Virgin America’s CEO wants the government to force other airlines to let him sell tickets on their flights, and share the revenue. He says it is ‘impossible’ for airlines to set up their own regional feeds, so taking over other airlines’ operations and treating them as a common resource is necessary.
“The government allowed consolidation to occur, but it’s the government’s responsibility to make sure competition is there,” he said. “Giving low-cost carriers access to the regional feeds that the legacies have set up is critical.”
Cush said it is “impossible” for airlines like Virgin America to set up a regional domestic network to compete with the likes of American, United and Delta.
He argues that this will stave off higher fares.
“When you have an oligarchy, it operates as an oligarchy, which means lowering capacity and raising prices. What we’re going to see is higher fares across the industry.”
Now, I don’t think Dave Cush means ‘oligarchy’ or he does not know what an oligarchy is. Surely he’s arguing that four competitive domestic airlines is an ‘oligopoly’.
It’s interesting that he makes the point about lower capacity and higher prices when:
- Airfares are down 7% year over year
- Capacity is growing
- Southwest is expanding at Dallas Love Field, bringing down fares in the Dallas market and beyond. American is matching Spirit Airlines pricing there. United is upgauging transatlantic services (replacing 757s with 767s, to put international 757s on cross country routes). Delta is going head-to-head with Alaska Airlines in Seattle.
- Fuel prices are at a low point which is encouraging this expansion and driving down prices.
Nonetheless, he’s suggesting that the government should take drastic action to reshape the airline industry on the basis of speculation about the future direction of prices. And in a way that just happens to benefit his airline.
Some initial reactions:
- Codeshares are confusing to consumers as it is, it’s trouble to suggest that the government should mandate more?
- Airlines take big financial risk with fly for hire agreements with regional carriers, why should Virgin America free ride?
- And in fact, why can’t Virgin America create its own service with smaller aircraft? If these markets aren’t competitive they should be ripe for disruption. (If there are limitations it’s driven by a pilot shortage resulting from crew rest rules and minimum experience hours for pilots, that just means it’s more expensive to attract and develop pilots, there still are few barriers to entry at regional airports.)
Cranky Flier interviewed Virgin America’s CEO about the idea.
Here’s how he justifies the idea:
I think this is the most efficient way to ensure there’s competition there. Just like the last mile in telecom, when we had landlines, everyone has access.
But if anyone can sell tickets on anyone else’s route network, there’s no reason to operate your own flights.
You’ll have fewer airlines serving small cities, with fewer flights. You won’t need a ‘duplicative’ route network (like American and United serving the same small cities out of Chicago). That means less choice and higher prices for those flights.
Codesharing is usually a way to avoid operating your own flights. That’s exactly how we get reductions in service and higher prices.
Cush says it will drive down prices, but the only way that works is by being granted a right to buy service on another airline’s planes and sell that service for whatever price he wants. So he says he will resell other airline flights for less.
It’s Peoria, it’s Springfield, places that currently don’t have access to low cost carriers. The fact that I’m willing to price this maybe 25% lower, as an example, than a legacy carrier because my costs are lower and because we’re now breaking an oligopoly… Essentially what that means is that there are dozens and dozens of airports that have access to low cost fares. And it’s not just us. It’s JetBlue from the east coast, and it’s Spirit, and it’s anyone else who wants to tap into what has become a constrictive monopoly due to consolidation.
There’s no risk to Virgin America. Few fixed costs. And he wants to be able to sell flights below cost and pocket the cash (airlines do not generally have 25% operating margins). He’s going to charge 25% less but still promises “we won’t put ruinous fares in there.”
If Cush gets the government to mandate access to other airline flights, you’re going to need the government to set the rules for fares too. And they’re going to need to mandate service, because airlines aren’t going to operate these feeder flights competitively when they can buy from each other (the monopoly provider) without a guarantee of profit (government set prices at a level at which profits are earned).
Now we’re back to the early days of aviation where route contracts were first awarded by the Postal Service (flying was profitable only when you carried mail, usually based on weight, and mailed bricks to yourself on the other end of the route at a fixed postage price) and then by the Civil Aeronautics Board which determined over a series of months and years what airlines could fly which routes and at what price — always set high to guarantee a profit.
Of course when there was profit on connecting routes, with prices high, airlines still competed — to offer great service in order to attract more passengers in order to make more money. And so the government, fearing this ‘ruinous competition’, actually held a hearing at one point at which the topic of regulating the thickness of onboard sandwiches was discussed. Because you couldn’t have airlines competing on quality food and giving back their profits to customers!
That’s the world that Virgin America’s CEO is selling. And it won’t be good for consumers.