Virgin Can’t Get Off the Ground

Richard Branson’s new Virgin America airline, that is. The U.S. Dept. of Transportation has rejected Virgin America’s application to fly domestically, on the basis of its foreign ownership. So Virgin is taking is plight straight to the people, with a tantalizing website replete with petition.


Mack

...good for the consumer and bad for the airlines

If you mean that price competition would follow, probably yes. But that might not be all that good for consumers, as we already have Gresham's Law in full force in the air market.

Maybe it's inevitable, but all I see coming from the airlines today is price competition -- I'm still waiting for there to be actual price and service points. I'd happily pay 10% more for 10% better service, but that's not how this industry works, and that's bad for everyone (IMO).

Instead we have this insane system where no two people on a given flight have paid the same price, and all are subject to the lowest common denominator in service.

There are only two levels of quality: horrible, at a wide range of prices, and pretty good, at an outrageous price. In no other industry would this be tolerated indefinitely.

Maybe Branson could find an innovative way to compete that would break this game open. We'll never know if we don't give him a chance.

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Razela

I think Virgin could do wonders for the American market. They currently offer far better service than any of the American domestic airlines. I think it would do well for the entire industry to have to compete with Virgin.

sud0n1m

Stephen, I notice you dont pass judgement on the Dept. of Transportation blocking Virgin. How do you feel about it?

Considering that DHL's acquisition of Airborne Express already created foreign ownership of a US domestic airline, I dont see the argument here. I also thought that Virgin was trying to do it through a loophole.

I tend to err on the side of purist capitalism. Even if you do want to restrict who can compete, Richard Branson is a responsible businessman who likes to shake up the markets he enters. Virgin America would be good for the consumer and bad for the airlines.

pkimelma

I should note that Virgin Atlantic has done well on price and service and "features". They introduced seat back screens with a huge library of movies and TV shows which you could start at any time (and FF and RW and pause); all this long before most Airlines even had seat back screens. They added video games and airplane wide games (playing against other passengers). They have done many other things like this, yet still put downward pressure on price. They also tend to be friendly, "cheeky" (intended to be in a good way), and reliable.
Virgin America is trying to use a loophole, by having an American partner who *appears* to own enough shares. Since they would adhere to US rules, be based in the US with a lot of autonomy (think Virgin Mobile USA for example), and have a positive impact on the US market, I think it is sad that they are being blocked.

ajakx

Mack, can you explain how Gresham's Law applies to airlines? I have only heard of it in reference to airline miles, but that was refuted because of GL's fixed exchange rate requirement.

WillClark

I'd love to see another carrier come in and compete. My home airport is dominated by Southwest, so that really helps keep fares down (at least on routes where Southwest is an option). But while Southwest does a good job with customer service (at least they meet the expectations their customers have) and pricing, I'd really like to see an airline offer more amenities, especially when I travel on business and a small fare difference is quite as much of a concern.

Here's a question: WHY is a foreign airline not allowed to fly domestic routes? With the whole "The World is Flat" thing, why does it matter where a company is headquartered if it meets safety and other business regulations?

synapticmisfires

Gresham's Law doesn't seem to apply, from what I can tell. People can figure out which airlines have better service and amenities before they buy a ticket, or at least before they buy a second ticket.

I think more competition would be a good thing. As it is, a given route between two relatively substantial airports really only has one cheap carrier. There is very little choice right now.

saturninesylph26

Okay, so this is really off topic, but I figure that the readers of this freakonomics blog would enjoy discussion on the presidential running mates for the '08 election. This blogger already has a plan: http://obamaaffleck2008.blogspot.com/ The correlating group is gaining popularity on facebook.

BobG

Thankfully, this move by the DOT seems more like a first shot in a war to finally bring down protectionist airline regulations. Richard Branson is battling on by taking his case to the U.S. flyer. Isn't it ironic that now a British revolutionary needs to invade the United States to bring free markets and freer travel for its citizens? Go, Richard, go!

More on my blog:
http://www.thechallengedividend.com/the_challenge_dividend/2007/01/holding_back_th.html

Mack

I'm using the term as a shorthand for 'race to the bottom', which is what happens when the focus of a market is on price alone.

I fly a fair bit on commercial airlines, but because of the 'hub city' structure I have little choice about which carrier I use most of the time, in a given city or route. The big boys all seem to me to be competing strictly on fares, desperately trying to increase market share by being the low cost leader. And what suffers is service.

