Virgin America Posts Terrible First Quarter Loss, Has One Year to Prove Itself

Here we are in July and believe it or not, I haven’t written an article focusing on Virgin America here since last year. I guess it’s because the airline seemed to be on autopilot. It kept adding new routes and posting losses. So what’s changed? Nothing. Except the fact that the recently released first quarter earnings were really bad, even by Virgin America’s usual standards. This next year is going to be crucial for the airline as growth finally, mercifully slows for a brief time. This is the airline’s chance to prove that growth really is the only reason it isn’t making money.

Virgin America Cash Burn

The subhead on Virgin America’s release says “Airline Reports 33 Percent Increase in Operating Revenues While Fueling New Market Growth.” And that is about the only thing that’s remotely positive. Operating revenues were indeed up 32.8 percent but operating expenses were up 36.9 percent. The result? The airline has a -18.2 percent operating margin (up from -14.7 percent for the same quarter last year). There were some pretty big non-operating expenses as well and that pushed net margin to a brutal -28.5 percent, up from -22.2 percent last year. What the heck is going on here?

Let’s look at this a different way. Passenger unit revenue was up 1.3 points year over year. Meanwhile, the airline’s unit costs were up 5.3 points. A huge chunk of that was fuel. Unit costs ex-fuel were up only 1 point. But every airline has to deal with fuel. Smart airlines usually hold tight on capacity and work to raise fares. Virgin America did neither.

Big Revenue Problems
In fact, Virgin America’s revenue performance was pretty poor. There was a 29.3 percent increase in capacity and Virgin America dropped its fares to fill seats. The airline’s average fare tanked. It was $182.46 in the first quarter of last year but this year it was way down to $168.17. Some of that was offset because the airline filled more seats. Load factor was up to 80.6 percent vs 75.7 percent last year. But that hardly improved the airline’s situation.

Some of this was blamed on the airline’s transition to a new reservations system. That happened last October and according to Virgin America, it had an impact of $10 to $15 million in the quarter. That translates into $7 to $10 a passenger, which is a substantial hit. But even if you drop that straight to the bottom line (which wouldn’t be the case), then the results are still worse than last year. Still, heads should be rolling over how badly this system transition was botched.

Fuel was worth another $15 million versus last year, but that’s just the way the cookie crumbles. Of course, now the airline has started hedging, just in time for fuel prices to drop. It says it won’t get a benefit of lower fuel prices until later in 2012. Sheesh.

What about that all important cash metric? The airline saw its newly-flush cash balance drop sharply. At the beginning of the year, Virgin America had $160 million in cash after raising $150 million in debt during the fourth quarter. Just three months later? It was down to only $111 million.

Capacity Slows, Numbers Better Improve
So, what now? Well it’s been five years and the airline is still hemorrhaging. I think I’d adopt a new slogan, “the airline everybody wants to fly and nobody wants to own.” If I had any investment in this company, I would have lost faith in management long ago. It’s always the same story. “We’re growing fast because we have to if we want to succeed, but it’s also causing us to lose a ton of money. Oh yeah, and fuel prices are high.”

How is Virgin America going to stop this cycle? Well, it seems to be hanging its hat on a pause in the current “planned phase of accelerated growth.” Current aircraft deliveries “wind down” right about now. For the next year, it will have a fairly stable fleet. But then in the second half of 2013, it ramps right back up again and starts taking the first of 30 new A320s over three years. Then another 30 A320neos start coming in 2016.

This means that the next year will be quite telling. Since the airline loves to say that the constant capacity increase is what’s really hurting, then will it fare better with flat growth over the next year? If so, that’s great, but then the spigot opens up again and doesn’t shut off for several years. So I wouldn’t even call it good news – other airlines have managed to make money while growing. That’s a bad excuse. Still, I’m very curious to see what happens in the next year. This seems to me like it’s the airline’s best chance to show that there is any reason it deserves to be flying. But if it can’t make things look dramatically better, then I don’t have much hope for its future.

