Virgin America: An Invisibly Lean Approach to Premium Service

I am a loyal customer and shareholder of Virgin America (VA), a luxury-branded, low-cost airline offering flights to 21 North American destinations for business and premium leisure travelers. When I first bought stock in the IPO last year, I hadn’t yet taken FIN1 and had little understanding of VA’s business model, let alone the operational strategy driving that model. I only knew that VA was a brand and service that I loved, and that whatever I consistently experienced on VA flights was a competitive advantage that customers and investors would recognize.

Indeed, unbeknownst to most passengers, VA’s “secret sauce” is a set of operational design choices that deliver a high-tech, seamless customer experience and command a revenue and brand premium. To understand how VA’s operations support core elements of its customer promise, I offer a few examples of particularly strong strategy-operations alignment:

Customer Promise #1 – A Hip, Comfort-First Experience in the Skies.

The Experience: The VA in-cabin atmosphere reflects the innovative, stylish, and adventurous character of the Virgin parent brand. Passengers are greeted with VA’s signature mood lighting, ample legroom, in-seat WiFi/power outlets, touchscreens for food and entertainment purchases, and a musical safety video featuring dancing flight attendants (11 million YouTube views to date).

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Operational Supports: VA made early investments in customer-facing technology that has elevated its offering above those of legacy airlines. VA’s decision to offer a lower density seating configuration delivers on passenger comfort. To offset these heavier investments in the customer experience, VA has also capitalized on low-budget, high-impact features like mood lighting that further differentiate its service at minimal cost.

Customer Promise #2 – Premium, Uniform Service at Competitive Fares 

The Experience: VA provides service on or above par with legacy airlines, at ticket prices that are competitive with low-cost carriers. Customers receive the same premium service from VA staff across the VA network. The airline has been able to maintain accessible pricing and consistent service while simultaneously increasing its revenue per available seat mile (RASM) by 9.3% from 2012-2013 (Virgin America IPO prospectus).

Operational Supports: VA generates substantial cost advantages (31% lower cost per available seat mile than legacy airlines) through a streamlined operating model centered on its modern, fuel-efficient fleet of 55 Airbus A320 planes. Unlike its competitors, VA utilizes a single aircraft and engine type, which translates to 1) lower maintenance costs and spare part inventory levels, 2) more efficient scheduling via interchangeable flight crews, and 3) a standardized customer experience across the fleet.  The entire fleet is financed via operating leases, half of which are set to expire before 2022: the leasing model frees VA from hefty, upfront capital burdens and affords significant flexibility around leasing terms and fleet upgrades. Outsourcing of non-core activities like ground handling, engine maintenance, and call center functions also reduces SG&A expenses, which further amplifies VA’s cost efficiencies.

Customer Promise #3 – A Business-Friendly, Reliable Route Network

The Experience: VA’s route network currently provides point-to-point, on-time service to high-traffic business and leisure destinations in the United States and Mexico.  The Elevate loyalty program and accompanying credit card encourages frequent flyer retention and rewards business travelers for higher-price purchases via its revenue-based points structure (i.e. gain points per dollar spent instead of number of miles flown). The airline’s policy of not offering free upgrades to first class, regardless of status, increases the exclusivity of this cabin and enables more value capture from these seats.

Operational Supports: Thanks to its standardized fleet and point-to-point design, VA achieves high aircraft utilization rates and achieves flight times that are, on average, seven minutes faster than the industry average.  To expand capacity and network coverage, VA has engaged in measured, strategic growth to high-traffic destinations like Dallas, New York, and D.C. With a 20% fleet size increase expected in 2016, the airline is positioned to further strengthen its functional value proposition to business and premium leisure travelers – particularly on routes originating in its LA and SF hubs (see prospectus).

The design and operations of the Elevate rewards program have the potential to amplify loyalty among tech-savvy, ego-expressive customers. By rewarding travelers for money (not miles) spent with the airline and its partners, the Elevate program offers multiple points of entry to travelers and differentiates itself from the long-haul-oriented rewards structures of other frequent flyer programs.

Looking Ahead

VA’s 2014 IPO enabled the company to de-lever significantly and to raise capital for strategic growth. The airtight operating model represents a substantial competitive edge as VA expands its route network and customer base.