"A Pair of Flying Leaps: No-Frills Skybus and Low-Fare Virgin America Enter a Daunting Field"

Friday, May 4, 2007

A Pair of Flying Leaps
No-Frills Skybus and Low-Fare Virgin America Enter a Daunting Field
By Del Quentin Wilber
The Washington (DC) Post


The airline industry is littered with the corpses of failed start-ups.

But that doesn't deter Bill Diffenderffer and his fellow executives at
Skybus Airlines. They are launching a new airline just as the industry is
recovering from a tough downturn that helped force United and Northwest
airlines into bankruptcy and contributed to the demise of local low-cost
carrier Independence Air.

Diffenderffer concedes that he wondered about the wisdom of starting a
no-frills airline when so many carriers were losing money. A former lawyer
for long-defunct Eastern Airlines and a vice president at IBM, Diffenderffer
said he couldn't resist Skybus's business plan, which is based on the
successful approach of low-cost European airline Ryanair. The new airline is
expected to start service from its base in Columbus, Ohio, in coming weeks
and fly to eight other cities, including Richmond.

Skybus will be joined by another new airline in the market this summer.
Virgin America, also brushing aside the history of airline start-ups, plans
to begin operations and proposes to eventually serve Washington Dulles
International Airport.

Despite the skepticism of some analysts and airline executives,
Diffenderffer said he sees opportunity in tapping what he describes as a
horde of Midwest residents eager for cheap fares and a willingness to fly to
secondary airports. The strategy has helped him raise $160 million in
capital, the airline says.

But Diffenderffer says he isn't shaping his battle plan only like a business
executive. He also thinks like a samurai.

"The airline industry keeps growing, and the dominant players are
essentially weak," said Diffenderffer, 56, author of the book "The Samurai
Leader: Winning Business Battles With the Wisdom, Honor and Courage of the
Samurai Code."

"Put those things together," he added. "What if you are given $100 million
and a blank piece of paper? What would you do differently? That's what we
are doing."

Skybus will have a tiny payroll -- mostly pilots, flight attendants and some
managers, executives said. It will contract out everything else. The carrier
has no customer service agents or even a number for passengers to call with
questions; passengers must book their tickets online.

The airline will sell advertising on the sides of its planes and inside the
cabin to boost revenue. If you want to check a bag or get a soda, get out
your wallet. Like Southwest, it will have no assigned seats. For an
additional $10 you can board the plane before anyone else.

The planes will have no in-flight entertainment, which can be expensive to
keep up. "Bring a book," Diffenderffer said.

To generate buzz, Skybus is offering 10 seats on each plane for $10 each.
The rest of its fares will be about 50 percent lower than the competition,
Diffenderffer said.

To simplify operations, the carrier won't even allow customers departing
from its eight other cities to book tickets to anywhere other than Columbus,
although executives have said that some passengers have figured out ways to
get from, say, Richmond to Boston through Columbus -- if they are willing to
spend the night in Ohio. Diffenderffer and other executives defend that
plan, saying that the Columbus market is actually massive, with more than 6
million people living within 100 miles of the city.

"People will drive 100 miles to save $100," Diffenderffer said, adding that
there are thousands of college students in the Columbus area, home to Ohio
State University.

Academics, former executives and analysts point out that the airline is
relying heavily on a mid-size market's population. Although Skybus said it
selected destinations that have little nonstop service from Columbus, it
will be battling two established low-cost rivals -- Southwest and JetBlue --
that serve more destinations with connections.

"I wonder if they can sustain and maintain a cost structure that enables
them to compete and make money, particularly if they get Southwest's
attention," said Dan Petree, dean of the college of business at Embry-Riddle
Aeronautical University in Florida. "It is an extraordinarily difficult and
challenging business."

On the opposite end of the low-cost scale is Virgin America, which will be
piggybacking on the hip brand of Virgin Atlantic. The airline, seen as an
extension of Richard Branson's global business empire, has gotten millions
in loan and investment dollars from the billionaire's Virgin Group. It is
based in San Francisco and will link to five other cities, including
Washington.

It applied to the Department of Transportation in late 2005 to begin
service. In December, the department agreed with critics who said the
airline was controlled by Branson, a Briton, and other foreigners in
violation of U.S. law.

After the lawyers reworked contracts and loan agreements, the department
reversed course in March, giving the airline preliminary approval to offer
service under certain conditions. Among the remaining issues is whether
Virgin America must get rid of its chief executive, whom regulators worried
was too close to Branson.

Gareth Edmondson-Jones, an airline spokesman, would not comment on potential
routes or the airline's fare structure, saying he must wait to talk until
the final approval is granted.

On its Web site, the airline describes planes offering first-class leather
seats that provide automated massages. Its coach seats will also be leather.
All will have sophisticated in-flight entertainment systems. The cabins will
have mood lighting and offer free refreshments in refrigerators stored in
the galleys.

Analysts say that Virgin America may have a better chance of surviving than
Skybus, if only because Branson wants to expand his brand and has the cash
to back up his investment.

"He is in it for the long haul," said Doug Abbey, an analyst with the
Velocity Group. "This is a long-term investment for the Virgin brand."

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