The destination wasn’t expected, but Virgin America has finally rounded out its flight offerings at Dallas Love Field with five new daily nonstops. As Rocky reported earlier this week, VX announced the launch of service between Dallas Love Field (DAL) and Austin-Bergstrom International Airport (AUS) on April 28th, complete with the obligatory ridiculously cheap launch fares ($39 each way in this case). I say the destination is unexpected, because when Virgin first announced its new Love Field service after it won the rights to two gates at the airport in the post-Wright Amendment era, the original proposal was to launch flights to Chicago O’Hare sometime in 2015. Rumors have been persisting for months that the ORD service wouldn’t happen due to a combination of VX’s inability to obtain additional gates at ORD, along with the airline’s middling operational performance at DAL thus far. It turns out those rumors were right, with AUS replacing ORD in the lineup. So is the launch of this super short-haul route an example of Sir Richard Branson’s airline genius, or yet another questionable decision by an airline struggling to gain traction in a crowded market? While perhaps not full-fledged insanity, my initial take on this announcement is – I really don’t get what Virgin sees in this route.
Virgin Enjoys Quick Success at AUS
Virgin America began service to Austin-Bergstrom on May 21, 2013, when it launched a single daily nonstop flight to San Francisco International Airport utilizing an Airbus A320. Given the heavy concentration of high tech companies headquartered in Central Texas, AUS-SFO would seem to be a natural fit for the young airline, as it could tap in to high dollar traffic bound for the Silicon Valley and offer ample connections via its SFO hub. The route was already pretty saturated at the time, with four daily nonstops on United and two more on jetBlue, but unlike the early returns at DAL, VX enjoyed early success at AUS. Frequencies were increased on July 9, 2014, with a second daily on an A319 (except Saturdays); the A319 was further upgauged to an A320 on October 28th. The last four months of load factor data show that except for a blip in September, a slow travel month in general, loads have been high on the route, generally hovering around 80%.
Of course, with a large number of flights on a relatively small-market route, something had to give, and in this case, it was jetBlue. VX pretty much completely canabalized B6 on the AUS-SFO route, with B6 first dropping down to one daily flight by August, 2013, before exiting the market altogether on July 9, 2014, the same date that VX began serving the market twice a day.
So VX is doing pretty well at AUS, and it might even make sense to expand there. But…
Entering the Crowded DAL-AUS Route Doesn’t Seem the Right Fit
As the state capital, home to the University of Texas and a thriving high tech industry, and with a metro population of approximately 1.9 million people, there’s certainly no shortage of demand for travel between Austin and the state’s largest metro, so at first blush, this would seem to be a decent risk for a new route. On Virgin America’s earnings conference call earlier this week, CEO David Cush set forth three primary reasons for wanting to enter the Dallas – Austin market. I’ll go through these one by one, and why I don’t think they hold up under further examination.
As you may know, this is currently a monopoly route that has long suffered high fares. We’re look forward to stimulating the market by lowering fares as much as 30 to 40 percent and offering local travelers a high-quality product.
With this statement, Cush gives the impression that AUS-DAL is a “shuttle”-type route with very high fares similar to those found on other shuttles DCA-LGA or LGA-BOS. And it is true that at present, arch rival Southwest does have a monopoly on the route, with 9 flights a day between the two cities. But high fares? I guess that’s in the eye of the beholder. I did a random search of an advance purchase, same day weekday return fare for March 10th on Southwest.com, and pulled up a fare of…a whopping $156. I’ve flown this route a couple of times before when I had a client down in Austin, and recall paying around the same a few years ago. AA also offers 9 flights a day to DFW, with the same March 10 depart/return coming in at $175. You can be the judge of whether that’s cheap or not, but it’s still far better than the nearly $500 same-day return fare I pulled up for both DCA-LGA and LGA-BOS. Nobody’s going to complain about lower fares, obviously, but this doesn’t exactly scream out as a market in desperate need of stimulation.
The other issue with his statement is, VX’s direct competitor on the route is Southwest, an airline with a cult-like following throughout Texas. It may not be the same airline that it was, but its reputation amongst both the Austin and Dallas faithful remains strong, especially college students shuttling between the two cities. Plus, while Austin is a lot cooler and hipper than Dallas, how many people are going to care about a hip, high-quality product over such a short flight? Do a funky safety video, leather seats, Dish TV, and organic cookies really matter that much over 50 minutes?
We think this is a market ripe for stimulation. We think there’s a lot of drive traffic that would rather fly with the right prices, in particular, walk-up pricing.
