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Coincidence or Rivalry? JetBlue and Virgin America Invade Each Other's Turf

By Adam Levine-Weinberg – Oct 8, 2014 at 6:08PM

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Last week, Virgin America and JetBlue announced new routes targeting each other's core markets.

On Wednesday, Virgin America announced some new seasonal flights from New York and Boston to warm-weather destinations. This announcement may have seemed innocuous enough. However, New York and Boston are the two main bases for JetBlue Airways (JBLU 2.09%) -- the other top carrier targeting the "high-value leisure" market.

Just eight hours after Virgin America announced its new flights, JetBlue announced new flights of its own in San Francisco, Virgin America's largest base. The timing of these announcements could just be a coincidence -- but it is more likely a sign of a budding rivalry between the two.

Virgin America goes east

Today, all of Virgin America's flights touch one of the carrier's two West Coast bases (San Francisco and Los Angeles) except for one daily round trip between New York and Las Vegas. Virgin America has been looking to diversify its geographical footprint, though.

Virgin America has been trying to diversify geographically (Photo: Virgin America)

For example, it was an active bidder for assets that American Airlines was forced to divest as part of its merger with US Airways. Virgin America picked up slots at New York's LaGuardia Airport and Washington's Reagan National Airport, as well as two gates at Love Field in Dallas.

Next week, Virgin America will use these new slots and gates to launch nonstop service from Love Field to New York and Washington, D.C. It will also begin nonstop flights from Dallas to Chicago in 2015. These additions will make the carrier slightly less reliant on its top two markets.

Virgin America's recent announcement builds on this diversification effort. From December to April, it will fly daily from New York's JFK Airport to Fort Lauderdale. From January to April, it will add four weekly flights between Boston and Las Vegas, and two extra weekly flights from JFK to Las Vegas.

Conceptually, adding these seasonal flights makes sense. Demand for transcontinental flights -- Virgin America's bread-and-butter -- is weaker during the winter. By contrast, warm-weather destinations like South Florida and Las Vegas are popular winter vacation spots for people in cold-weather cities like New York and Boston.

JetBlue strikes back

The problem with Virgin America's move to diversify is that routes from the East Coast to warm weather destinations are a key pillar of JetBlue's franchise. Indeed, JetBlue's strong presence on these routes helps smooth out some of the seasonality typical of the airline industry. It's a major reason why JetBlue has reported 17 straight profitable quarters.

JetBlue has a big presence on routes from the Northeast to warm-weather destinations (Photo: JetBlue)

On the same day as Virgin America's announcement, JetBlue announced that it will offer two daily roundtrips between San Francisco and Las Vegas beginning in January. This is a key route that Virgin America has been serving since just two months after it began operations.

The timing of JetBlue's announcement was suspicious, to say the least. JetBlue has very few flights within the Western U.S. -- and almost all of those touch its focus city in Long Beach. The new San Francisco-Las Vegas route doesn't fit either paradigm -- but it is a clear shot across the bow for Virgin America, which flies that route six times a day.

What's going on here?

Objectively speaking, Virgin America's new route announcements aren't especially threatening to JetBlue. This winter, JetBlue will operate up to 24 daily roundtrips between five New York-area airports and Fort Lauderdale. Virgin America's single daily flight won't impact the market much.

Even on the routes to Las Vegas, the threat to JetBlue is manageable. Virgin America's extra two flights from New York to Las Vegas will have a minuscule impact on that market. In Boston -- where JetBlue is the largest airline overall -- JetBlue will remain the only airline with daily nonstops to Las Vegas. (It actually offers two daily flights every day but Saturday.)

However, JetBlue has carved out a niche for itself in the high-value leisure market -- essentially, people who are willing to pay a little more for extra comfort and amenities -- on the East Coast. Virgin America has a similar product, but is focused on the West Coast.

JetBlue may be trying to pre-empt any further attempts by Virgin America to encroach on JetBlue's territory. In other words, JetBlue's response may be more about setting a precedent than about the competitive impact of a few new Virgin America flights this winter.

JetBlue is introducing its "Mint" premium product in San Francisco later this month (Photo: JetBlue)

There's also a potential strategic rationale for JetBlue's new route. Later this month, JetBlue will introduce its highly acclaimed "Mint" premium class on flights between New York and San Francisco. It will increase service on that route from three daily roundtrips to five daily roundtrips by February. This will give it a better shot at winning small-business and corporate travel dollars.

Las Vegas is the No. 2 business travel destination in the U.S., behind New York. JetBlue may hope that offering flights to both cities from San Francisco will boost its appeal to business travelers. That said, it will still offer far fewer flight options in San Francisco than Virgin America, let alone market-leader United Continental.

Why can't they be friends?

JetBlue and Virgin America both have a long way to go to prove that their business models can produce profitability in line with the rest of the industry. Many airline analysts doubt that the cost of offering extra frills can be justified outside of huge network carriers that can compete for lucrative global corporate travel contracts.

The two carriers have had enough trouble generating good financial returns even without trying to poach customers from one another. Ratcheting up competition between the two will only make it harder for each carrier to earn good returns.

JetBlue and Virgin America would be better off working together -- either through an outright merger or a code-sharing arrangement. By pooling resources, they could offer a more competitive route network in the U.S. and Latin America to win more business from the high-value travelers they are both chasing.

Adam Levine-Weinberg owns shares of JetBlue Airways and is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. 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.

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