Virgin America Posts Operating Profit, Still Hurdles Ahead

Dec 14, 2009

More Reading on This Topic: Virgin America

First Alitalia had to go and post a profit and now Virgin America has done it. What is this world coming to?!? Ok, so they didn’t actually post a profit. They still lost money, but they did squeak out an operating profit. Though this is certainly encouraging news for Virgin America, this is just one quarter and there are a lot of things to be concerned about. Still, they’ve done better here than I ever expected.

I’ve obviously been a harsh skeptic of the viability of Virgin America since the beginning. While I’m sure there are many expecting me to eat crow, I’m not quite at that point. Sure, maybe I’ve picked up the fork and knife, but there’s a lot more we need to see before proclaiming this to be a true victory for the airline.

Virgin America says it posted an operating profit of $5.1 million in the third quarter of 2009. That comes out to be a 3.2% operating margin. Good for them. But let’s think about a few things here.

Remember, this is the third quarter and it’s the easiest quarter to make money. A single almost-profitable quarter in the summer, while good news, is not an indication that all is rosy now. If they can pull out a profit in the fourth quarter, then that’s a different story.

The information here is somewhat opaque and will remain so until they go public. The nice thing about being private is that you get to remain relatively quiet about your financials. The airlines in the US still have to submit their data to the government for dissemination, but it’s hard to really understand what’s going on there. For example, I remember a few quarters ago when Spirit posted a profit in the government data. It turned out they sold a bunch of hedges and made money that way. So it can be misleading.

While they’re touting their operating income, they bury the piece at the bottom showing that they still lost $6 million on the quarter. That’s obviously still a big improvement. How did they do it? Unit costs excluding fuel were down nearly 25%. How did they do that? Is it a permanent reduction or was there something in there that skewed it?

According to spokesperson Abby Lunardini, “The reduction in unit costs was primarily driven by our growth (and the efficiencies of scale that come with that) and cost control.” Very good. But there are clearly some secondary reasons that kept costs low as well, and we don’t know what those are.

Also, while they may have posted an operating profit, they still lost cash. At the end of the second quarter, cash was at $28 million. At the end of the third quarter, it was down to $23.2 million. Will that be enough to last the winter?

The data hasn’t been filed with the government yet, so I can’t dig into that. I only have the press release to go by. Yes, this was a good quarter comparatively, but there is still a lot to worry about.

Brett

14 responses to “Virgin America Posts Operating Profit, Still Hurdles Ahead”

David SFeastbay

Dec 14, 2009 at 8:06 am

Anything an airline can put in the news that is positive sounding can only help. It gives people the impression they are doing good so people shouldn’t be afraid to purchase a ticket on them for far off travel dates.

Airlines have aways been good at making things sound better then they really are.

But since Virgin America is headquartered here in the bay area I have to say ‘good for them’.

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eponymous coward

Dec 14, 2009 at 8:27 am

Well, VX said they anticipated doing this for a quarter in 09, so they seem to be on target so far. I do agree that the proof of the pudding will be seeing them make an OVERALL profit and not having to burn cash.

I am interested that they plan on adding 20 or so planes to the fleet- obviously that means more investment capital…

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A

Dec 14, 2009 at 8:42 am

Nothing like “spin” accounting to make things look good. I’m still skeptical because I just can’t see an airline ever being profitable on basically one trans-con route structure, i.e. LAX/SFO to BOS/JFK. Most people need to service to more places than the major costal cities.

Hell, I’d love to fly Virgin America (more competition the better) but since I’m living in “flyover” land I’m not worthy of their business I gues.

What I don’t get is that there is a ton of business that happens in the land of flyover hubs, none of which is currently served by Virgin America. Airports like ATL, ORD, DFW, IAH, DTW, MSP, DEN all have mountains of passenger traffic and many of them looking for an alternative to the standard DL, AA or UA options. I’ve heard they are looking at Chicago, but what else? Jet Blue never took this long to expand.

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Nadyne Richmond

Dec 14, 2009 at 10:09 am

I’m usually a UA flier, but I’ve switched to VX for SFO to SEA (a flight which I take about once per month). VX has been on-time on that route, it goes without saying that the planes are in much better condition, and their staff doesn’t seem to think that I’m inconveniencing them by being on their airplane. I still fly enough elsewhere that moving that flight to VX hasn’t impacted my status with UA, and I get a great experience on the single route that I fly the most. I’d entirely switch to VX if it were possible.

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David SFeastbay

Dec 14, 2009 at 10:46 am

eponymous coward wrote:

I am interested that they plan on adding 20 or so planes to the fleet- obviously that means more investment capital…

There was a story in the paper last week that they were getting new investors but they were not saying who it was yet.

