2. FEED: Very few people actually are traveling to Keflavik, although as time goes on this situation will change. The vast majority of people are traveling to/from Scandinavia, a market in which FI operates a large number of flights. In fact, traveling to/from Scandinavia is actually more efficient now using FI than SAS was in the past, especially to Norway; the travel time over the previous SAS operation has been cut by almost three hours.
3. The ability of FI to act quickly on its opportunities: When Icelandair began operations to Seattle, they signed an agreement with Alaska Airlines to do reciprocal frequent flyer marketing and an enhanced prorate agreement that allowed AS passengers to feed onto FI's service and v.v. at less cost to both carriers. This expanded FI's reach beyond Seattle into markets previously held by SAS, especially western Canada in which traffic to Scandinavia is especially strong. Just last week, AS and FI announced a code sharing agreement whereby FIs code will appear on AS flights from SEA to destinations in the west and ASs code will appear on FI's flights from SEA to Keflavik. This enhanced visibility and associated revenue sharing agreement will only make the relationship between the two carriers stronger and in the Seattle market-Alaska Airlines is king.

Icelandair has done what it does best: Seize opportunities and capitalize on them by providing a low cost alternative to other carriers operating in a market. By being a niche carrier and serving the need of the Scandinavian community here, it doesn't need to fill traffic down to other destinations in Europe as the other carriers do to survive, although I will say that there will be more of that now that the AS/FI relationship is stronger and people come to discover the Icelandair product.

SAS was a victim of a series of events not completely of their own making; however, their decision to join Star Alliance and the consequence of the move away from Alaska Airlines in the Pacific Northwest along with their fleet planning initiatives (larger aircraft on its long haul routes) were two drivers to the loss of the SEA-CPH route. Will they return? Unlikely. They have a different set of issues to address which don't relate to the SEA-CPH route issue, but as a result of these issues, they do not have the ability to operate a SEA-CPH route profitably and if a route cannot be operated profitably in this current environment - it isn't operated at all.

The real winner is the Scandinavian home market in Seattle. We may well miss SAS and the unique brand of service they provided in this market. However, Icelandair has filled that niche with their Nordic sensibilities and in this regard, there is no reason to believe that Icelandair won't be around Seattle for the next 40 years.

Continental and United - A Merger of Equals?

The proposed merger of Continental and United announced on May 3rd came as a surprise to nobody in the airline industry. Since Continental indicated its intention to join Star Alliance, it was all but inevitable that these two carriers would merge. In fact, Gordon Bethune published an article stating that these two carriers should merge - as long as Continental's management was allowed to run the airline.

This last point is the key, because if you look at the merger from the logo (Continental's) to the makeup of it's management team (Continental's CEO), one would think that the only thing that is United is the name. While that is certainly far from true, what is true is that this merger is one of necessity for both carriers. The reality that is now the mega-Delta, with a strong transatlantic alliance with Air France/KLM, Star Alliance found themselves in a weakened position absent some kind of US alliance of their own. Continental and United makes the most amount of sense for a number of reasons, but the concept of a "Merger of Equals" from a number of different perspectives simply isn't accurate.

What is accurate is the following:

