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

Virgin America

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

  1. Is this to suggest herbal ancillary revenue opportunities on Seattle-Denver flights? The movie got crap reviews, but at least grossed more than it’s budget.

  2. I think this airline will survive. Year after year they post a loss. Time and again they get a cash infusion. If it was any non-Branson airline it would’ve been dead already. But he’s not going away and neither is Virgin America. He’s gotta have some back door deal with investors…..especially in this economic time.

    1. I don’t think that this airline will survive. Branson is precluded from infusing any more equity due to foreign ownership limits. In fact, that’s probably why they have debt with the conversion provision upon IPO, so that they can present a reasonable capital structure and live within the ownership limitations…. except that an IPO requires willing investors. This is a company that hasn’t found a profitable niche. They compete with the big 3 legacy carriers plus Alaska on virtually all their routes, but they don’t have a compelling program for frequent travelers who are more apt to pay last minute fares. Therefore their yield doesn’t match that of the majors. And their cost advantage is eroding. They are burning cash. I don’t think VX will make it.

    2. Honestly, I tend to agree with Don. Branson continues to find a way to get other people to put money in. You would think at some point it would stop, but I thought that 3, 4, 5 years ago. It still hasn’t happened. Anyone who can keep this thing going losing hundreds of millions of dollars for 6 years might be able to keep it going forever.

  3. I think the problem for Virgin America is that it was founded on the belief that there was agap in tthe market between the legacies and the LCCs by offering superior product at a decent price. Thanks to bankruptcies and consolidation, virgin will have a tough time beating the legacies on price and frequency. The legacies are catching up on in flight product as well.

    1. Ryan – I continue to think the only way JetBlue has any interest in Virgin America is if it’s cheap enough that JetBlue can justify paying the price to just shut it down. I can’t imagine it’s that cheap.

  4. The graphic you used is absolutely inappropriate for this story. If I were someone in the airline industry that you contacted for a blog post, I’d decline in a second once I saw this.

  5. Anyone notice that VX didn’t file any Q4 form 41 data? The numbers were released for all airlines today and all of VX’s lines are blank.
    How the heck did the DOT sign off on an extension of the form 41 data? I suppose we’ll find a bunch of accounting hijinx in those numbers once they’re released.

    And how did the DOT ever sign off on ‘conditional equity’ that exceeds 25%? I hope other airlines appeal this junk and that it’s ruled against VX.

    Debt to equity conversion and lowering interest payments – they’re calling it a restructuring. I call it an informal bankruptcy.

    1. iflyjetzzz – I think the conditional equity is from US-based lenders (I assume), otherwise you’re right, that shouldn’t be allowed. If the data isn’t filed yet, I’m sure it will be. Could just be a delay in loading it.

      1. 1) The ‘conditional equity’ has been acknowledged to be from Virgin Group. I can’t remember the source but it was Virgin Group debt that was restructured into equity.

        2) As for the form 41 data, this isn’t a ‘delay in loading it’ issue. The due date for filing form 41s is far enough in advance of public release that the DOT has plenty of time to load the data. The deadline for filing fourth quarter form 41 data is March 31.

        1. iflyjetzzz – I hadn’t seen it was Virgin Group debt, but if so, then you would think the other airlines wouldn’t challenge this pretty quickly. I assume Virgin’s argument is that it isn’t equity yet, and it won’t be until they go public when it will be sold to American investors. But I don’t know how well that argument would go over with DOT.

          1. I stand corrected. It wasn’t entirely Virgin Group debt; only ‘a majority’ of it. Paragraph 4 of CNBC article:
            Cush told AP the carrier is reducing costs by suspending aircraft deliveries until 2015 and by a recent deal to eliminate $290 million in debt, a majority of it owed to Virgin Group. The debt was converted to “conditional equity,” he said
            Link to article:

            This ‘restructuring’ package comes to $135 million this year – $75 million cash plus $20 million/quarter for Q2,3, and 4. This is on top of $175 million that they got in Dec 2011. So the cash burn at VX is nothing short of breathtaking.

