Branson Heats Up Low-Cost Carrier Market

Plans to launch U.S. airline could push fares down even lower in some areas

By: David Jones

Plans for a U.S. discount airline by Virgin Atlantic Chairman Richard Branson could add yet more competition in an already heated market and could push airfares in some key markets even lower.

Branson, who has openly praised the success of New York-based JetBlue, announ- ced earlier this month that he plans to launch a “quality, low-cost” carrier in the U.S. by early next year.

Branson said he made the move because he got tired of waiting for the U.S. to lift restrictions on foreign ownership of domestic airlines, and he said he is seeking an institutional investor in the U.S. to take a majority stake.

“We’ve been waiting for nearly 20 years for the laws to be changed in America,” said Branson.

While Branson did not specify what routes the new airline would fly, he noted there were plenty of untapped routes in cities not served by JetBlue.

JetBlue currently flies from John F. Kennedy International Airport in New York to several major western markets including Salt Lake City, Seattle, Las Vegas, San Diego, Oakland as well as Ontario and Long Beach, Calif.

Still, there has been growing industry interest in low-fare carriers. American has begun to market itself as a low-fare airline in several transcontinental markets where it competes against JetBlue and the United Shuttle is expected to return to the West Coast.

If Virgin decided to launch service in the western U.S., the carrier would likely take passengers from one of the existing low-cost airlines operating in the market, according to Marc Casto, chief financial officer at Casto Travel, in Santa Clara, Calif.

“It’s going to be a pretty crowded playing field for another discount carrier,” said Casto. “For the most part we find that price is the motivator for all decisions.”

Casto said airlines like Southwest have maintained market share by offering customers incentives to book online, a move that might be echoed by Virgin.

However, he conceded that such incentives are not always helpful to agents.

Branson has repeatedly urged the U.S. to change foreign ownership laws on aviation. Currently the laws allow foreign carriers to own no more than 25 percent of the voting stock of U.S. airlines. They also ban foreign carriers from flying domestic routes in the U.S.

Department of Transport- ation officials say one reason for the restrictions is that domestic airlines are often used to transport soldiers to battlefields during wartime. Many U.S. carriers were used to transport American troops to the Middle East in the weeks leading up to the Iraq war.

The U.S. and U.K have been entangled in negotiations in recent years to create an “Open Skies” pact that would open aviation markets for foreign carriers, however those talks have been bogged down over who controls several lucrative slots at London’s Heathrow Airport, which is the most popular transfer point in the world.

Recently the European Commission has taken over talks for an “Open Skies” agreement with the U.S., which if passed would allow European carriers the right to access more U.S. markets.

Branson has long wanted to launch a domestic airline in the U.S. that is similar to his Australian carrier, Virgin Blue.

The Australian carrier operates a series of all-coach flights on Boeing 737 aircraft that are configured for either 144 passengers or up to 180 passengers, depending on the aircraft type.

Branson said his low-cost U.S. carrier would start as a modest operation with about 10 to 15 aircraft. He said he is in talks with Boeing and Airbus on new orders.

A Boeing official would not comment on the Virgin Atlantic announcement, but said low-cost carriers have been “particularly active” in driving new business especially AirTran and Ryanair.

Asked why fewer travelers are flying, Branson said he believes it’s a lack of quality service by the airlines.

“Passengers want to have a pleasant experience when they’re flying,” he said. “When you fly on American or United, you wonder what they’ve missed.”