1. It will arguably be the most balanced of the US airline mergers in terms of regions served, mix of domestic and international flying and hub geography. Approximately 40% of United and 50% of Continental's capacity is deployed on international routes. The carriers share very few direct routes and are not significant competitors at any congested airport hubs.
2. While United has 56% of the operating revenues of the two airlines, it lost $15M more than Continental in operating loss, but worse, its' net loss was nearly 2.3 times that of Continental (-$651M vs. -$282M).
3. In looking at RASM/CASM for the two carriers, UA had 114.2M RASM on a CASM of 140.7M (-18.9% Unit Margin), CO had 89.1M RASM on 109.6 CASM (-18.7% Unit Margin); CO is slightly better than UA on unit margin.
4. Neither airline is growing domestically. UA's ASM's dropped 10.4% last year, after declining 7.8% in 2008 and 3.3% in 2007. Mainline revenue attributed to its domestic operation totaled $7.7B in 2009, down from $9.7B in 2008 and $10.9B in 2007, although much of that can be attributed to the recession. Continental's domestic ASM rose 4.5% in 2007, but fell by an equal amount the following year and a further 6.5% in 2009 as the economy continued to fall.
5. United's strength lies in its Pacific network with its hub operation at Narita and its rights to operate point to point beyond Narita into Asia. CO's Pacific operation is not large, but its Micronesia operation based in Guam provides extensive service to nine Japanese cities and extensive service in the western Pacific, more than any other US carrier.
6. In the Atlantic, UA's operation is not as large as one might believe, as LH and other Star carriers have carried the UA code on its own aircraft. UA serves 13 destinations on its own where as CO operates 33 transatlantic routes; 29 of them from Newark.
7. In South America, UA has a small presence, whereas CO has a much larger network, serving 30 Latin American and Caribbean destinations from Newark; a network that pales in comparison to its Latin American operations at Houston, in which CO serves 29 cities in Mexico plus 10 Central America cities, six in the Caribbean and seven in South America.
8. The big difference is in the mixture of the fleets. CO operates 737-500s and variants of the 737NG, 757-200/300, 767-200/400, 777-200ERs, with a large number of 787's coming starting next year. UA has a large number of A319/320s, 757-200s, 747-400s, 767-300s, 777-200/200ERs, with orders for 787s and A350s for arrival in 2016. While CO has the smaller fleet, it also has a more efficient fleet, all Boeing and very little crossover between aircraft and great commonality in the 737/757/767 and 777 fleets. UA's fleet costs are higher as a result of the larger number of variants, an older fleet (16.9 years vs. 9+ for CO) and significant costs in upgrades to their product, which must be updated for competitiveness, adding to UA's overall fleet costs.
9. Another significant difference is the regional fleets and the SCOPE clauses for each airline, which are a greater problem at CO than at UA. The fact that both carriers are represented by ALPA may be a help, but the consolidation of the fleet will cause some issues in pilot contract integration as will the issue of the SCOPE clause at CO, which is far more restrictive than UA's contract.

Each carrier has it's strengths and weaknesses; however, one significant strength that will come from this merger is the CO philosophy of "Working Together" which has been inbread into the management philosophy ever since Gordon Bethune sat in the CEO chair. A significant aspect of this is sizeable profit sharing for employees which is a very large carrot for improving efficiencies and customer service.

While Glen Tilton will be Chairman, he will be an "Executive Chairman" a figurehead position which he will hold for a short time, then Jeff Smisek will take his place as Chairman and CEO. While integration of the UA/CO management teams will be an interesting exercise, I expect COs management to take a much larger role in the day to day management of the airline. I also expect some really talented people at UA to join their team, which will make them a much stronger competitor in the end than some may anticipate.

For the average passenger, it's a net positive. If CO is successful, it will take the best parts of United's product and integrate it into its own very successful and popular onboard product. What will change? If we take a crystal ball and peer into the future, this is what we might see:

1. United has already announced the retirement of the 747-400 fleet. This will very likely be speeded up as the CO fleet and UA fleets are rationalized. If CO does get their 787-8s on schedule next year, then as they get them, expect those aircraft to replace the 777-200s on the ultra long haul routes and the 777-200s to be redeployed on the higher density routes. United's 767-300s will be combined with CO's 767-200s and will make up the bulk of the aircraft flying the longer Atlantic routes with CO's 757s operating the shorter routes across the Atlantic and possibly from Chicago (using UA's ps aircraft which could make ORD-LHR with lower density higher yielding traffic a real possibility).
2. The Airbus A350 order will most likely be cancelled in favor of additional Boeing 787/Boeing 777-200LR/300ER aircraft. UA will be able to get these aircraft into their fleet earlier than the A350 and allow them to speed up the retirement of the 747-400 which will provide them additional CASM savings on the Australia/South America high density routes.
3. CO's 737-500s will be retired and eventually, the UA A319/320s, as the cost of operating these aircraft in a mixed manufacturer fleet are going to be higher than COs single manufacturer deal with Boeing for which it receives considerable savings.
4. In terms of product, Economy Plus will be expanded to the CO aircraft and the CO Business First product will likely become the product expanded to the entire fleet over time. Whether a First Class product will remain will be an open question; one based on the number of passengers actually paying for the product vs. those upgrading from Business Class. It is most definitely not required across the Atlantic; but across the Pacific their might be a need for an F cabin based on the long stage lengths; although carriers such as Air New Zealand, Air Canada and others are doing just fine without an F cabin, so it may remain to be seen if BusinessFirst becomes the ultimate premium product for United. In many ways, it makes good sense; a solid premium product in the front and an Economy Plus product at a reasonable upgrade cost for the Economy passenger may just be the ticket; with other carriers installing a Premium Economy cabin (and charging considerably more for it than Economy), this might be just the carrot to pull the passenger away from those carriers that have it.