            The only US investor with any ‘deepish’ pockets is Cyrus Aviation Investor, LLC. It is a subcorporation of Cyrus Capital. Total assets under management for Cyrus Capital is only $2.2 Billion so I doubt that they have kicked in more money. Perhaps VAI MBO Investors took the hit – they’re 5 investors … Don Carty, Sam Skinner, Cyrus Freidheim, David Cush, and Robert Nickell

  6. Sort of unrelated, but do you think that Virgin America could or would file for Chapter 11 bankruptcy to buy themselves more time? Their financial situation is very different from the legacies and they aren’t ‘too big to fail’, but I can see them trying this, especially if it can help erase any debt.

    1. Fred – I can’t imagine that happening. If they filed for Chapter 11, I don’t see how anyone would give them DIP financing. Their best hope at survival is to keep the people giving the money today happy. Filing for bankruptcy would burn that bridge.

  7. Could some of their problems be from trying to have a major schedule from both SFO and LAX from day one? Seems most new airlines start at one location and build off that city, but Virgin America jumped in from both cities heading east right from the beginning.

    Should they just have tried to be the Hollywood airline heading east or started in SFO for some north/south connecting traffic and long hauls to the east.

    Didn’t putting money to try and build up LAX and SFO at the same time take a toll on the wallet?

    1. David – I don’t think that’s the case. I think the problem is they went into two cities that didn’t need service. If there was great opportunity in both places, they could have made it work at the same time.

      1. Cranky,

        Curious – what if VX flew from San Jose vs L. A. or San Fran as SJ is the tech hub. Flying from there creates a new area for demand as aposed to competing with UA further north & the mess that is LAX.

        1. Sean – There are a few issues with San Jose. First is that the airport has spent a lot of money and it’s fairly expensive to operate at. Of course, SFO isn’t cheap, but there is a lot more demand for that airport since people can use it both from the City and from down on the Peninsula as well. (It’s not much further to go from Palo Alto to SFO vs San Jose.)

          So with lower demand and high-ish costs, it’s not ideal. You are right that there is less competition, but that really only applies to long haul flights. On short haul, Southwest has a long-entrenched position. I just can’t imagine San Jose really working out. If there was huge opportunity, you would think others would have tried it already.

  8. Cranky,

    Do you think it is a matter of just poor timing for Virgin and its business model? Meaning, Midwest Express did pretty well for a number of years , but the reality of the airline industry (consolidation, fuel prices, etc) made its business model unsustainable and then the Airtran bid, Republic acquisition, etc.. In your opinion, is that what is going on with Virgin- that premium, higher end airline service model can no longer pencil out financially?

    1. Bobsmith – I think the model can work as long as there’s a solid network underneath that plan. Just look at JetBlue. They are making a more premium product work, but the product is a piece of it. The big picture is that they first secured a chunk of slots at JFK that made them the first real low cost carrier in the area. Then they started edging in on Boston and now provide the most utility there as other airlines pulled back. Of course, there’s all that Latin/Caribbean stuff as well.

      Virgin America has none of that. It’s in markets with a lot of capacity, much of it from low cost carriers. It doesn’t have that strong market position that it needs.

      So I think product can be important, but you need that solid network base first.

      1. Yes, JetBlue was able to secure a lot of slots at JFK and has essentially established a hub in BOS when none other existed there…both lucrative business travel markets, not that LAX and SFO aren’t, it is just that the competition was already entrenched there…

        JetBlue is everything that VA isn’t, yet could have been: hip, fun, appealing to younger flyers who want a certain experience and to high-end business travel. I think VA is also very encumbered to the West, there is no point to point East Coast service so it has been difficult to establish the brand east of the Mississippi. If you live on the East Coast and aren’t flying West, they aren’t even on your radar.

        1. Honestly, if you live more than ~2 hours from the ocean, give or take, it’s very difficult to fly Virgin America or JetBlue, simply because they have no (or almost no) destinations other than the East and West Coasts.

          I’d love to see JetBlue try some flights at some mid-sized cities in the Midwest, like CVG, IND, or St Louis.

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