Virgin America Actually Posts a Real Profit

Virgin America just released second quarter earnings, and guess what? The airline actually HAD earnings. Virgin America made a net profit of $8.8 million. That’s not much (only a 2.5 percent margin), but it’s certainly progress. This is tale of how successful capacity constraint can be.

Virgin America Profits

A 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, 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.”

So has Virgin America done that job? Sort of, but it would be very hard to say that growth was the only issue. There was also a crushing debt load and high fuel prices. With those having changed, things look a lot brighter

Virgin America has been in operation for 24 quarters now, and the most recent was only the airline’s second profitable one. The first was the third quarter in 2010. A second quarter profit is more impressive because it’s a weaker quarter, though the profit does lag the industry.

The airline’s net margin was 2.4 percent which doesn’t sound like a lot. But really for Virgin America, any net profit is a big deal. How did it happen?

The numbers tell the tale. The most important statistic here is that capacity only increased by 0.5 percent year-over-year with no change in the number of airplanes. Since its start, Virgin America has rushed to add capacity quickly and that those dizzying increases meant that it was tough to really produce any good unit revenue growth. With almost no capacity growth this quarter, we can really get a sense of how things improved.

Revenues were up 8.3 percent. That came about by operating 5 percent more flights and then putting more people on each flight. The airline filled 83.7 percent of capacity vs 79.7 percent last year. It’s not that Virgin America was charging a lot more. The average fare dropped, but that’s not a surprise because the airline operated more short haul flights.

What happened to costs? Well, there were more flights using more fuel but total fuel costs still dropped by 6 percent. That’s thanks to an 8 percent decrease in the fuel price per gallon, and that’s a big deal.

Excluding fuel, costs climbed a little, and that was largely because of increasing salaries, landing fees, and a few other areas. Virgin America got some help from a 20 percent decrease in maintenance costs. I have to wonder if that’s a temporary benefit.

It’s also important to note that Virgin America’s trip through its version of the bankruptcy spa (a restructuring that wiped out hundreds of millions of dollars of debt, not actual bankruptcy) started to pay dividends. “Other expense” includes interest expense, and that dropped 31 percent, over $8 million. This includes, I would assume, at least some costs from a new $75 million round of debt that was raised during the restructuring. Had this all been completed sooner, costs would have dropped another $10 million.

In the end, this all added up to a profit. And we should see another in the third quarter. Of course, a rising tide lifts all boats, and times are generally pretty good right now (despite the fact that Southwest seemed to believe otherwise on its earnings call). But does this mean Virgin America has turned the corner?

It’s hard to say that, especially since it is underperforming the industry when it should outperform with a leaner, younger cost structure. But a profitable Virgin America, no matter how profitable it is, is great for travelers. It means that the other airlines probably have to take the threat even more seriously.

Just look at the product investments that other airlines are making on some of Virgin America’s bread and butter routes. Everyone is putting flat beds in business class on the JFK-LA/SF flights. And now Delta is starting a shuttle service from LA to SF. I can’t say these are directly because of Virgin America’s influence, but it certainly couldn’t hurt.

Meanwhile, Virgin America does keep moving its routes around, looking for the right mix. Some routes and frequencies have been cut over the years while others have been launched (like LA-Vegas and LA-San Jose most recently). And we’ll probably see more of that until 2015 when the growth spurt begins again and revenues again feel pressure.

For now, however, Virgin America is making progress and things are looking better. It’s amazing what wiping off a bunch of debt, watching fuel prices drop, and then not growing the fleet can do for your results. These aren’t great results, but they’re certainly way better than what we’ve see in the past. It bodes well for Virgin America sticking around for awhile… at least until the next downturn.

[Original photo via Virgin America]


25 Responses to Virgin America Actually Posts a Real Profit

  1. Xnuiem says:

    Even a broken watch….

    Seriously, this is good news, but it really looks like it is more of a perfect storm of happy circumstances than any real progress. The debt was reduced, by an amount that equals about 90% of the profit. Fuel went down, capacity was flat, load factors went up, and there is the dubious maintenance cost savings. This is progress, but not much.

  2. A says:

    Progress in a market of extreme competition, not bad IMO. Then again, after yesterday’s JetBlue cabin update news it’s looking like nobody is resting easy on these “bread and butter” routes. I’d still like to see more expansion…especially into Delta fortress hubs like ATL, DTW and MSP. There has got to be profit in undercutting Delta in those places.

    • SEAN says:

      I know what you’re referring to, but Delta has the size & mustle to flood a route with aditional flights to crush new entrents. See JetBlue in ATL a few years ago.

      • Jason says:

        There are some Delta fortresses that they don’t appear to care to defend much anymore like CVG. They haven’t exactly used their might in response to Frontier adding that DEN flight that basically opens up the west. I don’t think DL has plans to maintain their CVG service levels when those concourse B leases expire.

  3. Making a profit of any amount is always better then being in the hole. Now they need to continue to look at ways to improve more and keep the profits coming and not get all smarty pants about it and blow the money needlessly.

    • SEAN says:

      Now they need to continue to look at ways to improve more and keep the profits coming and not get all smarty pants about it and blow the money needlessly.

      But David, isn’t that the point of todays corporate America? I meen make money & either sit on the money or as you put it – blow it needlessly.

  4. Timbo says:

    How about Virgin to the East Coast from Dallas? We love that Virgin has packed flights to LA and SF, but we need some more competition to DC and NY from DFW. Many of us in Dallas have NO allegiance to AA–our only choice to DC or NY–and I just know Virgin would do well in those markets.

    • Sanjeev M says:

      Yes, decent medium haul markets that VX could make happen. Granted, they missed the boat on expanding DFW a while back and Spirit took advantage.

      Also remember Wright Amendment goes away Oct 2014, so look for WN, UA, and AA to do longer haul stuff out of DAL.

      • Jim says:

        It makes no sense to expand at DFW or other spokes right now. What they need to do is build up enough of a critical mass at their two hubs that they become a viable option for business travelers. Then they will start to see loyal customers choose to stick with them.

    • Russ says:

      Don’t forget Delta has daily service from DFW to LGA. AA isn’t the only choice to NYC.

  5. What a change in the airline industry over the last 10 years. Heck, it might almost make sense to actually invest in airlines instead of simply trading in their shares.

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  15. Hrm, all I have to say when did h*ll freeze over? WN isn’t doing as well as they always have, and VX makes a profit? Geez, next thing you know American airlines will be well run for the first time in a decade.

  16. Trent880 says:

    Virgin found the secret to LCC success: just stop growing! #thereifixedit

  17. Patrick says:

    I flew VX twice last week after several year’s hiatus. Those planes used to be so shiny, sexy, and new. Not anymore. It was clear than nothing had been spruced up in a long time, and the interiors were shabby. Of course, that’s superficial and the flights were great, but I couldn’t help but think about CF’s dire words about VX.

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