ANALYSIS: Will Virgin America's business traveller focus pay off?

Washington DC
This story is sourced from Pro
See more Pro news »

Virgin America transformed in recent years from a leisure-focused carrier to an airline catering largely to business travellers, a strategy chief executive David Cush says pits the six-year-old carrier squarely against recently-invigorated legacy competitors.

"We are geared towards business travel even though we started as a leisure [airline]," Cush tells Flightglobal. "We have to carve our business out of others' markets."

He made his comments roughly 40,000 feet above Texas on 21 May during Virgin's first flight from San Francisco to Austin, Texas - a new route.

Cush notes that Burlingame, California-based Virgin launched in 2007 with a "traditional low-cost-carrier" distribution model, selling most tickets on its website rather than through global distribution systems, or GDSs, where most business travel is booked.

But two years ago, Virgin changed course, partnering with Sabre Airline Solutions to sell inventory through GDSs.

The airline also embarked on a "good old-fashioned, boots-on-the-ground" sales effort, targeting technology firms in the "Silicon Valley" between San Francisco and San Jose, California, Cush says.

As a result, business travellers now generate half of Virgin's revenue, up from 20% three years ago.

The airline made other business-friendly changes in recent months, cutting less-popular, leisure-focused flights and embarking on a slower growth plan.

After a two-and-a-half year period during which Virgin doubled its fleet to 53 Airbus aircraft, it announced last year it would take only 10 of 30 Airbus A320s on order. It also deferred delivery of 30 A320neos by four years, to 2020.

Cush says Virgin will not add more cities to its route map this year, with the exception of seasonal service from San Francisco to Anchorage in Alaska, which starts in early June.

Slower growth should allow Virgin's existing markets - it flies to roughly two dozen cities - to mature, says Cush, adding that markets typically become "highly profitable" in 12 to 18 months.

The airline's changes may be paying off.

Virgin reported an operating profit of $5.1 million for the fourth quarter of 2012, its first profit during that period. It also narrowed operating losses in the first quarter of 2013 to $15 million, and reported industry-leading gains in revenue per available seat mile.

In addition, Virgin recently announced $75 million in new financing and an agreement with investors that eliminated $290 million in debt and $20 million in interest.

Now the airline's balance sheet, for years heavily-leveraged and short on equity, is more in-line with the other US carriers, Cush says. He adds that the airline is now in a better position for an initial public offering.

Cush predicts good things will come.

"All the circumstances are right for us to make a profit [in 2013]," he says, adding that Virgin is on track to report an industry-leading profit margin and a healthy return on investors' capital.

Even if 2013 profits don't materialise, Cush says Virgin will remain viable in the coming years.

"If we don't make money, the company will go forward. We have the cash we need," he says.

His optimism comes as some airline analysts have predicted that Virgin's days could be numbered.

Vaughn Cordle, partner and analyst at Ionosphere Capital LLC, told Flightglobal in recent weeks that Virgin is "not a viable business" if it doesn't soon report more profits. Another analyst, Michael Miller of Miller Air Group, said, "Virgin America needs to make money or it can't survive."

Cush himself concedes that the airline industry has never been more competitive, noting that merged mega carriers have "unprecedented market strength".

If the American Airlines-US Airways merger goes through, the industry will be dominated by a "highly-concentrated oligopoly" of four carriers with 90% domestic market share, he says.

While mergers will allow legacy carriers to provide better customer service, better returns to investors and an improved work environment for employees, Cush says consolidation heightens challenges for Virgin, JetBlue Airways and other low-cost airlines that rely heavily on business travellers.

That is because the legacy airlines have the competitive strength to "crowd out" smaller airlines, Cush says, noting that United Airlines roughly doubled flights from Newark to San Francisco and Los Angeles after Virgin entered those markets in April.

Despite those challenges, Cush insists Virgin can compete.

"We feel pretty bullet proof," he says. "We have deep-pocketed investors."