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.
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]
