Virgin America Loses More Money, Puts All Efforts on Going Public

After 6 years of big losses, it looks like the time is finally coming for Virgin America to start making money or just go away. The airline decided to announce both fourth quarter 2012 and first quarter 2013 results yesterday, and there were some bright spots. But many of the moves that were announced from a financial perspective make it look like the investors and debt-holders alike are getting antsy and want to make a return soon. The message is loud and clear – the company needs to go public in the next couple of years. CEO David Cush has a very tall task ahead.

Virgin America Go Public or Die Trying

It looks like Virgin America has started to release results before the DOT does it, so that’s why we have both fourth quarter and first quarter results arriving at once. This appears to be part of the airline’s efforts to work toward a public offering by releasing numbers on a more traditional schedule. (This shouldn’t actually matter.)

Let’s start with the bad news. No surprise here; the airline lost money. It lost just shy of $25 million in the fourth quarter ($145 million for the year) along with another $46 million loss in the first quarter of this year. That’s terrible, but the first quarter numbers were less terrible than last year’s first quarter.

And that’s the good news. Virgin America looks like it shifted to a yield-based strategy and that meant the airline did much better on the revenue side. What do I mean by a yield-based strategy? Well, airlines tend to waffle back and forth between two revenue strategies. The yield-based strategy means you charge more for each ticket and you deal with filling fewer seats. The load factor-based strategy is to moderate your fares to fill as many seats as possible. In this case, Virgin America has clearly gone for the former.

The average fare in the first quarter was up a whopping 19 percent versus the year before. Some of that can be explained by the fact that the airline actually cut capacity in the quarter. For an airline that has been in hyper-growth mode, that’s a big change. And the results are very clear. But even on less capacity, Virgin filled fewer seats as a percentage of total. Load factor dropped from 80.6 percent last year to 77.3 percent this year.

In this case, it all turned out very well. Unit revenues were up over 17 percent (though part of that increase was due to a shorter average flight length). And that largely accounted for the decrease in the loss. But there’s a problem. Even with such massive increases in fare, they still lost a ton of money. Net margin was a negative fifteen percent. Oh, and one other problem? Unit costs excluding fuel jumped nearly 8 percent. This is an airline that cut capacity but it increased the number of employees. And the workforce is starting to become more senior. That means they get paid better. By the way, its airplanes are starting to age as well. Maintenance costs were up more than 12 percent in the quarter.

The Push to Go Public
As we head toward the airline’s 7th year of existence, losses continue. What’s the plan to end this? Well, if the airline continues to keep the lid on capacity and the demand for tickets remains stable, then Virgin America might be able to squeak out a meager profit during the good times. In fact, Cush says that 2013 will have a “significant” operating profit in 2013 (whatever that means) and a net profit for the second half of the year. We’ve heard this before, so I’ll believe it when I see it. But I wouldn’t be surprised to see an operating profit this year if demand stays steady. That’s good. But, then what?

The plan here is very clear. Cush wants (or is being pressured) to take this airline public with an initial public offering either at the end of next year or the beginning of 2015.

In the press release, Virgin America notes that it made the following financing changes.

  • $290 million in debt (nearly a third of total debt) will be wiped off the books. Instead, it will be converted “into equity that [the debt-holders] would own once the company went public and the stock hit certain targets.”
  • The interest rate on the remaining debt will drop. This combined with the conversion of some debt means the company’s interest expense in the second half of 2013 will be merely a third of what it was in the second half of 2012.
  • The airline took out yet another loan, this one for $75 million.

Why on Earth would the debtors give up so much… and then loan more money? The only reason I can think of is that they were afraid they were going to get nothing if the airline failed. And they would have had to be fairly certain about failure for them to be willing to do something like this. But that first bullet point is key. The investors have been stuck in Virgin America for a long time now and they want a payday. All efforts are going to be on going public because even more is riding on that happening now.

I just have a hard time understanding how they could actually go public with the results they’re posting. The worst performing airline out there may improve to near-profitability this year, but it will hardly have the track record or even favorable industry comparisons to really entice someone into investing. I mean, would you buy stock?

Things will most definitely look better with this restructured debt, and Virgin America will live to see another day. But from the way Cush is talking, it sounds to me like the airline has maybe a couple years to go public or… die trying. I’m not sure that’s enough time. Good luck.

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