In any case, the upcoming merger of CO and UA (which will get approved by the DOT/DOJ without too many concessions) will be a strong competitor to Delta and SkyTeam. The question now is what will American do without a US carrier with whom to merge. It is approaching British Airways and with the expanded US/UK/EU treaty allowing greater foreign ownership of a US carrier, the chances that an AA/BA deal could occur. Should that occur, then watch out for other foreign carriers (Lufthansa in particular) get into the US market in a much greater way than just their deal with jetBlue). Of course, the jetBlue deal will have an impact on CO/UA (they may get UA's Airbuses for example), but expect LH to have a say in how the CO/UA deal comes together, as, after all, they are the Star Alliance powerhouse in Europe, with Swiss, LH Italia and potentially SAS under their wing before long.

One thing is certain: The US airline landscape is certainly changing in favor of consolidation, but greater than that, we are seeing two levels of airline product developing in this country: The LCC point to point model and the network/alliance carrier model providing a higher level of product and service (with a commensurately higher price). How these carriers will complement and compete with each other will be an interesting experiment to watch unfold.

Data and analysis: Courtesy ATW June 2010.

Welcome Icelandair to Seattle!

Today marks the beginning of the new era in travel to Scandinavia and Europe. Icelandair flight 681 arrived yesterday evening on time after it's 7 1/2 hour trip from Keflavik. Today, the return, flight "Iceair 681" departed today at 4:21pm headed back for Rekjavik. While the flight was not fully booked, it went out with a very respectable load for its first flight.

Looking at its forward bookings, it appears that, at least for the summer period, Icelandair's flights are going to be fairly full in Economy and Economy Comfort. However, in Saga Class, I discovered the bookings were almost non-existant: only 1-2 passengers per flight for the month of August; September on cursory examination didn't look especially better.

What is the problem? The problem is threefold: 1) The Economy - people don't want to pay huge amounts of money to fly anywhere this summer. 2) The price: Icelandair's Business Class pricing has been higher than its transatlantic competition from Seattle, especially SAS who, in its last few days of operation here, is still trying to keep its flights full. 3) The product: Here is the area in which Icelandair will have the greatest challenge. Their Business Class (called Saga) is roughly the equivalent of a domestic First Class service: No sleeper seats, seat pitch at 39 inches and a 7.5 hour flight. All of its competition in Business Class offer sleeper seats as well as advanced lounges at their hubs. While Icelandair does have a Business Class lounge at Keflavik, due to the relatively short connecting time between flights, it would be difficult for a business person to take advantage of its services.

Unfortunately for Icelandair, it is impractical to modify its premium product to meet the needs of a single route. However, the SEA-KEF route is the longest route in it's network now and it would seem some kind of strategy change is going to be necessary in order to achieve better loads in the front of the aircraft...and to be clear: Icelandair needs good loads in Saga Class at a reasonable yield, otherwise, this experiment in connecting Seattle with Scandinavia over Keflavik will be a short one.

For now, Icelandair is here and with their unique product targeted not only at the business traveler, but the leisure traveler between Seattle and Scandinavia, they will continue to provide a vital link between Seattle and the north of Europe. This will be especially inportant after July 31, with the last SAS flight from Seattle to Copenhagen will close 42 years of SAS service to Seattle.

