The Differentiation Strategy: How To Enter into a Highly Competitive Market

Background of the Company

Virgin America was founded in 2004 by the British entrepreneur Sir Richard Branson. The airline, part of the Virgin Group, began operations in 2007 with a mission to offer a high-quality, customer-focused travel experience. Virgin America quickly became known for its stylish service, mood-lit cabins, comfortable seating, and advanced in-flight entertainment systems, making it stand out in the competitive airline industry.

American Airlines, established in 1930, is one of the oldest and largest airlines in the United States. Headquartered in Fort Worth, Texas, American Airlines boasts a comprehensive global network and an extensive fleet, offering a wide range of domestic and international flights. Over the years, American Airlines has solidified its position as a major player in the aviation industry through strategic mergers and acquisitions.

Key Facts and Figures

• Virgin America Founded: 2004 (operations began in 2007)

• American Airlines Founded: 1930

• Virgin America Acquisition by Alaska Airlines: 2016 ($2.6 billion)

• American Airlines Revenue (2016): $40.18 billion

• Virgin America Fleet Size (at acquisition): 67 aircraft

• American Airlines Fleet Size (2016): 1,789 aircraft

• Virgin America’s Market Share (2016): Approximately 1.5% of the U.S. market

• American Airlines’ Market Share (2016): Approximately 16.6% of the U.S. market

The Competition

Virgin America positioned itself as a premium yet affordable alternative to the legacy carriers from the outset. However, entering a market dominated by giants like American Airlines meant that Virgin America had to work hard to carve out its niche and attract a loyal customer base.

Virgin America's Strategic Moves

Differentiation through Service and Experience:

Virgin America aimed to stand out through its innovative in-flight experience. The airline's aircraft featured mood lighting, touch-screen seatback entertainment systems with on-demand TV and movies, and power outlets at every seat. Additionally, Virgin America offered Wi-Fi on all flights, setting a new standard for in-flight connectivity. The airline emphasized friendly and attentive customer service, training flight attendants and ground staff to go above and beyond to assist passengers and create a positive travel experience.

Brand and Marketing:

Virgin America leveraged the strong Virgin brand, known for its flair and customer-centric approach, to target tech-savvy, younger travelers who valued experience over price. The airline launched creative marketing campaigns, engaging with customers through social media, viral videos, and partnerships with popular brands. Campaigns like "VXNext" and collaborations with companies like Spotify and Netflix resonated well with their target demographic, helping to build a loyal customer base.

Efficient Operations:

Operating a fleet of Airbus A320 family aircraft, Virgin America achieved operational efficiency and kept costs down. The uniform fleet reduced training and maintenance costs, contributing to the airline's overall efficiency. Additionally, Virgin America's point-to-point model allowed for more direct flights and reduced travel times for passengers, unlike the hub-and-spoke model used by larger airlines.

Challenges Faced by Virgin America

Market Penetration:

Despite its innovative approach, Virgin America had a smaller network compared to American Airlines, limiting its ability to compete on a broader scale. While American Airlines operated over 6,700 flights daily to nearly 350 destinations, Virgin America's network was significantly smaller. Securing takeoff and landing slots at major airports was another significant challenge, often restricting Virgin America's presence at key airports like JFK, LAX, and SFO.

Pricing Pressure:

Larger carriers like American Airlines could leverage their economies of scale to engage in price wars. American Airlines often matched or undercut Virgin America's fares on key routes, making it difficult for Virgin America to maintain competitive fares without compromising on service quality.

Financial Pressure:

Despite its focus on efficiency, delivering a premium experience came with high operating costs for Virgin America. The expenses associated with maintaining a new fleet, providing high-quality service, and marketing to build brand recognition were substantial. While Virgin America reported its first annual profit in 2013, the financial pressures and competitive environment made sustaining this profitability challenging.

American Airlines' Counter Strategies

Competitive Pricing:

American Airlines often matched or undercut Virgin America's fares on key routes, using its larger financial reserves to sustain lower prices for longer periods.

Network and Capacity:

With its extensive network, American Airlines offered more flight options, destinations, and frequencies, making it a more convenient choice for many travelers. The American Airlines AAdvantage loyalty program provided significant incentives for frequent flyers to remain with American, offering extensive benefits such as upgrades, access to premium lounges, and bonus miles, keeping many high-value customers loyal.

Strategic Alliances and Mergers:

American Airlines extended its global reach through partnerships with other airlines and membership in the Oneworld alliance. The merger with US Airways in 2013 further expanded American's network and resources, strengthening its competitive position against carriers like Virgin America. This merger made American Airlines the world’s largest airline at the time, providing more leverage in market battles.

Outcome

The intense competition proved challenging for Virgin America to sustain independently. Despite its strong brand and loyal customer base, the financial pressures and competitive landscape led to its acquisition by Alaska Airlines in 2016 for $2.6 billion. The merger was completed in 2018, and the Virgin America brand was retired, with Alaska Airlines integrating the best aspects of Virgin America's service into its own operations.

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