Competition works -- at least in the airline industry.
Virgin America, the newest part of British tycoon Richard Branson's Virgin Group, started flying yesterday. For now, the new airline is only running flights from San Francisco to New York and Los Angeles. However, a nonstop New York to L.A. flight will start flying later this month, and the carrier has plans to add Washington and Las Vegas as destinations later this year. Eventually, Virgin hopes to add flights between most major U.S. cities.
Yet the biggest question about Virgin America is this: For travelers who have been plagued by high fares and bad customer service, will a new airline make things better?
Deep discounts
Like other new airlines, Virgin America is offering discounted promotional fares to raise business. For carriers who have a strong presence in the transcontinental route market, including JetBlue (Nasdaq: JBLU), American Airlines (NYSE: AMR), and United Airlines (Nasdaq: UAUA), that's bad news. It's likely that they'll have to match Virgin's promotional fares to hold market share.
For people traveling from coast to coast, on the other hand, that means that you probably won't have to scramble to find an open seat on a Virgin plane. If you're loyal to one particular airline, it's likely that you'll see savings without having to shop around.
Limited effect
If you don't happen to be flying between the cities that Virgin serves, however, don't expect to see much change. If anything, competitive pressures in some markets may cause carriers to try to make up for lost profits by hiking fares on other routes. While large cities generally have enough different airlines serving them to make unilateral price hikes effective, smaller destinations where travelers have only one or two options are more vulnerable to pricing pressure.
Moreover, even though the industry has recovered in recent years, financial concerns never really go away. Most carriers, including Northwest Airlines (NYSE: NWA), Delta Airlines (NYSE: DAL), and Continental Airlines (NYSE: CAL), have gone through bankruptcy in an effort to restructure their operations. Even relatively stable Southwest Airlines (NYSE: LUV) has had to deal with the effect of rising fuel prices. Labor disputes are always a threat. Airlines just don't have the financial capacity to survive a sustained fare war.
Better service?
One way that Virgin may make a difference, on the other hand, is in improving service. The virtual disappearance of in-flight meal service on U.S. flights, combined with increasing delays and shrinking seat space, has made flying a lot less pleasant. With gimmicks like massage chairs and in-seat televisions for first-class passengers, Virgin wants to enter the market in style.
But what remains to be seen is whether Virgin America will be able to replicate the reputation of its international counterpart, Virgin Atlantic, for passengers in coach. Many travelers believe that European carriers offer better service than American ones. If Virgin America can import higher service standards and customer friendliness to its U.S. flights, it may encourage other U.S. airlines to follow suit.
In the meantime, though, don't expect Virgin America's arrival to make a huge impact on your flying experience anytime soon. The race to the bottom in customer service will continue until travelers make it clear that they value service over price -- and put their money where their mouth is.
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Fool contributor Dan Caplinger apologizes to everyone who had to listen to his screaming toddler on the plane last week. He owns shares of Southwest. JetBlue is a Stock Advisor recommendation. The Fool's disclosure policy gives you great customer service.
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