The "Bare Essentials" of Air New Zealand

If you are involved in the airline industry at all, by now you most likely have heard of Air New Zealand's new campaign called "The Bare Essentials". If you haven't, then in the spirit of "a picture is worth a thousand words", have a look at the latest Air New Zealand advert running in the New Zealand domestic market (and of course, 'round the world, courtesy of YouTube.com.):



Did you watch carefully? The pilots and flight attendants are "sans clothing" or in other words, naked. Go figure it would be the Kiwi's who would come up with something so bold, so original and so over the top that it gets a whole realm of emotions (or hormones) going when you watch it. More than that, it makes me want to fly Air New Zealand. Why? Well, it isn't because their pilots and flight attendants are naked (OK, they are in the ad, but I can assure you they won't be on the plane). What it IS about is the fact that Air New Zealand, while being a world class airline with a large number of excellent professionals, doesn't take itself too seriously. The idea that it puts forward is that New Zealand is a fun place and the people are very vivacious and just plain fun to be around. Anyone who has ever met a Kiwi or been to New Zealand knows that is true.

So what does the ad convey?

Air New Zealand's fares have nothing to hide. In other words, no added fees, no added surcharges; what you get is what you get. In today's world of "ancillary revenue" and "optimization of revenue streams" in which airlines are trying to find as many ways to separate you from the money in your wallet when you fly them, Air New Zealand won't nickel and dime you. It's somewhat hard to believe that these days, since there seems to be a perception amongst passengers these days that airlines are out to screw them. If those of you reading this don't believe that statement, go ask someone in the who has flown on any major carrier, especially in the USA, and ask them how they feel about their experience. You'll get varying responses from benign to visceral, but all with one theme - I paid more than I should have.

So why is this ad, that is really made for the domestic New Zealand market, having such an impact outside of New Zealand? Well, for one thing because you have to be blind for this ad not to get your attention and even if you had some kind of visual impairment, the brilliant music and the few words spoken during the ad convey the same message and idea of fun. The other thing is that there are so many people that have or use YouTube.com or Facebook or Twitter that the concept of social networking as a means of advertisement is starting to have some effect. The idea that a video can be screened across the world in as quickly as two minutes (about the amount of time it took me to post the ad to my blog) takes advertising to a completely new level. It reaches different audiences in different ways that could only be conceived by someone with a significant amount of creative forethought about how the Internet brings us together as a community; and make no mistake about that: The Internet, for good or ill, has now brought us together as a global community in a way that no other medium can.

For an airline who is interested in changing its image or repositioning its brand, by finding the right message that can resonate in a way that will catch the attention of millions of people, developing a creative way of conveying that message and then simply post it to specific websites, it can effectively target market its product in a way it could never do before. The best part is that is it virtually cost free once the advert is made.

The more important aspect of this notion of spreading an image around the world in an instant to your target customers using the Internet is the idea that if that concept is really liked, it can be expanded to other areas with the same positive effect.

For example, Air New Zealand, after the wild worldwide success of that first advert has decided to "brand" their safety announcements by creating a new set of in-flight safety videos, bringing the "Bare Essentials of Safety" to a Air New Zealand 737 near you and will be expanded to the entire fleet in the near future. Anyone who has seen the original ad knows it's certainly attention grabbing, but have a look at the safety video:



Now, would you watch this video every time you got on board an Air New Zealand flight? If the answer is no, I'd say you were probably not telling the truth. At the very minimum, you'd be curious, at the opposite end of the spectrum, well...you get the idea. The point is that you'll watch the video and know more about the emergency features of that airplane, which just might save your life in a real emergency. Now while that might sound a tad melodramatic, the reality is that it is true (ask the folks on the US Airways flight that landed in the Hudson River).

This demonstrates the power of advertising and how applying something completely crazy and different will get your attention, for good or bad. This is the entire point of advertising: It gets our attention. You might love it or hate it, but if you have a reaction to it, that means that the message got through and that is the whole intent of advertising (well not the whole intent, but this is a blog, not a Master's thesis on advertising).

