Virgin America CEO: Why Traditional Carriers Can't Innovate
Virgin America CEO David Cush delivered the keynote at the Airports Council International-North America (ACI-NA) Marketing and Communications conference in San Diego this week, during which had some pointed words for the network carriers about innovation, airport access and the likelihood that they'll continue to lose share, but he's only half-right on that. Let's dig in.
Innovation Cush noted that there hasn't been much innovation in the last 20 years and that's primarily because of high oil prices and lack of profits. He admitted that during the height of peak oil prices, Virgin America was "running on fumes" and "had a couple more weeks of cash." Yet in the same breath, he says the airline is not sitting still and putting money into innovation.
It's an interesting issue, because it does beg the question of when to invest in innovation and how much. If an airline is bleeding cash, then how can it afford to invest, and will it actually pay off? For Virgin America, the answer may be easy. They have nothing to lose and need to innovate somehow in order to convince people to switch from flying on the legacy carriers. But nobody has really been able to offer an innovation in coach in a long time that makes people stop and say, "wow, I need to fly that airline."
The last one I remember was when JetBlue (JBLU) launched live television ten years ago. That was a revelation, and parents with young children instantly bought tickets in droves. But has there been anything so stellar in the last decade that people are looking to switch their business? Not in the back of the bus.
Cush acted like the low cost carriers were putting the legacy airlines out of business through innovation. He said that back in 1993, 7 percent of seats were offered by low cost airlines, but this year that should be 35 percent. By 2015, it will be 50 percent. So how can the legacy carriers survive without innovation? Cush claimed "this is a train that isn't gonna stop."
I stood up and challenged that with a question. The reality is that there's a very good reason the legacy carriers will stick around, and it's the very hub-and-spoke model that Cush seems to think will be in trouble. Smaller airports around the country can only really sustain service to a hub, because that's the only way they can fill up airplanes enough. They need to be able to send people to a single point where they can disperse.
So I asked Cush how he thought low cost carriers would be able to serve that market if the hub and spoke model is really dead? He said he didn't really have an answer for that. That's one area where a good replacement for the hub and spoke model remains elusive, so that model is hardly dead, just adapting.
Airport Access Another focus area for Cush was the issue of airport access. There's no question that Virgin America has been very vocal in public about wanting access to congested airports. Cush mentioned O'Hare, of course, and Newark, which he claimed they've tried to enter since 2007 without success. He wanted there to be airport access available for new entrants and the government should make it happen.
But who says that they should just be given access to airports? Low cost carriers have shown time and again that they can get into crowded airports. JetBlue, for example, just got into Washington/National and they've flown to Chicago for awhile. If Virgin America wanted to get in to Chicago, they could. They just don't want to pay the price to enter.
Is it up to an airport to let people in without paying the current price of admission? As you can imagine, the legacy carriers say no while the low cost carriers say yes. I agree with the former.
Environmental Sustainability The last major point that Cush touched on was environmental sustainability. He said that this is going to become front and center in the near future and we're all going to have to deal with it. He supports a carbon tax, which may sound strange, but having one of the newest, most efficient fleets means that Virgin America would benefit by seeing its competitors pay more. It makes sense.
I think he's right on this one. Every airline should be paying close attention to environmental issues because it will simply become more pressing as time goes on. The combination of volatile oil prices, environmental pollution, and disasters like the on in the Gulf, are only going to make this more important.
Cush's mood was clearly upbeat, and it should be. If the airline can't make money this summer with the strong demand that's out there, they'll never make any money. I like some of his ideas but others just don't ring true for me.