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80 Comments on "Virgin America Posts Terrible First Quarter Loss, Has One Year to Prove Itself"

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Southeasterner
Guest

“after raising $150 million in debt during the fourth quarter”

Any idea where the $150 came from? Perhaps a 22 year old loan officer at Citibank or JP Morgan?

Amazing that companies that are actually making money are struggling to get a cent from the banks but if you show consistent losses money seems to grow on trees. Airlines (and banks) seem to operate in a parallel universe.

Sean S.
Guest

The reality is Virgin America is simply not going to attract the consistent business traveller as they don’t have the network available, nor the connections to other carriers or the robust frequent flyer program that the larger carriers do. Truthfully legacy carriers domestic networks survive due to their need to funnel them into lucrative international destinations, corporate business, as well as robust credit card programs.

The question is, if they collapse, who will buy up the A320neos?

Jason H
Guest

If the price was right I’m sure Delta would pick them up. They need them to complete the mongrel fleet look. :-D

Rachel M
Guest
Here’s the elephant in Virgin America’s room, their destinations suck. Frankly, California is their “hub” and pretty much the only place east coasters can fly to on their airline. Unfortunately for Virgin America, there is only so many times we can fly to California. Worse yet, California has a few financial woes, so its not like there are going to be record numbers of Californians flying right now. All that being said, the lack of destination diversity is killing that airline. I’m not going to pay full price for a ticket unless I have to be in Dallas or something… Read more »
Jim M
Guest

Living on the West coast, I say the same about Jet Blue. Since I don’t go to JFK (or want to connect through) that much they are irrelevant to me. However Jet Blue is doing OK.

noahkimmel
Member
Jetblue has managed to add destinations that are profitable, not flashy. See the Cartagena announcement. Jetblue says that things must “earn their way” into the business, VX just wants everyone to like them. I hope Virgin can turn a profit, because it is a great airline for Customers to fly. But management cant make money at this size, I dont see how -15% over even more flights can help. The critical mass they need is simply too big. Jetblue has the Dominican Republic cash cow. What does Virgin have? Transcon is the most competitive markets in the country, and they… Read more »
Sean S.
Guest

Dominican Republic cash cow? What? While the Dominican Republic I’m sure generates a fair amount of leisure travellers, and also service amongst migrants, its hard to imagine that this is a “cash cow”.

The reality is domestic capacity is, at this moment, sufficient for the needs of most leisure and business fliers in almost all markets. The airline industry is mostly at the whims of regional growth to spur a reason FOR travel. Its hard to imagine where signifcant growth can be maintained.

robertol
Guest

@rachel I missed where VX has its hubs in Fresno, Bakersfield, and Stockton. The economies in the Bay Area and LA are doing fine. This is about competition.

Rachel M
Guest
Robertol, This wasn’t a jab at California, but I think two hubs in one state is a little risky. Also, while SFO and LAX may not be doing poorly, I can tell you as someone in the conference and meetings industry, we discontinued California as a meeting site as of 2009. It is far too expensive for our attendees. I know we are not the only group to do so. And while we have 500 members in the state of California, we have seen incredible low attendance numbers from that state in the last 3 years. And they are primarily… Read more »
David M
Guest

I think criticizing SFO and LAX being a poor choice of hubs since they’re both in the same state is a bit of a red herring. Western states like California are much bigger than the east coast states. SFO-LAX is almost twice the distance as JetBlue’s JFK-BOS.

Sanjeev M
Guest
Yeah something is wrong. One big problem is not enough seats in their planes. While it may be wonderful for legroom, 149 seats doesn’t cut it in an A320. Generally what they should do is pack 180 seats in there, but provide nice amenities like VX already does and perhaps a bag free. I doubt that VX makes enough money of those lovely first class seats to offset such a big reduction in seat count. The A319 is just horrible on that account. 120 seats!!! Not gonna work. Also red eye Hawaii flying needs to happen to improve utilization. These… Read more »
Ian L
Member

Uh…have you looked at how many seats legacies have in 320s?

US: 124 (319), 149 (320)
UA: 120 (319), 144 (320)
DL: 126 (319), 144 (320)

So VX isn’t putting any fewer seats in their planes than a legacy. They just have more spacious F…and fewer F seats.