So, is Air New Zealand crazy? No. Far from it. They have some extremely talented and broad minded people in their marketing department as well as some very courageous people willing to bare it all to make a point. After all, these pilots and flight attendants decided to take their clothes off, get their bodies painted in body art - and extremely good body art it was; you really had to look to tell that they were "without clothes". Air New Zealand should be very rightfully be proud of their people, for they are the face of their airline...quite literally.

The "Bare Essentials" of Air New Zealand will probably go down in history as some of the most creative, innovative and courageous video and print advertising. More importantly for Air New Zealand, it sets them apart as a very different airline, a fun airline; one that is very professional, but one that doesn't take itself too seriously. That's a great combination.

Consider that flying from the west coast of the USA to the South Pacific takes 12-18 hours and from Europe to New Zealand closer to 24-28 hours direct, if you were going to choose what airline you were going to fly and price was not the only deciding factor, which airline would you choose? The airline with the big "roo" on the tail, a "Virgin" in the market, two major US carriers and Air New Zealand?

Now that you more familiar with the "Bare Essentials" of Air New Zealand, if you did a little more digging, you'd find that they have the best seating product of any airline flying to Auckland and one that is certainly competitive with Qantas A380 (in Economy Class). Add fun to the mix and the fact that on Air New Zealand, what you see is what you get, if you were to say Air New Zealand, then the advertising has been successful.

This is just one man's opinion, but I suspect that it's going to be wildly successful. Oh, and by the way, Air New Zealand is just as good as they say they are-if not a little bit better.

Here are two "fun" features for you:

The first is a short film on how the advertising campaign came about and what went into the making of the adverts. The second is a blooper reel...if you don't think these folks had a blast getting buff(ed) for their performance, think again...






Kia ora...and thanks Air New Zealand!!


Films Courtesy Air New Zealand, YouTube and AirNZNothing2Hide.

Virgin America

What makes Virgin America an outstanding airline brand? It's the delivery.

The question and answer above were offered as the theme of a blog and discussion about Virgin America and why it is successful as an airline brand. This blog speaks more in detail about Virgin America, how they have developed their brand and new changes which should act to strengthen their brand and position them as the carrier of choice in the domestic US market.

Why is Virgin's brand so successful? Is it its fleet? Its network? Its association with the worldwide Virgin brand? The answer is both yes and no to each of those questions. What makes Virgin America so successful is a theme, a vision of how it views its customers. The ideas are unique and different and the resulting product a dramatic improvement over other offerings in the domestic USA market. However, the concept that has driven these changes is not new. In fact, it's been done before.

Once upon a time in a far off land, a very wise airline CEO made these statements:

"Everyone needs to know and feel that he is needed."

"Everyone wants to be treated as an individual."

"Giving someone the freedom to take responsibility releases resources that would otherwise remain concealed."

"An individual without information cannot take responsibility; an individual who is given information cannot help but take responsibility."

On the basis of these four "pillars", this man changed the way his airline functioned. Actually, he didn't do it alone; the employees of his company were largely responsible for the changes that were made to the whole of the airline, from the operation to marketing to the flight kitchen. He gave the company a single vision: Become the best airline in the world for the frequent business traveler." That goal wasn't new or original; it wasn't something that they hadn't tried to do in the past. The difference was the total focus placed on that goal by the entire organization, from pilots to customer service agents, from accountants in cubicles at HQ to flight attendants half way around the world. Management was asking them about what the customer needed instead of dictating it to them. As a result, new and innovative products were developed that were very popular with business travelers. Employees, especially those in direct contact with the customer, were given significant latitude (and the training to go with it) to make decisions that could better serve their customers.

The result? They became the best airline in the world for the frequent business travelers. Moreover, they did it in just three years.

That was 25 years ago.

This is, by the way, not the story of Virgin Atlantic, but another European airline. I'll give the answer at the end of this post, but who might this visionary be? Certainly, Sir Richard Branson did a great deal with Virgin Atlantic in the early 90s. Look at where they are today. The Virgin brand is widely recognized as being a quality for value product. The passenger surveys certainly bear this out for Virgin Atlantic...as well as Virgin America.

