Almost exactly one year ago, Virgin America (NASDAQ:VA) took advantage of the expiring Wright Amendment to open a small focus city operation at Love Field in Dallas. Love Field is limited to 20 gates under federal law, nearly all of which are controlled by hometown carrier Southwest Airlines (NYSE:LUV).
Virgin America aimed to lure some customers -- especially business travelers -- away from Southwest with a differentiated product, including first-class sections on every flight and various high-tech amenities. Meanwhile, it expected to earn a premium relative to airlines operating at Dallas-Fort Worth International Airport (DFW) due to Love Field's proximity to downtown Dallas.
However, the road has been anything but smooth as the Dallas market has become the epicenter of airline industry price competition. This is forcing Virgin America to change its strategy there yet again.
Virgin America's strategy starts to shift
When Virgin America first announced its interest in acquiring gates at Love Field, the company planned to operate five routes from Dallas. In addition to Virgin America's two hubs -- San Francisco and Los Angeles -- the other destinations were New York's LaGuardia Airport, Washington's Reagan National Airport, and Chicago's O'Hare International Airport.
Service on the first four routes started last fall. (In the case of San Francisco and Los Angeles, the flights were moved over from DFW, where they had previously operated.) Virgin America has had mixed results thus far, primarily due to price competition from Southwest Airlines, and it has delayed plans to institute a fourth daily flight to Reagan Airport multiple times.
However, due to the slot-constrained nature of LaGuardia Airport and Reagan Airport, Virgin America expects both markets to become highly profitable as they mature in the next few years.
On the other hand, Virgin America never started its proposed Dallas-Chicago service. Chicago is Southwest's largest base as well as a hub market for two of the three global network carriers. That was too much competition for Virgin America's planned two daily roundtrip flights. Instead, in February, it announced plans to begin flying from Dallas to Austin in late April.
The idea was to stimulate the market with lower fares, inducing more people to fly rather than drive, particularly for short business trips. Virgin America also expected the Austin flights to generate connecting traffic for its New York and Washington, D.C. flights, thus improving its results on those underperforming routes.
Is the third time the charm?
Plenty of people were skeptical about Virgin America's plan to fly between Austin and Dallas. Southwest Airlines has been offering frequent service between the two cities for decades. Meanwhile, the relative ease of making the 200 mile drive means that Virgin America would risk losing its traffic if it ever tried to raise fares on the route.
It seems that the skeptics were right. A few months ago, CEO David Cush began hinting that Virgin America might not be in the Austin-Dallas market for the long run. He also complained that delays were rampant at Love Field due to airlines trying to operate 10 flights per day at each gate. On Thursday, Virgin America pulled the plug on its Dallas-Austin flights.
Virgin America's latest plan is to fly twice daily between Love Field and Las Vegas, beginning on December 1. This will reduce the stress on its gates at Love Field while potentially producing better financial performance.
Las Vegas is a relatively promising market insofar as Virgin America has already been quite successful there. The Dallas-Las Vegas route should attract a good mix of leisure and business travelers. Virgin America's premium amenities will also play better on a 1,000+ mile flight than on a short 200 mile hop.
That said, Virgin America will confront some of the same problems in the Dallas-Las Vegas market that have affected its other Love Field routes. Las Vegas is another Southwest stronghold, and Southwest offers five daily roundtrips between the two cities. There are also many nonstop flights to Vegas from DFW.
Virgin America's experience over the past year at Love Field suggests that Southwest and its other rivals will aggressively match its prices. As a result, even if the new Las Vegas route is ultimately successful, it could take a few years to ramp up to peak profitability. In the meantime, investors can hope that at least it won't lose as much money as the Austin flights.