Also, VX ALWAYS charges for first class, last I checked.

Sanjeev M
Guest

Sorry I may have overestimated. I though DL and the likes put 160 in an A320. So that argument is moot :(

Yes VX doesn’t upgrade anyone to first class, period.

noahkimmel
Member

No, but the airport kiosk offering an upgrade for under $100 makes me wonder why anyone would pay an additional 500+ at time of booking. Sure they are eeking out marginal revenue with those cheap upgrades, but they are also stopping people from booking them early due to the cost differential.

Nick Barnard
Member

There is also the issue that if you have 155 passenger seats on an A320 you just required an additional flight attendant to work the flight, and labor in every airlines case is your second biggest cost, right behind fuel. Jetblue launched their airline with 162 seats, went down to 156 seats, and finally settled at 150 seats per A320.. They didn’t have that issue with the E190s which they just launched with an even 100 seats, and have stayed there..

Chris Miller
Guest

I have always wondered on the A320 with 155 seats…. What if it is a light load and there are 20 empty seats. Can they fly with 3 flight attendents on that leg?

Nick Barnard
Member

I’m not an expert, but I think the FAA regulations are by available seating, not the number of passengers on the plane.

The other question is you don’t want schedule that flight for less people, then have to turn away folks because you don’t have a flight attendant to cover the seats.

JS
Guest

150 seats works just fine on an A320. Virgin isn’t trying to be Spirit.

David SF eastbay
Member

Starting codeshare with Virgin Australia may help, what would help even more is codeshare with Virgin Airways. At least that would give people a reason to connect via SFO from up and down the west coast.

I never did get why a new airline would start using SFO and LAX as bases. You would have thought it would have been SFO and using the airplanes to more cities from the start. Maybe a LAX-JFK would have been ok for the Hollywood set, but that should have been it for LAX.

Sean S.
Guest

Using LAX as a hub is like walking into a lion’s den. The competition is vicoious, and its not apparent that any one company can become the dominant player in the market. The legacies have been benefited to a certain extent by their fortress hubs protecting them in certain regional markets. Opening up in LAX gets you none of that.

noahkimmel
Member

Jetblue tried SFO and OAK as “focus cities”….there hasnt been much growth at them for a reason–they dont make $$$$!

Chris W.
Guest

Put a fork in it.

Eric the Italian Guy
Guest
All good points…but I think Rachel hit the nail on the head…they are too Cali-centric. SFO is a great nexus from the US to the Pac rim…not so much as a domestic hub (UA learned this). I also think they underestimated the leverage of MP in cherry-picking UAL disconent in the Bay Area. Get more bang for your buck by doing some flyover country>east p2p and they help (not solve…help) the utilization and revenue metrics. I wish, in a perfect world, that a Virgin Alliance would happen…but that is unlikely at this point. VAussie and VAtlantic are getting cozy with… Read more »
Xnuiem
Member

I agree. As a resident of D/FW, VA sucks! I can only get to LA and SFO easily, something I can already do on AA or WN (albeit with a stop). That in of itself would be fine, but I can’t get ANYWHERE else, like the east coast. Why would I build loyality with an airline that cant get me where i need to go?

noahkimmel
Member

even beyond that, what is the VX advantage? The product is great, but if you wont spend more to get it, it simply doesnt work. VX goes after competitive markets, not niche, profitable ones.

I truly hope they can find some cash cows–why not try california-caribbean or mexico?

Jessica
Guest

Virgin America flies to Mexico, Noah.

Todd
Guest
There really isn’t much demand for California-Carribean, and most of those flights would be too long to do non-stop on an A320. E.g., LAX-SJU is 3386 miles. Demand for travel to Mexico has also been in decline, with many U.S. tourists (sometimes unfairly) viewing the country as unsafe to visit, given the headlines about drug violence. Tellingly, Alaska, which has been serving Mexico leisure destinations for years, has been putting more capacity on Hawaii routes and cutting Mexico. But Hawaii isn’t an option for VX without going through an expensive ETOPS certification process (and since no US airline has ever… Read more »
s.allardice
Member

VX have been quietly doing ETOPS flights with the FAA for sometime now.