While Virgin America has the Virgin brand, it is not the Virgin brand that makes Virgin America the winner it is right now and the hope for the future of the American airline industry. It's the way it does business, similar to the example I cited above. In other words, it does things right. Very right.

Here are some examples of what Virgin is doing right:

-They have a common fleet of A319s and A320s. This gives them a cost advantage over most of its competitors and gives the customer a consistent product.

-They leverage technology: Their website is easy to navigate and gives the customer prices choices on the first search display page. Their airport kiosks are easy to use. Their cashless system onboard makes selling in-flight easy and customer friendly.



-Their onboard product in Economy Class is very much like an international Economy Class product, except that the meals are buy-on-board.




-Their First Class product is like a long haul Business Class (a non-bed seat product).




-They train their people to think of passengers as their guests, not just passengers.

It is this last point that is making the difference for Virgin America. It is no secret to anyone who travels frequently outside the USA that US carriers do a rather poor job of providing quality service. There are a lot of reasons for this; some are economic and some are cultural. It isn't that we Americans can't do a bang up job; it is just that nobody has been motivated to do so. Of course, there are notable exceptions. These "notable exceptions" are the carriers that consistently score high in customer surveys. In fact, the latest Zagat US Airline survey, in which carriers are scored on comfort, service, food (in premium and economy classes), website and timeliness bears out some very interesting results. Here's how Virgin America scored:*

Overall: Premium: 1st. Economy: Tied for 2nd with jetBlue.

Comfort: Premium: 1st. Economy: 3rd behind Midwest (who was 1st with four across seating instead of five on their MD80/717 aircraft) and jetBlue (who was 2nd with seat pitches of 34-36 inches).

Service: Premium: 1st. Economy: 2nd behind Midwest (who won as its ratio of passengers to flight attendants is lower than Virgin America. Service tends to be better when flight attendants don't have to serve as many passengers.

Food: Premium: 1st. Economy: 2nd behind Midwest (who won as it has a modified First Class meal service to go with its modified First Class seating in its Economy Class).

Website: tied 3rd with American; Southwest was 1st, jetBlue/Continental tied for 2nd place.

More important than the rankings were the scores they received in those categories:
Comfort: 20 (jetBlue-22, Midwest-25) Again, Midwest won with the modified First seating and catering, jetBlue placed second with the substantially greater seat pitch.

Service: 21 (Midwest-24)

Food: 15 (Midwest-20) Most of the legacy carriers couldn't muster a score above ten.

Website: 20 (Southwest-22, jetblue/Continental 21, American 20.

Comments: "Maybe it's too early to tell, but this low cost up and comer backed by Sir Richard sets a new benchmark for domestics, especially in the premium ranks, where it is number one across the board with a service-focused attitude, brand-new planes, mood lighting, state-of-the-art entertainment system, leather seats and much more. It's a staggering improvement over the US norm - all it needs is more flights."

Clearly the prevailing theme here is service. In the transcon market, Virgin beat United, whose p.s. (tm) product has a bed seat product in First Class, a sleeper seat product in Business Class and a 33 inch seat pitch in Economy that are exclusively dedicated to those markets.

The impression that is left reflecting upon the comments and the scores is that the airline does something that the legacy carriers either can't or won't do: They invest in their people. I have been told (so this is second hand) that everyone in the organization from the CEO to the ramp personnel slinging bags is focused on making the service better for their guests.

The legacy airline managers spend an enormous amount of time trying to develop different ways to augment passenger revenue. The term "ancillary" revenue has come to the forefront of the discussion. Items that passengers took for granted as included in the cost of the ticket are now additional cost items. Free meals, seat assignments, free baggage allowance and frequent flyer miles have either been converted to "ancillary revenue" items or have been scaled back or cut completely. Of course, Virgin America has had to keep its costs under control as well. However, if we look at the results of the survey, how is Virgin America able to charge the very same types of fees that other airlines do and their passengers don't object to paying them? What is Virgin America doing differently?

