A competitive puzzle

So I am writing this blog post somewhere over Kansas. For just $12.95, I was able to logon and get 1Mbps speeds from Boston to LA. It’s very nice although my family have already discovered that it isn’t perfectly free (they appear to block Farmville so some chickens may not survive the flight). At the same time, in economy we have a personal touch screen TV with movies (you pay US$8 and I opted for Michael Moore’s capitalism movie in a fit of irony) but also (for free), cable TV that is live. If I want to buy food, I just order it from my seat and it comes. It is a marvel.

But there is more, the airline was very easy to deal with. You had to pay to check bags but you could do so at home so you didn’t have to fiddle around at the airport. And the airline kept you informed about any delays.

This is not the standard US airline experience. That is usually a disaster. But somehow a new entrant, Virgin America, is able to provide all of it. The plane is full but the tickets were dirt cheap.

The puzzle is this: why did this type of entry take so long to happen? And why isn’t it a bigger competitive threat? I guess time will tell. For the moment, fly Virgin in the US if you can.

5 thoughts on “A competitive puzzle”

  1. Currently (2003 numbers), foreign ownership of us airlines cannot exceed 25 % and 49% of capital req.
    Basically that means that foreigners cannot set up shop in the us. Only if they make a joint venture with an american company they can do so, but only as a minority partner.
     
     

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  2. I think Richard Branson mentions in his book how many barriers to entry there are in the aviation industry.  Really, how many people or companies have the captial required to start an airline and are prepared to take the risk? 

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  3. See this Michael Porter interview (about 2.30 mins in) and associated HBR article for some discussion of LOW barriers to entry (in a financial sense) are in airline business… planes can be leased, gate access rights are purchasable, much of the processes are outsourceable etc…
    Result is that the  industry is a money-pit…let’s listen to Warren:
    “Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.”
    — Warren Buffett, annual letter to Berkshire Hathaway shareholders, February 2008.




     

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  4. You don’t have to be non-US to replicate this sort of service. The issue is why other airlines have not done it. I suspect there are barriers to expansion more so than barriers to entry.

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  5. It’s simple, Virgin (whether they be Virgin America, Virgin Blue or any of the international arms) seem to understand their customers. In my experience, no other US airline with the possible exception of SouthWest, seems capable of doing so, treating customers as an incovenience.
    In setting up the airlines, Virgin seem to have deliberately ignored how things are ‘done’ in the industry and started from scratch, meaning they’ve been able to provide what people want today instead of what they expected 40 years ago.

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