Virgin America Heading to the Deadpool Next?

Published by AirlineFanatic | Filed under airline business

Last week was not exactly good news for the commercial airline industry, with three well known carriers heading into abrupt bankruptcy and ceasing operations. Three bankruptcies does a trend make, so I started wondering if/who would be next heading to airline heaven (or hell depending on your experience).

Unfortunately for Richard Branson, my thinking lead me straight to chic new startup Virgin America. If this were the beginning of the American version of Virgin Atlantic, in which Sir Richard has controlling interest, I would be pretty certain he would not be so quick to give up on a new airline. He went through some tough times getting Virgin Atlantic to where it is today, and probably wouldn’t be afraid to burn some cash doing the same for Virgin America.

The problem in this situation however is that Virgin America is controlled by American companies and uses mostly American funds. With the high publicity and rapid succession of last week’s bankruptcies, I wouldn’t be surprised if some of those investors were now considering getting their money out while VA still has value.

Of course their decision hinges on whether or not VA’s situation is as bad as the airlines that have gone before them. Since VA is a private company, we really have no knowledge of its exact financials, but do know that in the first quarter of operation they lost $35 million, and even management doesn’t expect to make a profit any time soon. Investors had to have been prepared for all this when the signed up for the deal, but given how high fuel prices have gotten, how low VA’s load factor is on most routes, and recent current events, they could be forgiven for having cold feet.

Overall I think Virgin America has a great product that takes a long term approach to winning customers and, given the time, will prove profitable.  The only question is whether squeamish US investors will give it the opportunity to prove it’s business plan over the long run, or if short term market conditions and recent trends will take down VA prematurely.

Read on for a closer examination of Virgin America’s current status…

Load Factors

Again, since VA is a private company for the time being, we don’t have a lot of data from which to draw conclusions.  We do know numbers through the end of last year though (you can see them here).  Not very pretty, especially on those long haul Washington Dulles routes.  When your competitor JetBlue posts load factors over 80% in March, and flies a number of the same rates you do, it’s not a good sign.  Oh don’t forget JetBlue is going to be entering the hyper-competitive JFK-LAX market in May, what has been Virgin’s strongest route so far.

Yield

The best way to get people on your airline when you are new? Really really low fares.  Thats what VA has been giving people since they started up operations last August.  Not a week has gone by when some discount or promotion isn’t out there for the taking.  That may be all well and good, except for the fact that those dollars you aren’t collecting don’t help your bottom line.  The combination of low yields, high fuel costs and low load factors is not a great recipe for profitability.  One of the pluses in this situation is Virgin’s first class revenue.  They offer what is probably the best first class product in the domestic market save for United’s P.S.  First class ticket revenue can make up for low yield in coach, but not for planes that are flying half empty!  First class seats also don’t attract as much demand on short leg trips as they do on longer ones where more leg room comes at a premium.

Competition

One of the down sides of flying to primary airports in major cities is that you are always guaranteed plenty of competition.  Even since VA started flying last year that competition has gotten tougher, with Southwest and JetBlue entering SFO.  As I mentioned earlier JetBlue is also entering the JFK-LAX market from their home base.  They will also take on some other routes in direct competition with Virgin America to Seattle and San Diego.  There is never a good time to start an airline, but the competition seems to be dying to make VA’s life miserable every chance they get.

Amenities

In flight service and cabin features is where Virgin America shines.  They definitely have a superior product even over long time customer favorite JetBlue.  One problem with having the latest and greatest in technology?  It costs a whole heck of a lot.  There is no question people love flying on Virgin, and in the long run I think it is definitely the right strategy when you are competing against a Southwest.  The one problem with that strategy is that Southwest and the rest could put you out of business in the short run before that investment pays off.

Here’s hoping Virgin sticks around a while longer to give some other airlines a wake up call.  That and I already have tickets booked on them in July; I hope there is an airline still there for me to take when that date arrives.

Technorati Tags: bankruptcy, virgin america

Related Posts

• On Notice: Virgin RED
• Virgin America Flight Review
• Virgin America Review Upcoming
• Virgin American Promotion: 30% Of All Flights
• Virgin America Announces Seattle Service