David M
Guest
Jon
Guest

So, uh…what exactly is that coming out the back of the engine there, Cranky?

EAG
Guest

They should have pre-empted Spirit and intruded on DFW while American is distracted. Huge missed opportunity, in my opinion.

Sanjeev M
Guest

The thing is VX still can. Spirit is handpicking routes with 1 daily flights at odd times. VX can come in with 4 dailies on any DFW-East Coast route and win some business. Although AAdvantage is strong, the MD-80 which are mainly at DFW are really dated and VX product would win.

Maybe VX should status match AA :)

Rachel M
Guest
I’d also like to add that Virgin America literally put all of their eggs in one basket. That is, the West Coast hub basket. If Virgin had substituted just one (I’d say LAX over SFO) hub for a midwest hub, they would be able to demand a bit more money for their product because they could connect more people to more destinations. For example, to get to Seattle on VX, I have to take a plane from IAD to LAX or SFO then go on to SEA. Seriously? At least with JetBlue, I can make more rational connections for a… Read more »
J Bird
Member

Cranky,

Where do you think up these graphics? They’re awesome.

Chicago Chris
Member

Anyone else get Cranky’s post delivered by email with an ad offering the Virgin America Visa credit card? Total irony.

Bill Hough
Guest
I agree with the comments regarding the shortcomings of VX’s network. Additionally, apart from some trendy superficialities, VX doesn?t stand out from the crowd of nickle and diming airlines. In 2009, the airline that promised a different flight experience announced that it would begin charging passengers for the first checked bag. And although a ?selection of non-alcoholic beverages is complimentary? in coach, VX charges for food just like the so-called ?legacy? carriers. Finally, Virgin America charges for pillows as well, as part of their “Red Eye Sleep Kit.” JetBlue?s baggage policy, on the other hand, continues to be that each… Read more »
Don
Guest

I think b6 doesn’t want to buy VX’s debts. If AMR gets bought out by US Airways and VX goes away b6 and everyone else will be sitting pretty. If AMR survives and merges with b6 and or Alaska and VX goes away or gets bought/merged everyone else will be sitting pretty. And i think some of these things will be happening in less than a year’s time.

Fred
Guest

I don’t think anyone wants to buy VX, and I don’t think that B6 or AS wants to merge with anyone at all – they are both quite happy with what they’ve got already, and don’t need or want to expand.

Bill Hough
Guest

Agree with both of you that VX is not much of a takeover target right now. My comment above is more in the wishful thinking category.

cahilldot
Member

but their customer service and staff ar great to the customers… united could take a lesson on this ….

cahilldot
Member

that is on Virgin in the us

Sean S.
Guest
While true that LAX is the largest, if you combine the NYC airports together, they outstrip LAX twice over in O&D traffic. Thats not inconsequential. A destination delivering twice the pax traffic is substantial enough to sustain such a large O&D operation. LAX isn’t that market. While a hub and spoke model in the regional feeder sense might not be in the cards, and I imagine they never will be, if VX had some sort of hub or focus outside of there West coast base it would be beneficial. The comparison of Alaska isn’t comparable, due to the unique geography… Read more »
Todd
Guest

Alaska also makes money…

Jason H
Guest
Alaska is comparable. Not in terms of competition within hubs; I love Seattle, but it will never be a San Fran or LA (thankfully!), but rather in terms of operational comparisons. VX could learn a lot from Alaska, especially in terms of route and capacity controls, measured growth, and operational expense discipline. VX’s growth has always seemed like it was a case of throwing darts on a map. Alaska, by contrast, has usually done a good job of selecting compatible markets even when they might, at first glance, seem odd (e.g., STL-SEA). Alaska has maintained tight capacity controls and only… Read more »
Todd
Guest

I would also add that VX could learn from Alaska’s codesharing and partnering strategy (i.e., the more, the merrier), and from its excellent freqent flier program.

