Upstart carrier Virgin America is on the verge of buying six slot pairs at LaGuardia Airport from American Airlines, according to multiple media reports. However, flight restrictions at LaGuardia will prevent Virgin America from flying to either of its hubs (San Francisco and Los Angeles). So why is Virgin interested?
The most likely explanation is that slots at the New York area airports are hard to come by, so Virgin America will take whatever it can get. Virgin America targets business travelers and tech-savvy individuals, a clientele that cares about access to big cities like New York. It may therefore use the LaGuardia slots to offer connecting service to the West Coast through Chicago or other cities it already serves.
Southwest Airlines (NYSE:LUV) has announced that it is acquiring most of the LaGuardia Airport slots being sold off as part of the American-US Airways merger. For Southwest, the move makes perfect sense. It already holds 27 slots at LaGuardia Airport, from which it flies to a number of important business and leisure markets in the Midwest and South. With extra slots, it can provide more flights to cities where it already has a strong presence.
By contrast, nearly all of Virgin America's flights today touch either San Francisco or Los Angeles, two cities that it cannot serve directly from LaGuardia (except on Saturdays).
Given that the company has pledged not to grow much for the next year and a half, it seems unlikely that Virgin America will look to set up a third major operational base in the eastern U.S. On the other hand, it would be hard for Virgin America to successfully compete on a point-to-point route where it has negligible market share on either end.
Fighting for position
Instead, a more likely outcome is that Virgin America will use the LaGuardia slots to broaden its offerings for people traveling between the West Coast and New York. Indeed, the company has long expressed an interest in expanding its West Coast-New York flight options.
Virgin America's nonstop flights from San Francisco and Los Angeles to JFK Airport were two of its earliest routes. Recently, the airline has been vocal about the difficulty of getting better access to New York. After five years of trying, Virgin America finally secured six slot pairs at Newark Airport, a fortress hub for United Continental (NYSE:UAL).
This allowed it to begin service from San Francisco and Los Angeles to complement the existing JFK routes. Despite a fare war instigated by United, Virgin America's Newark routes quickly became profitable.
While the LaGuardia slots cannot be used for nonstop service to the West Coast, Virgin America could use them to offer one stop same-plane service from San Francisco and Los Angeles to LaGuardia. Chicago's O'Hare International Airport would be the most natural connecting point for these flights.
O'Hare is only a few miles out of the way for travelers flying between New York and either San Francisco or Los Angeles. This would minimize the additional travel time compared to nonstop flights. LaGuardia is also more convenient to midtown Manhattan than either JFK or Newark, which would partially compensate for the extra stop. Most importantly, LaGuardia-Chicago is a high traffic market. While there is a lot of competition, Virgin America's differentiated product should allow it to snag a reasonable share of local traffic.
Virgin America hasn't announced its LaGuardia plans yet, but its options are relatively limited. It will only have six slot pairs there, while its two major operational bases are on the West Coast -- and cannot be served nonstop from LaGuardia.
Virgin America's best bet may be to use its new LaGuardia slots to augment its service from San Francisco and Los Angeles to the New York area. While there are a few airports that it could use as a connecting point, O'Hare Airport in Chicago seems like the most logical, due to its favorable location and large travel market.
This additional service would make Virgin America an even more potent threat to United Continental and the other legacy carriers on the highly profitable transcontinental routes from San Francisco and Los Angeles to New York.
Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.