Virgin Plans to Build Its New Discount Air Carrier in U.S. From Scratch
By MICHELINE MAYNARD
Published: June 8, 2004
he Virgin Group's new low-fare airline in the United States will not take over the shell of one of its struggling competitors, but will be new from the ground up, the new airline's head said on Monday.
Frederick W. Reid, the former president of Delta Air Lines, who joined Virgin's American operations in April, said in an interview that the new airline was hoping to make its maiden flight from New York in 2005. The airline is looking for American investors to contribute capital to the venture.
Mr. Reid, whose previous employer has warned that it may have to seek bankruptcy protection, said that Virgin was not daunted by the prospect of starting up in an industry racked by intense fare competition, rising fuel costs and widespread losses.
"It is a difficult atmosphere, and it will be a difficult atmosphere," he said in his first interview since taking the job.
"It is anyone's guess what the structure of the airline industry will be" when Virgin's American carrier begins flying, he said. "This is an industry that is going through upheaval, and upheaval always presents opportunities to innovative and smart companies."
Airline industry experts have questioned Virgin's wisdom in starting a carrier while the industry is flooded with excess capacity and is beset by financial challenges.
Mr. Reid's answer is that customers simply are not happy with the choices available; he noted one study that ranked the airline industry second-to-last in consumers' regard, ahead of only lawyers.
"I am not going to decide whether the industry needs another airline," he said. "The customers will decide."
On Saturday, Virgin said that its new carrier, which has yet to be named, would use San Francisco as its principal hub and New York as its corporate headquarters. New York, Boston and Washington had all bid to serve as the airline's hub, where flight crews, maintenance and technical operations would be based.
San Francisco is also a hub for United, but neither that city nor New York is dominated by any single carrier. Virgin is receiving about $15 million in incentives from the State of California to put its hub there, and $11 million from New York City and New York State for the headquarters. Virgin expects to hire 300 employees in New York, including staff for its head office in SoHo - which, Mr. Reid noted with some chagrin, is not air-conditioned - and about 1,500 workers in California, including pilots and flight attendants.
First, Virgin must find American investors willing to take a majority stake and join Mr. Reid in running the new carrier. Under federal law, foreigners may not control more than 49 percent of the equity or 24.9 percent of the voting power in a domestic airline. In essence, Mr. Reid said, the venture will be a licensee of Virgin, created by the British entrepreneur Sir Richard Branson, rather than a subsidiary.
Virgin, based in London, has three other airlines already operating: Virgin Atlantic, an international carrier serving the United States; Virgin Express, operating within Europe; and Virgin Blue, a low-fare carrier in Australia. The American venture is expected to pattern its operations after Virgin Blue.
Mr. Reid declined to name any likely investors, but he did say that Virgin did not plan to set it up as a joint venture with an existing airline.
Asked about industry speculation that Virgin might build its carrier by buying some operations that US Airways is trying to sell to stave off another bankruptcy filing, he said, "This carrier is going to be red, white and blue and born in the U.S.A. We are not going to start it out of the shell of another carrier."
Mr. Reid said the airline expected to announce its management team and its choice of airplane vendor as soon as next week. Mr. Reid said that both Boeing and Airbus had offered "very good" packages and would not say if either had an inside track.
With investors, management and planes in place, it will be time to seek regulatory clearance and then begin service.
"We are coming in with a brand proposal and a brand culture that is very, very well known in highly competitive industries," like telecommunications, entertainment, financial services and travel, said Mr. Reid, who has also been the president of Lufthansa and has worked for Trans World Airways and American Airlines. "There are truly not many start-ups that make it," he said. "But not many start-ups are approaching it the way we are approaching it."
