The Failure of Virgin America and the Hypocrisy of the American Air Traveler

Moneybox
A blog about business and economics.
Nov. 1 2012 11:41 AM

The Failure of Virgin America and the Hypocrisy of the American Air Traveler

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PORTLAND, OR - JUNE 05: In this handout photo provided by Virgin America Airlines, actor Kyle MacLachlan who plays the Portland Mayor on the IFC show 'Portlandia' speaks to guests after Virgin America airlines 1st flight arrival, Tuesday, June 5, 2012 at Portland International Airport.

Photo by Bob Riha, Jr./Virgin America Airlines via Getty Images

Everyone complains about the poor quality of airline service, so why doesn't someone try to make a better airline? Well, Virgin America did it and as Brad Tuttle writes despite getting rave reviews from customers they're consistently losing money. The basic moral of the story is that airline service is bad because customers want bad airline service. Or, rather, they don't want to pay a premium for better service.

Things used to be different. Before Jimmy Carter took office, there were federal regulations in place sharply limiting price competition on interstate airline travel. Where meaningful intra-state markets existed you saw a lot of cheap fares and stripped down service. Texas was the main market for intra-state air travel, and not coincidentally Southwest has its origins as a provided of intra-state aviation in Texas during the regulation era. But outside of Texas and LA-to-San Francisco almost all the routes were fairly cozy monopolies and/or had legal restrictions on price competition. Airlines responded by overcharging customers and then competing by offering a high level of service quality. But since deregulation, customers have consistently shown that they'd rather take a cheaper flight than a better one. Virgin America tries to put an alternate strategy to the market test, and they seem to be failing.

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That said, in defense of Virgin America they're hardly alone in losing money. Data on cumulative earnings among airlines makes it clear that absent state-sponsored monopolies nobody makes money doing this:

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The only individual airline to make consistent profits is Southwest. The industry as a whole is a disaster area. Virgin America is doing surprisingly poorly in the sense that new airlines often do manage to make money for a while before fleet aging and labor disputes eat their profits up. By contrast "since 2007 Virgin America has posted a net loss of $671 million, and an operating loss of $447 million" and now they're furloughing workers.

But in general the main reason the inter-city air travel network we know and love to complain about exists is that entrepreneurs seem to have a bottomless appetite for losing money by investing in this industry. Passenger rail used to operate on a similar basis, but eventually there were no more suckers to be found and we ended up with Amtrak. Something similar might happen to airplanes some day, but until then let's offer at least two cheers for those who are willing to lose money on failed efforts to make it work.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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