Virgin America Cuts Aircraft Orders as It Posts Another Loss

For those who are in the Phoenix area today, don’t forget that we’ll be Crankyspotting at Tempe Beach Park today from 4p to 6p. Hope to see you there!

You would think that Virgin America’s news that it had posted a small operating profit for the third quarter would have been the big headline last week, but you’d be wrong. The operating profit was actually worse than last year, and it was overshadowed by a net loss, dropping cash, and a slashing of aircraft orders.

Virgin America Cuts Aircraft Orders

To be fair, cutting aircraft orders is good. The airline never should have ordered these airplanes in the first place, but it was hell-bent on growing a big network no matter how much money it lost. The question now is whether this is a change in strategy or simply a necessity as the airlines continues to fail to make any money.

Let’s Do the Numbers
The headline that Virgin America wants you to read is that it had $15.8 million operating profit in the third quarter. The third quarter is traditionally the best quarter for the airline with the bulk of the summer in there, but this was only a 4.3 percent operating margin. Last year, it actually had a 5.6 percent operating margin. More importantly, the airline again lost money overall. In fact, it had a net negative margin of 3.4 percent, more than 2 points worse than last year.

What was the difference? A bunch of interest payments. As the airline takes on more and more financing, it has to pay more interest. Last quarter, that was just shy of $30 million, nearly 50 percent more than last year.

Were there any other positive numbers in there? Sure, Virgin America was happy to see average fares rise. Only one problem there. While the average fare rose 2.5 percent, the airline saw its load factor drop from 84.2 percent last year to 79.6 percent this year. So fares went up, but they couldn’t fill their seats with those higher fares. In the end, the all-important unit revenue metric dropped by over 3 percent.

Was there any legitimate good news? Yes. Unit costs excluding fuel dropped by 2.8 percent. That’s good. But you know what else dropped? Cash in the bank. You would hope that Virgin America would have been able to add to its cash during its best quarter, but that wasn’t the case. Cash dropped from $82 million at the end of the second quarter to $75 million at the end of the third quarter.

Bye, Bye Growth
Where does that leave the airline? Well, it’s trying to figure out a path to profitability. And the new path is to stop growing by slashing aircraft orders. Remember, this is growth that it has claimed it needed for so many years.

Virgin America has 30 current generation Airbus narrowbodies on order, but it has been able to ditch 20 of them. In addition, it has deferred the thirty Airbus neo aircraft from a 2016 start to 2020. In short, it is now on the hook for only 10 new airplanes in the next 8 years.

Why the sudden shift in strategy? Well Virgin America says that markets which it has served for over 2 years had an 8 percent operating margin during the quarter and would have been profitable. That doesn’t sound overly impressive when you’re cherry-picking your best markets, but the airline is really trying to push the story that if it serves a market for a long time, it can make money. All these new markets are killing it.

So now it will stop growing (or slow down a lot) and let markets mature so money can start pouring in. In fact, it’s even cutting capacity this winter. At least that’s the plan. But there could be another reason for this … the airline can’t afford it. All of these airplanes require a lot of capital and after five years of big losses, Virgin America might be running out of options to finance these birds.

With growth all but halted, the pressure is turned up on Virgin America to start making some money immediately. This year was supposed to turn an operating profit, but now the airline is saying that will happen next year. Still no word on when it will make an actual net profit. It better be soon, because if it isn’t, then it’s going to be out of options.

[Original photo via Christopher Parypa / Shutterstock.com]


25 Responses to Virgin America Cuts Aircraft Orders as It Posts Another Loss

  1. Don says:

    If they are still taking on aircraft it doesn’t make a difference. And their workforce is maturing so that will be bigger costs as is the maintenance on their existing aircrafts. I’ll bet they don’t survive to see 2014. They’ve acquired so much debt nobody would merge acquire them now. Cush should be removed. This is the third year we heard him say on track for a full year record and now their financials are worse than last year. He’s making them look foolish. Branson should be able to maintain more than 25% stake but unfortunately the foreign ownership rules will not allow it.

  2. It’s getting harder and harder to start an airline nowadays. On balance, that’s good for the industry. Moreover, It seems the start up airlines who are most successful have just the opposite business strategy as Virgin America’s (i.e., ULCCs). I saw a recording of Ed Beauvais, the founder of America West, who gave a “gold medal” to America West Vacations, an entity that helped pioneer the idea of airlines as hotel brokers. Allegiant has done extremely well with that model. Virgin America, with its upscale emphasis, hasn’t done nearly as well. It says a lot about us as consumers. People whine about the lack of airline amenities, but don’t want to pay for them. When airlines had lots of amenities included, fares were much higher. But people conveniently forget that part of the equation.

