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.