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Virgin America Gears Up for Debut

However, the carrier finds itself in a very different industry than when it first formed.
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Virgin America

will finally take off Wednesday, three years after the start-up carrier unveiled its initial operating plan.

A lot has changed in that time. Most importantly, Virgin's base, San Francisco International Airport, welcomed two low-cost rivals.

JetBlue

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began flying from there to New York's Kennedy Airport in May, and

Southwest

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will begin flying Aug. 26 to Chicago, San Diego and Las Vegas.

Meanwhile, a succession of bankruptcies caused costs to plummet at the legacy carriers that fly many of the trans-continental routes being targeted by Virgin America. Costly flight delays surged at the major airports Virgin wants to serve. And the Transportation Department ruled earlier this year that Virgin CEO Fred Reid must leave his post six months after the airline starts flying.

Virgin announced its name, its order for Airbus jets and the basics of an operating plan in June 2004. It applied to the DOT in December 2005, triggering objections from U.S. carriers and labor unions.

This past May, after continuing adjustments by Virgin, the agency mandated various additional changes -- including Reid's departure -- to ensure that Virgin's relationship with U.K.-based Virgin Group and its chairman, Richard Branson, does not violate requirements mandating that U.S. citizens control U.S. airlines.

Reid says Virgin has not been deterred, but instead has adapted. "We're not as

transcontinental-centric as we were thinking two or three years ago," he said in a recent interview. "The way things will look now will be a little different."

The 57-year-old sounds resigned to his departure. "Nobody expected the cards to fall that way," he says. "It's bizarre, but if that's what it takes to get this off the ground, I will try not to take it personally."

On Wednesday, the carrier will inaugurate service from San Francisco to New York and L.A., as it begins to implement a strategy of establishing itself at major airports and then filling in the gaps. On Aug. 29, it will begin New York-Los Angeles flights. It will add San Francisco-Washington Dulles on Sept. 26, San Francisco-Las Vegas on Oct. 10, and Los Angeles-Dulles on Oct. 24.

At this time, 39 additional destinations are under consideration. They include major airports in Atlanta, Denver, Detroit and Phoenix, as well as seven cities in Florida and five in Texas. "We could be up to 25 or 30 in five years," Reid said. But he adds: "I never saw a five-year plan that

didn't change after five months."

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Growth is a given. Virgin has firm orders for 31 new Airbus A319 and A320 jets, with 23 options. Branson said that "with 20 planes our U.S. rivals will be beginning to take us seriously," the London

Sunday Times

reported. "Until we get to 40 or 50 planes, they will not be too panicked."

On a

United

(UAUA)

conference call, Executive Vice President John Tague said the carrier is not worried about Virgin. "We are in the transcon markets to provide a market-leading, competitive, profitable product for our very best customers," he said. "We are not in the transcon markets to win the volume war at any price."

JetBlue, however, anticipates a negative impact because Virgin will overlap more than 10% of its routes. Virgin offers first class and "is a significant brand name," said CEO Dave Barger, on a conference call. "

It isn't like it's a new brand." But he cited a JetBlue advantage: "We are attacking the Bay Area from the East Coast,

and we are doing that with seven years worth of brand loyalty."

Reid said Virgin will distinguish itself with low fares, advanced entertainment systems, good service and a focus on major airports.

Additionally, while JetBlue has been slow to embrace alliances with other carriers, Virgin is targeting them. Virgin Atlantic and Australia-based Virgin Blue are possibilities, Reid says, but they are not the only possibilities.

Reid knows alliances. As president of Lufthansa, he was a key negotiator in the 1992 creation of the Star Alliance. Later, as president of

Delta

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, he was instrumental in the creation of SkyTeam.

Consultant Robert Mann says alliances could help Virgin America, but notes that they don't typically provide a huge boost. At the same time, he says, the effort to affiliate with other Virgins could revive concerns about foreign control. Meanwhile, Virgin will suffer from losing Reid, Mann says. Directors will have to "turn it over to someone who is perceived as an equally adept and impassioned leader."

Still, he says, the carrier will succeed if it can replicate JetBlue's beginnings. The pieces are all there -- attractive fares, high capitalization ($312 million), new Airbus jets and popular routes.

"The bloom is off the JetBlue rose," Mann says. "The question is, can Virgin America do what JetBlue did in the first three years -- build a halo around the thing and offer a great service story?'"