  3. I’m still not sure why a new airline started service with O/D at two major west coast airports like SFO and LAX. Seems to me they could have done a lot better with a forcus on just one city to build up to expand later. But no, they have tried to run long haul domestic service from both which could not have been the smartest thing to do.

    The few up and down the west coast flights in/out of SFO can only help a little to keep your planes in the air making money in between that long cross country flights which operate during only certain times due the time difference.

    If you are going to have your main hub airport on a coast and centrally located on that coast, seems only natural you would be having a lot more north/south traffic then Virgin America does. That or day one should have been to east coast cities and Hawaii to keep things moving in two directions.

    • Fred says:

      The problem with flights up and down the coast is that they would be killed by competition there too. Alaska has tens of flights a day from Seattle and Portland to the bay area and LA area airports, and Southwest has even more within California (as well as there being a good number of United and a few Delta and AA flights in the west). Aside from these four areas, competition still exists for smaller cities like Spokane or Vegas, and those aren’t the markets Virgin America would want anyways.

    • As I understood it, this was a decision by Cush to to try and “seal the deal” on this big market. He thought VX would be like Jetblue and be able to sustain the competition for a bit until it reached proper size. Unfortunately, LAX/SFO is very different from JFK (at the time of b6’s growth, almost no competition, not to mention fuel cost differences).

      VX’s problem is still a lack of a bread and butter route. B6 has the dominican republic (and had LGB and others along the way). AA has Miami, UA has EWR, DL has ATL. What does VX have? A small presence in a fiercely competitive airport? @Cranky, do you know what routes (if any) VX has a frequency, revenue, or yield premium on?

      I don’t think the product was a failure, but I do think the choice of only SFO/LAX was a huge factor in the fall of the beloved airline

      Does anyone know if the 10 airplanes on order are going to replace any current ones? Or can they at least grow ASMs with them?

      • CF says:

        Noah – I don’t have time to do the research, but I do believe it is doing well on the JFK flights along with Boston. That makes sense since they’re longer haul markets with a lot of high dollar traffic. (JFK far more, of course.)

  4. EricInChi says:

    Like everyone else, I love their product and want them to succeed. My gut tells me that VX simply does not that the economy of scale in its favor (noted my many posters above) and few opportunities for growth. I suspect that they have avoided midcon markets for the same reasons B6 can not make ‘heartland’ markets work. This narrows the list of viable destinations significantly.

    Are the operating margins to Mexico above system average? Perhaps looking south of the border (including Central America & NW South America) for growth would bring some financial sustainability.

    • Todd says:

      NW South America is too far from their California hubs. Even LAX to BOG is nearly 3,500 miles, beyond the range of VX’s exisiting aircraft. Central America is also further than one would think from the west coast. It’s a much shorter flight from JFK to anywhere in Central America than from LAX or SFO.

  5. Cranky, can you compare the b6 growth to the VX? I.e. financials, # markets, avg. frequency, stage length, fuel, a/c costs, etc. for their respective growth periods?

    I think it would be really interesting to see a detailed head to head split of the airlines both with data and the intangibles/expert insight

    • CF says:

      Noah – I just don’t have time to do any of this right now. I’m sure it can be dug up by someone with time to look through the 10-Ks.

  6. Chicago Chris says:

    Given Virgin’s current state, how long can it sustain this? Five years of losses has to mean investors are getting antsy. Cutting airplane orders is one thing, but I haven’t seen any plan to become profitable, only a plan to stop some bleeding.

    • The real question is do a majority of the investors have anything at risk? I forget the exact details, but I thought besides Branson the other 75% of the investors had guarantees for Branson to make them whole..

      • CF says:

        Nick – The original investors did have guarantees, but I think they were forced to drop those down the road. Now, that doesn’t mean there isn’t some agreement behind the scenes. I have no clue what happens behind closed doors.

  7. Kyle says:

    I think the biggest reason that they made a change to their order book was the impact of PDPs. PDPs on these aircraft would pull their cash position so low that they would have to file for bankruptcy, which might still happen anyway.

  8. AV8TR says:

    As a Captain for a major airline, you have to question the thought process of starting an airline with crew bases in SFO and JFK. Immediately, 75% of your work force are now commuters and you are paying them regional jet crew wages. Of course, it’s a starting block and people will endure with the prospect of growth but that hasn’t happened regardless what management has promised. I think Virgin America has a good product but with the Branson empire under a financial strain, I would be surprised to see “Redwood (Virgin’s FAA call sign)” last 5 more years. I hope I’m wrong. I’ve flown with two brand new First Officers who were former Virgin America Captains. To hear their stories of how much they loved the flying but just couldn’t take the stressful commutes and limited pay and the lack of job security was sad. To hear that they made more as a First Officer in our company then a Captain at Virgin was eye opening. I hope Virgin stays around but the next few years will be a challenge for the company and its employees.

