What Do Virgin America’s Poor Financial Results Mean for Travelers?

Mergers/Finance, Virgin America

After a long battle against the DOT, Virgin America has now finally been required to release its financial results to the public. What’s the verdict? It’s not pretty. I’ve already tackled the high level financial side of Virgin America’s information over on BNET, but over here I wanted to discuss what these dismal numbers mean for travelers. The answer is . . . probably not much right now, but I’d keep my eyes open.

The results are staggering, and it’s certainly no surprise that they’d want to keep this info quiet. The best quarter they’ve had so far, the third quarter of 2008 (which is the most recent information we have) resulted in a -52% margin. That’s right. They lost nearly $60m on merely $114m in Virgin America Cash Burnrevenue. Even if fuel were free, they would have only broken even. At the end of the second quarter, their cash plunged to only $11m on hand. That bounced back to $25m at the end of the third quarter, but that had to be from additional money flowing in and not from operations. They really have burned through a lot of cash, though I understand they received another infusion in October so they’ve got a more comfortable cushion once again. If you’d like to get more detail on their reported numbers, I’ve created a spreadsheet with the Income Statement, Balance Sheet, Fuel Prices, and Load Factor by Route for you to download.

With these numbers, you’d think they’d be trying to do some damage control, and of course, they are. The airline is saying that everything is fine, they’re on plan, and there’s nothing to worry about. I suppose they have to say that or bookings would disappear overnight, but is that really the case? It appears to be. As I said, the airline claims that it received more cash in October and it now has a healthy cushion. It also is saying that it expects to even be profitable in the second or third quarter of this year. You’ll obviously have to decide for yourself if you believe it or not, but for now death doesn’t appear imminent.

Certainly, lower fuel prices will help slow the bleed tremendously, but it won’t put them into the black. They are adding new routes, so possibly the additional scale will help them, but that requires those routes to perform well. So far, load factors seem to be pretty decent with New York long hauls doing the best in the 80%+ range. Washington long hauls and most short hauls are weaker but have clawed up toward 80%. Oh, but if you’re in Seattle, it’s a different story. Those loads have been horrendous.

Good load factors aren’t actually good news in this case. If they’re already filling seats, that means that there isn’t much room to just add more people on the plane to reach profitability. They have to become profitable the hard way, by charging more money. Sure, they’ve probably added a little to the bottom line from Main Cabin Select (we won’t see the impact until the next quarter comes out), but this is a small impact in the scheme of things. The weakening economy sure isn’t going to help, and yesterday I received an email about another fare sale from them. So we’ll see if they can somehow find a way to be profitable, but they appear to have a long way to go.

So would I hesitate to book them right now? Probably not, but I might think about trying to book my trip a little closer to the actual departure date just to be sure. It would surprise me if Sir Richard Branson let this fail without a fight, and he’s better equipped than most to keep it going for awhile. The airline says that it’s on track, and as long as the investors don’t panic, they’ll keep on trucking. So, play with the data (download the spreadsheet) and make a decision for yourself.

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24 comments on “What Do Virgin America’s Poor Financial Results Mean for Travelers?

  1. Hmm.. I’m amazed Seattle isn’t doing well given that their core customer “hip etc” is what Seattle is known for…

    That being said with Alaska hubbed here and I’ve seen no advertising for it..

  2. Hip may drive crowds to a restaurant, night club, or bar, but not to an airline doing a relatively short haul flight. With Alaska Airlines having nearly triple the flights to LAX and SFO and matching the fares, they are out to ensure Virgin America doesn’t get a toe hold in Seattle and would eventually drop it. VA’s unique onboard service and main cabin select would do better in longer haul markets. These numbers were worse than expected, but are trending in the right direction. Given the decline in fuel, and if their RASM rises another 15% by spring, which continues their rise over several quarters, a big if now given the economy, it would get them to break-even.

  3. Hey, man, I LOOOOOVE having $49/59 fares to SFO/LAX. I would be one sad camper if VX went away. :(

  4. I subscribe to your email postings and I found hugely ironic that the Google ad at the bottom of the article was for Virgin America. Can you even plan that level of irony?

  5. Correct me if I’m wrong but wasn’t VA’s plan to connect big city hubs for primarily business travelers? Granted I’m not in a market served by VA but my corporate travel has been cut. My clients (Fortune 500 companies) have made huge cuts, including non-essential travel. I’ve noticed on recent trips through major hubs like ATL, DAL, ORD that the crowds aren’t what they were a year ago. While load factors may have been improving in 2008, I’m not optimistic for 2009. Even if fuel stays cheap things aren’t looking good anywhere, especially when strong competition with better route networks (WN, etc.) want to put you (VA) out of business. “Investors” will only take the slow (fast) bleed for so long. Call me pessimistic but I would say VA is not long for this world in a bad to worse economy. I know many on the west coast are in love with this airline but is it really anything special? TV’s and mood lighting only go so far and JetBlue, Delta and Continetal seem to have sealed up that slim benefit.

  6. I’m wondering what airline company IS long for this world in this economy. Even the bigger airlines are suffering and raising prices, charging for luggage, cutting routes–all sorts of measures that don’t make much of a dent in the crisis, but alienate customers. And yet we still have to fly… Oxygen mask anyone?