It is my observation that Virgin America does two things that most other US carriers do not: First, they think "outside the box". They have approached generating ancillary revenue as part of the brand value proposition. In other words, Virgin America has positioned itself as a low cost, high quality carrier. In order to achieve the low fares demanded by the market, it must charge fees for various services. Recently, Virgin America has taken this a step further. They have modified their fare structure to include a "Main Cabin Select" product within Economy Class. For an additional $90 each way, you can have an exit row seat or bulkhead seat that has additional seat pitch (they advertise 33 inch seat pitch), a free meal, free amenities (blankets and pillows), free headsets, two free checked bags, specially reserved overhead bins for storage and priority airport check-in and no fees for changing the reservation. In other words, for an additional $90, you pay no fees.

They have also altered their fee structure to include the first three checked bags at $15.00 each with a weight allowance of 70lbs each. They have changed their "change" fee to be $50.00 (from $75.00). Their fares start out very low. For example, a one way SEA-SFO on Virgin America for May 1 is $59.00 for Main Cabin, $149.00 for Main Cabin Select and $199.00 for First Class.




This new fare structure is in line with the kind of fare structure that I have been advocating for some time. In essence, different fare levels come with different levels of amenities included. Air Canada has this type of fare scheme, although they have many different levels. Virgin America has simplified this by having one low fare with ancillary fees, one fare with no fees and First Class. The advantage to this fare scheme is quite simple: The customer has choice.

The customer can choose to pay the low fare, which is a market fare based on advance bookings and flight profitability. With that fare, you can choose to pay for a meal, check a bag, purchase a headset or an amenity package consisting of a pillow and blanket. The fare is non-refundable but the change fee is only $50.00. If the customer wants, the customer opt to buy none of the items. On rather short flights (intra-California is a really good example), the "extras" are really not terribly necessary, whereas on the longer transcon flights, the extras become fairly important, especially a pillow, blanket, a sandwich, a headset and a beer (not necessarily in that order).

The customer can pay an additional $90 than the market fare (this is a set price) and pay no fees whatsoever, including no change fees; however, the ticket is still non-refundable.

Of course, if the customer wants First Class, they will pay the market rate for First Class based on space available and time remaining before departure.

The fees are there, but these are value added fees, since the low fare does not include any of these features, only the reservation and the seat assignment.

The legacy carriers, on the other hand, continue to offer their rather complex fare structures. If traveling at off times, a low non-refundable fare can be purchased. If travel is desired for more popular times, the fares go up considerably. Of course if inclusions are desired, inclusions that were once free, fees will have to be paid. While seat assignments are still mostly free, baggage fees are in the $15-25 range for the first bag and $50 for the second bag with a weight restriction of 50lbs per bag. Preferred seating can be purchased, presuming it is available at the airport or reserved in advance if an elite flyer. Meals no longer exist on domestic flights (except on certain longer Continental flights), but a BOB (buy on board) snack can be purchased for $5-20. For the most part, these snack boxes are mass-purchased, pre-packaged snack foods which are anything but healthy. In fact, the food on most legacy carriers now is far worse than when meals were served that were "not fit for human consumption". If it is necessary to speak to a person to make a reservation, a fee of $20.00 per ticket will apply and if a change to a reservation is made, the airlines make the big money: A change to a ticketed reservation will require a fee of $100-150 plus step up to the next highest fare category that is available. If a Gold or Platinum Elite Flyer, then perhaps some of those fees can be waived, but for the most part, any change on a non-refundable ticket can be a very expensive proposition for the customer and a winner for the airline.

Fees that are structured in this manner are designed to "capture" revenue. I say capture, because the passenger is essentially held hostage and forced to pay them if they want to check a bag, or get a meal or get a decent seat assignment. Then there are the fuel surcharges and "psuedo taxes", taxes that are not really taxes at all but fuel surcharges that do not appear on the face of the ticket.