Presumably, Cush is targeting people like me, folks who live in Dallas that drive down for day business trips to Austin. Here, he at least has something of a point. While advance purchase fares between Dallas and Austin are quite reasonable, walk-up fares are pricey; a same-day return for February 24th prices out at $414 round-trip on WN, and $519 on AA. And yes, most people do choose to drive instead of pay fares at that level. Critically, though, with flights not starting until April 28th, we don’t know what VX’s walk-up pricing is going to look like. Anyone who’s had the misfortune of driving down IH-35 regularly knows that it sucks, but will a lower fare by itself convince people to get out of the car and fly instead? I’m not sold. Frankly, I’d rather deal with the interstate than the TSA at both ends; at least I can stop for a kolache in West if the traffic is bad. Plus, AUS is quite a ways out from downtown Austin and the metro area is highly sprawled out, making a rental car a necessity, and AUS suffers from some of the most obnoxious taxes on car rentals that I’ve seen anywhere in the country. Last time I rented there, a $30 day rental came out to nearly $50 total because of local taxes and fees – an effective rate of 67%. Add in that Texas consistently has some of the cheapest gas in the country, and I’m skeptical that just dropping airfares will siphon off drive traffic.
And finally, the last one…
The route will complement our existing schedule and will also have some pretty significant connecting opportunities over Love Field. It brings our total schedule to 19 departures daily from our two gates.
And I think critically, two of the markets we serve out of Love Field are DCA [Washington Reagan] and LaGuardia, both beyond perimeter to Austin. Austin does have one nonstop flight from Southwest. But that makes those connecting markets that we think Love Field is going to be a good place to connect people.
Here’s where I really struggle to understand Cush’s point, or at least where I think VX has dropped the ball to some extent. When the AUS route announcement first came out, a friend e-mailed me asking for my thoughts, and I replied that I figured it was a ploy to get more butts in seats on underperforming DAL routes by funneling connecting traffic from AUS. Once I got home and checked out flight schedules, though, I was surprised to find that there really aren’t many feasible connecting opportunities via DAL at all. I put together a quick graphic showing possible connections, capping connecting time at 3 hours since I’d consider it unlikely that anyone would choose a connection longer than that. I also left off potential connections to SFO, since VX already operates that route nonstop from AUS.
As you can see, some of these connection pairs are the far upper end of what would be considered reasonable, with 2+ hour waits at DAL. The only “true” connections are to LAX and LGA off of the 3:35 P.M. arrival, and to DCA off the 5:20 P.M. arrival. Southwest, meanwhile, offers 11 connecting options to LAX with intermediate stops of between 45 and 90 minutes, four to DCA, and seven to LGA. I personally prefer longer connections, but the traveling public has been pretty clear with their preferences over the years – longer is not better. VX probably could have timed these flights a little differently to open up more connections at DAL, a remarkably easy airport to transit through given that VX only operates two gates right next to each other. But for some reason, they chose not to, and as it is, this setup doesn’t seem very compelling.
VX Blames DAL Pricing Pressure for Anticipated 1Q Revenue Weakness, Responds With – Another Fare War?
Cush also commented on anticipated revenue pressures facing the airline in the first quarter of 2015, saying rather bluntly, “our primary in the first quarter will be from Dallas”. Which is yet another reason why I find the airline’s entry into the DAL-AUS route, and immediately instigating yet another fare war with Southwest (and, by proxy, AA) with $39 teaser fares. It’s the latest in a long line of fare wars against the incumbent carriers, which has frequently plunged one-way fares to DCA, LAX, and LGA into the double digits in an attempt to “stimulate” the market and get butts in seats. In fact, in one of the finest examples of the pot calling the kettle black, Cush has this to say about revenue pressures at DAL:
What we’ve seen out of that so far is fares much lower than anyone expected. Whoever thought you could get double-digit fares into LaGuardia and DCA? Well, you can right now. At the same time, we’ve seen a lot of stimulation in the market.
That would be fine and dandy if those el cheapo fares really were stimulating the market, but so far at least, Virgin is the only one worse for the wear. As I reported a couple of weeks ago, WN has been very pleased with their post-Wright performance at Love, claiming that they are seeing 90% load factors on new flights from DAL, but VX has struggled, only filling around 65% of seats in the fourth quarter of 2014. Now, Cush went on to say some of the weakness is the result of some distribution challenges through SABRE. I haven’t been able to dig up much discussion on this problem, but if that’s the case, then perhaps things will turn around in time (for what it’s worth, my flight home from SFO last Sunday was completely full). But in general, running a nuclear fare war against American and Southwest with only a few flights a day between city pairs doesn’t seem like a smart idea. Like I said in my previous article – VX needs to better articulate why they’re a better alternative at the same price, not a cheaper one.