  7. Stephen – Now THAT’s good comedy. I just started the ads in emails this week via Google, but I didn’t realize they would be so excellent. The only way those won’t show up is if Virgin America specifically says it doesn’t want to advertise on my site. Otherwise, it’s probably considered a pretty relevant ad!

  8. A – Yes, they are trying to serve the business needs of Californians, or so they say. And you’re right – this is just about the worst time for someone to be struggling to reach profitability. Things are starting to look worse for all the airlines right now.

    As for the product, it is pretty nice. The TV thing is good, but you’re right, everyone else is catching up now. The service was good on the one trip I took as well, but I don’t think that’s enough of a differentiator right now.

  9. Just because the load factor from SEA is weak doesn’t mean the yield is, and again, just because they are filling planes from JFK doesn’t mean they are making money. The industry needs to stop looking at load factors and start worrying about yields. It would be interesting to see what the yields (or lack of) are for each market pair, along with the LF.

  10. inourgrave – I don’t see where I or anyone else is saying that high load factor means the route is doing well. I think it’s fairly clear that nothing is doing well for them in this set of results, but I do agree with you. If you have one guy on the plane but he’s paying $100,000, I’ll take it and fly the rest of those seats empty. Still, I think it’s safe to assume that Seattle is not performing well.

  11. Ah, the load factor number. When I worked at United a while ago (less than a decade,) we had a contest, the most oxymoronic flight (highest load factor, but no profit,) and the worst load factor that still made a profit. BWI-ORD had a breakeven load factor of 146%. Even if we loaded people in the cargo hold and overheads, the flight still would have lost money on DC-10’s. OK, that dates me. That was to compete with WN from BWI-MDW. Our lowest profitable LF was IND-IAD leaving at 5:20AM, only business travelers would be nuts enough to take that, and it had a 14% load factor. If you only have B or Y class on a flight, it should work. Load factor has nothing to do with profits. Yield and total revenue do. My dad is a retired US 330 Captain and he used to always tell me their greats loads across the pond and how they must be doing well, and I told him about the oxymoron contest. Total revenue, and bottom line, profit, matter far more than load factor. Given that Alaska has nearly three time the flights as does VA, they are probably getting killed on SEA flights as high yield business passengers are sticking with AS.

  12. Randy, I’m an industry outsider but about a year ago CNBC did a special about the airline industry showing the ins and outs of American. They looked at the revenue for a whole week on a transcon flight from JFK to LAX and back as I recall. The interesting thing was that when they did make a proft on a flight it wasn’t much, and could easily be lost on the next flight. Also, that revenue included things as minor as food/beverage sales inflight or the air cargo below. Any airline has a huge uphill battle to make a buck.

  13. I think they’re a strong contender for award for worst business plan ever. The idea that a new airline in a saturated domestic market, where travel has become a commodity, would do well simply because they had nice service (which they do) was laughable from the start. They never were in the game to stimulate traffic, just shift traffic because they’re the ipod of airlines and have moodlighting. They’ll end up on the trash heap with Eos, Maxjet, Silverjet, etc, and any other carrier trying to get the high yield customer without the network and schedule that the high yield customer requires. Skybus had a much better business plan until they decided to fly Timbuktu to East Upchuck twice daily–and they probably lost less money before calling it quits.

  14. Cranky, what’s the idea behind forcing airlines to reveal their pax numbers? Isn’t that pre-deregulation and a business secret?

  15. Ari – To be honest, I don’t know, but it could be something along the lines of it being in the public interest to know that an airline is financially stable. I don’t know for sure. But if Virgin America wants to challenge the whole validity if the system, they’d have to file a separate proposed rulemaking.

  16. cometome – I couldn’t disagree with you more here. If you have proof that Virgin America is operating an unsafe airline, please post it here. If not, that’s a very irresponsible statement.

  17. It amazes me that Americans are so short sighted that they don’t equate cheap fares with failure of a company (job losses, unreliability, etc.). The industry cannot continue to run this way and cheap fares are a short term thing which is bad for the country in the long run.

    This has to stop or we’re just going to continue to see airlines fail and people lose more jobs.

  18. Randy’s right on the money. Load factor is a poor indicator of profitability. Now there’s a number out there “Average Breakeven Load Factor” that applies to the entire system, but the yield picture is much different from route to route. Another indicator of load factor as a poor indicator is industry darling Southwest. SWA traditionally has an average load factor very low compared with others in the industry (often hovering in the low 70s) yet it’s perenially profitable. (if you don’t count the paper losses on fuel hedging in the last two quarters, which the media pounced on while ignoring the operating profit).

  19. For what it’s worth, I think they forecast this type of loss in their business plans and financial modeling. No matter what type of company you start, a start-up is going to lose money the first few years, unless you have zero overhead and run it out of your garage.

    Anyone have a big enough garage to store 20-some-odd A320’s?

    I think the short of it is they were expecting to show a loss all the way through to 2010, the investors knew this before they invested. I don’t think any of them are going to panic until then. the second cap call they did probably wasn’t unexpected due to fuel prices last year, it ate up a huge chunk of my personal budget, i can’t imagine what it did to theirs.

    They’re not looking to put legacies out of business, just simply give passengers an alternative.

    Bottom line is, nobody can say for sure, but I do know they’re taking delivery of more plans, adding more routes, and they’re still hiring. Only time will tell, and I hope they do make it… i love their service and their product, and they’re the only ones I’ll fly to any of the cities they service if I need to go to those particular cities.

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