For travel agents, it has become necessary to disclose every single fee and tax being paid by the customer, because if one is missed and the customer is caught by a fee, the travel agent can be held liable for that mistake. Consequently, travel agents are booking far less domestic air, especially if the client is not well known, since the risk of getting caught with fees is rather high. Customers are then forced to book the air directly with the airline and then the customer gets really hit as most of them are not sufficiently savvy to find a way around the myriad of fares and fees, they just pick what's convenient and pay. Then they still get stuck with the fees when they arrive at the airport.

Since the economy went into freefall last September, far fewer people are traveling because of these hidden fees. Carriers are scrambling to figure out what to do next, because lowering the fares to next to nothing is no longer bringing in the customers. Of course, that may have something to do with the fact that the customer doesn't really know what they've paid for their travel until they've returned because of all the ancillary fees that are charged as they travel.

Virgin America doesn't seem to have this problem. Their fares are simple, easy to understand and their fees are value add-on's instead of "takeaways". No wonder Virgin is perceived to be so customer friendly.

Of course, there are other carriers that think outside the box: Southwest and jetBlue are just two of them. Neither of them, however, has the high quality onboard product that Virgin offers on its aircraft. Both Southwest and jetBlue have their own unique brand value propositions. Virgin, however, has something very special, and it seems that it's their people and their approach to service that is making them so popular amongst travelers.

What they all have in common is their total focus on the customer. They train their employees to believe that they are critical to making the customer experience a positive one, even though they may have no interaction with the customer whatsoever. They also go one step further: Management treats their employees with respect. They make employees part of the solution. We all know there are carriers in the US market that do everything possible to cut their costs and labor is one of the largest line item costs for an airline. As a consequence, the employees do not feel valued as they perceive management is "taking from them". When someone is not happy about their job, in most cases, they will not do that job as well as they could. They just don't have the emotional investment.

It is this element, the human factor of one person caring for another that gives Virgin's service something different and special. Yes, AVOD in the seat, a cashless cabin, leather seats, oversize overhead bins, a generous baggage allowance and of course, low fares are all part of the larger equation. However, absent this human factor of "service" that is memorable, these other product features are completely worthless. After all, it wouldn't matter if the airline had every possible amenity available for free and the fare was $1.00. If passengers are consistently treated badly, they will find another carrier to fly them to their destination. Any other carrier.

The airline CEO I mentioned at the beginning of this post also said something that was very important: "It doesn't matter what fare the customer pays, be it Economy, Business or First Class. While the products may be different, the delivery of that product must be the same, no matter where the customer sits in the airplane" That is what set that airline apart from all the others so long ago. It is that same philosophy that is making this work for Virgin America now.

So who was this maverick CEO to whom I referred at the beginning of this post? Well, I said it was a European carrier. A northern European carrier. A Scandinavian carrier...yes, it was SAS. The CEO was Jan Carlzon, who in 1981 came to SAS at a time when the carrier was in significant disarray. He came in and gave the employees a vision, the tools, the authority, responsibility and accountability for achieving that vision. The results? In 1984, SAS won "Airline of the Year" for their stunning turnaround and in 1986, they earned "Best Passenger Service Airline". They were highly profitable in the mid to late 80's. By thinking outside of the box and letting his people do what they do best, SAS achieved the vision set out by Carlzon. His book, "Moments of Truth" is a primer on how to change an airline for the better."

A final thought: If the customer feels that they are receiving value for their money, they will not hesitate to "buy up" as long as they feel that there is a value relationship between the quality of the item and its cost (in other words, they feel good about what they spent). So if we take this statement to its logical conclusion: If service is delivered well, regardless of what the customer pays, customers will be more willing to accept fees for services. Therefore, if an airline wants to enhance its ancillary revenue, get the service right first. It is perhaps the best return on an investment the airline could ever make. After all, it costs nothing for a supervisor to say, "Great job!". Yet, that simple statement, delivered to an employee who is working hard to make the customer feel welcomed and valued, that act will yield a positive return every time.

Virgin America gets that...and that's why they are as popular and successful as they are today.



Sources:
*Moments of Truth, Jan Carlzon (president Scandinavian Airlines, 1981-1994) c. 1987.
**Zagat Survey of US and International Carriers, 2007
***Virgin America website, for booking SEA-SFO May 1, performed on April 6, 2009.