Thus the invocation of Gresham: there are still enough people for whom price outweighs all other consideration that capturing them can make a big difference in market share. So the brass begins to displace the silver.

Their marketing says otherwise, to be sure, but in fact there is almost no difference among the leading carriers. When you take the huge step in price to business or first class you do get a relatively small increase in comfort and service. But there are no shadings in quality, it's on or off.

Yet there is infinite variety in pricing, with almost zero transparency. Not good if the goal is a working market.

The best answer, I think, is vigorous competition, not the collusive variety we see today. So I would welcome all comers (who meet safety standards), especially someone like Virgin who have a reputation of shaking things up.

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Mack

Sorry for the italics, I was trying to quote something and missed a bracket, I guess. Preview would be a nice option, S & S. :-)

keithbchurch

Wait a minute. Is this the same free-market loving Richard Branson who is getting over one billion pounds in taxpayers subsidy paid to his private company to run trains in the UK over the next few years?

This may be harsh. But then I've just struggled home after after he canceled all his trains because it was a bit windy.

dan from california

If Virgin manages to pierce the net of ownership restrictions, will they have to change their name?

tokyojoe

I'm not sure why anyone would want to fly with Virgin. Don't they have a reputation for not going all the way?

pkimelma

keithbchurch, this is not fair to Virgin rails. When Britain tried to reform the rail system from public to private, each private entity was given a term of subsidy to allow them to clean up the mess that had become of the rail system. Further, they had to agree to service stations that were not cost effective otherwise (many smaller markets).
As to the trains being delayed due to crazy circumstances, that is British rail all over! I used to travel the London/Cambridge route and it was delayed 72% of the time (I logged it), with 30% of the time being more than 45 minutes late. The reasons given were "leaves on the rails" (I kid you not), "fog", "rain" (so unusual in England ;-), "sunshine" (yes, sunshine - they said it was confusing signals or something), someone "maybe" walking on the tracks, but the location unknown (over a huge area), and finally "heat" (this in the summer). This seems to be the lot of train travel in England.

Read more...

Mack

...good for the consumer and bad for the airlines

If you mean that price competition would follow, probably yes. But that might not be all that good for consumers, as we already have Gresham's Law in full force in the air market.

Maybe it's inevitable, but all I see coming from the airlines today is price competition -- I'm still waiting for there to be actual price and service points. I'd happily pay 10% more for 10% better service, but that's not how this industry works, and that's bad for everyone (IMO).

Instead we have this insane system where no two people on a given flight have paid the same price, and all are subject to the lowest common denominator in service.

There are only two levels of quality: horrible, at a wide range of prices, and pretty good, at an outrageous price. In no other industry would this be tolerated indefinitely.

Maybe Branson could find an innovative way to compete that would break this game open. We'll never know if we don't give him a chance.

Read more...

Razela

I think Virgin could do wonders for the American market. They currently offer far better service than any of the American domestic airlines. I think it would do well for the entire industry to have to compete with Virgin.

sud0n1m

Stephen, I notice you dont pass judgement on the Dept. of Transportation blocking Virgin. How do you feel about it?

Considering that DHL's acquisition of Airborne Express already created foreign ownership of a US domestic airline, I dont see the argument here. I also thought that Virgin was trying to do it through a loophole.

I tend to err on the side of purist capitalism. Even if you do want to restrict who can compete, Richard Branson is a responsible businessman who likes to shake up the markets he enters. Virgin America would be good for the consumer and bad for the airlines.

pkimelma

I should note that Virgin Atlantic has done well on price and service and "features". They introduced seat back screens with a huge library of movies and TV shows which you could start at any time (and FF and RW and pause); all this long before most Airlines even had seat back screens. They added video games and airplane wide games (playing against other passengers). They have done many other things like this, yet still put downward pressure on price. They also tend to be friendly, "cheeky" (intended to be in a good way), and reliable.
Virgin America is trying to use a loophole, by having an American partner who *appears* to own enough shares. Since they would adhere to US rules, be based in the US with a lot of autonomy (think Virgin Mobile USA for example), and have a positive impact on the US market, I think it is sad that they are being blocked.

ajakx

Mack, can you explain how Gresham's Law applies to airlines? I have only heard of it in reference to airline miles, but that was refuted because of GL's fixed exchange rate requirement.