Peter
Guest

They keep saying that their RASM will pop when they stop growing, but so will their CASM, and judging from their historical performance, CASM will grow as much or more than RASM. And on a related note, they’re sinking money into an IFE system that looks to be increasingly outdated as airlines look more toward wifi combined w/ passenger-provided tablets/pcs/smartphones/etc. I really see no revenue premium to their model, or upside whatsoever. Tweeting your way to profitability doesn’t work.

Don
Guest

What a disappointment. They have a great product and service with great prices. I wish I could say this was unexpected; but it’s not.

bobsmith
Guest

Cranky, are they really under the same pressures that other airlines are? Obviously their financial performance is not good, but isn’t Virgin’s situation unique because of Richard Branson? I guess I would equate Virgin with India’s Kingfisher airline- which has outstanding service but is essentially a hobby for the uber wealthy Indian owner (forgot his name). Anyway, maybe my question is incredibly naive but just was wondering.

yo
Guest

“We are losing money on every seat!” “Yeah, but we expect to make it up with volume!”

billyshearer
Member

Really interesting article.
I have never flown Virgin America before but by all accounts they seem good.
I think they have to ask the question “What are we for?”

As Ireland’s “hated” Ryanair proves: you can have the worst reputation and press, you can nickle and dime your customers to new levels, and still grow.
Because if the perception is that you are cheap and you fly where your customers want to go and can sustain price competition (ideally to become the monopoly carrier) on a given route then you will succeed.

In other words: the product can be amazing but people shop on price.

Don
Guest

The one thing that has to change is not the product or service. It is the management. I think that is the main problem. It is time to think outside the box. They are not cutting it.

AbFabSkyLife
Guest
Virgin’s problem is that they wrongly assumed they’d be able to compete in a saturated market on gimmick alone. The successful companies – Apple, JetBlue, Southwest, Starbucks – have one thing in common – they created a unique, quality product for which there is no real substitute and introduced it to a market that was screaming for it. Virgin America’s onboard product is flashy, but it’s not *that* different. And the transcon market is a bloodbath, especially for low cost carriers. ATA tried and failed. America West tried and failed. All those funny named deregulation startups tried and failed. Airlines… Read more »
Bravenav
Guest

America West has actually been very successful. Don’t be confused by their name change to that of their last buy-out US Airways. Even money they end up one of the big three along with United and Delta.

sjc user
Guest
The problem is that VX doesn’t serve the markets that are useful to a lot of flyers like me. I live in California and I can either fly VX to JFK or I could fly a legacy carrier for the same price. The advantage is that once you fly 25k with a legacy carrier, you get some perks (like free bags). You never get those with VX. So, why should I fly VX? Also, if I want to go to Montana, Savannah, Burlington VT, or some other out of the way place, VX won’t get me close.
FRANK
Guest

ONE FLIGHT ATTENDANT per Fifty SEATS. And, bother way, on Seatguru.com and USAir has 150 on their A320\’s. And, United has two version of their A320’s: 144 and 138 seats

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[…] Virgin America Posts Terrible First Quarter Loss, Has One Year to Prove Itself – >> The … – crankyflier.com Here we are in July and believe it or not, I haven't written an article focusing on Virgin America here since last year. I guess it's because the airline seeme Posted on July 7, 2012 Category: News, Travel. Bookmark the permalink. ← Travel News – July 3rd 2012 to July 5th 2012 […]

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[…] Virgin America Posts Terrible First Quarter Loss, Has One Year to Prove Itself […]

Timmy Truth
Guest

Word is that a couple VPs in marketing and planning/RM got canned for this awful performance. They need to ditch transcon to survive…its profitable 3 months of the year and a loser the rest

Gautam Ramanujan
Guest

If you want to be a millionaire start an airline but make sure you are billionaire before that.

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[…] year ago, I wrote a post about Virgin America proclaiming that “This next year is going to be crucial for the airline as growth finally, […]

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[…] year ago, I wrote a post about Virgin America proclaiming that “This next year is going to be crucial for the airline as growth finally, […]

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