To me, if you can’t give the whole story, then don’t give half a story.

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CF

Dec 14, 2009 at 10:52 am

A wrote:

I’ve heard they are looking at Chicago, but what else?

I remember them talking about Austin, but that’s about it. The flyover states aren’t cool enough, I guess.

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A

Dec 14, 2009 at 11:36 am

Nadyne Richmond wrote:

I’d entirely switch to VX if it were possible.

Exactly why I think their business model is doomed to failure. Their route network works for maybe one or two destinations, but not for the frequent business traveler that needs to be in many different places.

They’ve proven that people like the on board product. Now just expand that route network to pick up major economic centers across the entire country and we’d have a serious business travelers airline to talk about. Just add flights to perhaps the top 25 largest metro areas in the US and you’d probably cover the vast majority of all corporate flying.

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The Boarding Pass

Dec 14, 2009 at 12:46 pm

Compare to AA etc…..

Any airline managing to make an operating profit deserves congrats.

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Dan Webb

Dec 14, 2009 at 1:23 pm

@ David SFeastbay:
I had heard about new investors…but when I interviewed Cush a couple of weeks ago he said 6-8 new aircraft, nothing as much as 20. That may have changed, of course.

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PF

Dec 14, 2009 at 8:32 pm

How many aircraft do they have now, and are they operating all of them? ? Are they all A-320?
Thanks

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eponymous coward

Dec 14, 2009 at 10:51 pm

Airports like ATL, ORD, DFW, IAH, DTW, MSP, DEN all have mountains of passenger traffic and many of them looking for an alternative to the standard DL, AA or UA options.

Word has it VX will expand to DFW as well as ORD (I’ve also heard AUS, but with B6 and AS there, I am a bit skeptical that THREE LCCs serving AUS from the Bay Area is going to work very well).

Jet Blue never took this long to expand.

B6 didn’t have periods of $100/bbl crude and the worst economy in 70 years to deal with, did they?

Now just expand that route network to pick up major economic centers across the entire country and we’d have a serious business travelers airline to talk about.

Uhhhhh- that would be why they are adding more planes and destinations, no?

Also, any airline that depends on business travel is going to be bankrupt. Anyone recall Silverjet? Eos?

To be honest, I don’t see VX as a business-based airline. I think their niche is wired 20/30-somethings on the coasts and in select urban markets. In that sense, yes, you WILL eventually see them in ORD, DFW and other midcon places… but it’s going to be choosy. As I said, I don’t think their model is fully validated yet (they still do not have positive cash flow yet), but they are pretty close, and they’ve done a good job of capturing mindshare and customer loyalty (every friend I’ve had fly them said they’d fly them again and enjoyed the experience).

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Jay

Dec 15, 2009 at 9:31 am

I agree with Cranky. Just because Branson is associated with VA and it carries the name Virgin that doesn’t make this airline unstoppable. NOW LET ME MAKE THIS CLEAR, I AM A VA FAN! I think they offer a great product. But look at Neeleman’s other airline in South America; Azul. It is expanding faster than VA and it is a start-up too.

They can’t expand more out of JFK and ORD. The slots are expensive and at their peeks at those hubs. Anywhere in Florida should be there best bet. But the continue to have a bigger focus on the West coast rather the big markets in the East. VA has to expand fast, while managing growth. But I really don’t see VA making money in the long run. They have a great product, and record loads, and investors, they should have pulled a profit already. This narrow loss they are talking about is not looking at all the nubers as Cranky points out. If they were doing that great; they’d release that data too. As a flyer I’ll continue to fly VA. If I were an investor; I’d cut my losses.

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Trent880

Dec 18, 2009 at 10:29 am

eponymous coward wrote:

B6 didn’t have periods of $100/bbl crude and the worst economy in 70 years to deal with, did they?

B6 continued to make money and to grow like a weed after 9/11. VX’s startup has been one of the less successful startups in recent memory. That somehow hasn’t stopped investors from shoveling money into it though.
eponymous coward wrote:

Also, any airline that depends on business travel is going to be bankrupt. Anyone recall Silverjet? Eos?

This is the trajectory I see VX on actually. They are point-to-point, which is tough to begin with, and they need the premium passenger to pay for those transcons–which the legacy carriers are going to fight tooth and nail to keep.

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DKViking

Mar 5, 2011 at 11:18 am

Has anyone looked at what they pay their people?? It’s embarrassing and in most cases below poverty levels!! So it is no great surprise that they are cheap. Should they ever get some middle management that is even close to competent they might do well…….we’ll see.

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