  9. yo says:

    LAX is the black hole, you can’t hub there, the best you can do is offer a good deal of flights that complement your other hubs or Asia flights. I see VX as another iteration of National Airlines (round 2), except National squandered so much of it’s initial funding on perks and things, and they could never survive (LAS is a terrible hub choice too). I don’t get this airline, yes, pax love the amenities, but, as we all know from a long string of higher service airlines, that doesn’t pay the bills. Passengers still book the cheapest flight. It is like they wanted a west coast version of Jet Blue, but thought that the Virgin name would carry them. Difference is, lots of short haul/high yield markets out of JFK, not so much from SFO/LAX. I can’t see them surviving, if only there was a real replacement for the 757, that could give them some range into some more underserved markets.

  10. SEAN says:

    Any chance that JBLU buys VX if they file chapter 11? After all JBLU already has a presence in VX markets & could expand without adding transcan capasity.

    • Don says:

      Doubt it. B6 would have to have a lot of money and then make it work. If VX files for Chapter 11 they will probably liquidate. B6 along with everyone else will probably fight for the slots at controled airports. I can see them buying their A320’s. And as for all the routes VX covers; they already have competition with them and everyone else. I actually see fares rising if VX goes away. But I don’t see anyone merging with the debt load VX has. BUT VX still has a small chance of survival. They may pull it off. That’s my two cents.

    • CF says:

      Don is right – why buy Virgin America? You get nothing but a bunch of airplanes that you probably don’t need. It’s easier to just buy airplanes directly if that’s what you want anyway.

  11. David says:

    As is clear from my previous posts, I am a big VX fan. I am a frequent business traveler and ardent follower of this blog so I know more than many about the airline biz, but don’t consider myself close to being an expert. So my question is this, why is LAX such a difficult airport to turn into a clearcut hub? Could it not work for VX to redouble their efforts at LAX to add frequency to business routes and turn it into a profitable hub for business travelers. I think it would be difficult to do this at SFO because of United’s stronghold, but no single airline dominates LAX. You have AA, DL, UA and WN so why can’t VX add enough frequency to overtake all of them?

    It also seems like the potential to feed into Virgin Australia and the new codeshare with Hawaiian can help with connecting leisure traffic. Thoughts?

    I love the VX product and think the new elite tiers are solid added value for biz travelers. I would hate to see Virgin go bankrupt.

    • CF says:

      David – I don’t think Virgin America wants to have a hub anywhere – it is really trying to build point to point networks to service the local markets in SF and LA. In LA, there is plenty of capacity and no need for even more in most markets. If someone else started to retreat in LA, that might open up some doors, but that isn’t happening now.

  12. chris says:

    AS seems to fly similar west coast n/s line and transcons and is doing great overall. Just a difference in company size? (AS=121 A/C VX= 52 A/C) Longevity/loyalty? Or does those 50 Q-400 70 seat regional planes for Horizon really expand the market for AS.

    • CF says:

      chris – Alaska owns the Pacific Northwest and has spent years developing it. Virgin America owns nothing and is really just adding extra capacity in markets that don’t need it. JetBlue is another good example. It got a big number of slots at JFK and became the first low cost carrier to really make a go at it. It served a key purpose in each market and Virgin America doesn’t have that.

  13. Respicio says:

    Regarding Don’s comment on the 25% foreign capital/ownership for US carriers, here in Brazil the maximum is 20%. But this has nor been a problem at all! LAN (Chile) acquired TAM (Brazil) by creating the LATAM holding through an ultra-complex financial web between the major shareholders of both sides. A similar arrangement was done back in 2006 when a Chinese-US group acquired VARIG (then 2 years later sold it to GOL for almost 10 times the acquiring value!!). Another Brazilian group (Synergy) acquired the majority of Avianca and then TACA, forming what you all know nowadays as AviancaTACA. Synergy is also the front runner for acquiring TAP, the national airline of Portugal that is being privatized. Therefore, if properly “engineered” by financial geniuses, any airline can be acquired by any foreign capital, exception to those linked to terrorist, obscure and/or criminal activities of course! All the very best from Rio de Janeiro, Brazil!
    PS: CF, cheers for your always interesting posts!

  14. Pingback: Virgin America Loses More Money, Puts All Efforts on Going Public - >> The Cranky Flier

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