New routes, business focus mean profits at Virgin America

Washington DC
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A financial restructuring, moderated growth plan and efforts to attract more high-yielding business passengers have helped Virgin America swing to an operating profit for the first six months of 2013.

Virgin's chief executive David Cush calls the results "a very big deal" for the seven-year-old carrier, which has struggled to stem the flow of red ink caused by years of rapid expansion.

The results give Virgin a foundation needed to maintain profits, critical to achieving its goal of an initial public offering in the coming years.

"For a couple of years [we have said] that once we slowed the growth we expected to achieve profitability," Cush tells Flightglobal. "Substantial profitability will come down the road."

"On a net basis we are confident we will turn a small profit for the full year," he adds.

For the first six months of 2013, Burlingame, California-based Virgin earned an operating profit of $12.9 million, a staunch reversal from its $52.7 million operating loss during the same period last year.

Virgin still reports a net loss for the half year of $37.5 million, but that's substantially better than its $107.8 million net loss for the first half of 2012.

Results during the second quarter alone were particularly notable: Virgin reports operating profits of $27.9 million and a net profit of $8.9 million.

That's compared to an operating loss of $4.1 million and net loss of $31.8 million during the second quarter of 2012.

Cush is pleased with Virgin's continuously improving revenue per available seat mile (RASM), the growth of which the airline says has "significantly outpaced all US carriers."

During the second quarter, Virgin's RASM was 11.56 cents, up 7.8% from the same period last year.

By comparison, low-cost carriers like JetBlue Airways and Southwest Airlines reported second quarter RASMs of 12.42 cents and 13.56 cents, respectively, according to securities filings.

Virgin's cost per available seat mile (CASM) declined 1.4% in the second quarter to 10.70 cents, below JetBlue's 11.48 cent CASM during the period and Southwest's 12.30 cent CASM.

Virgin ends the quarter with $148.2 million in unrestricted cash, up $90 million since the end of March due partly to receiving $75 million in new debt.

Turnaround plan

Virgin America, which in recent years has grown about 30% annually, has intentionally slowed expansion in recent months, an strategy Cush says has let existing market mature.

In 2012 the airline completed a two-year growth spurt that saw the acquisition of 24 aircraft and nearly double its fleet to 53 Airbus A319s and A320s.

But so far this year, Virgin took delivery of only one aircraft, in the first quarter, and it does not intend to increase its fleet until the second half of 2015, Cush says.

He notes that routes the airline has operated for 12 months or longer - those he calls "mature" - are "highly profitable," but says newer routes have not performed as well. Roughly 15% of Virgin's routes are "immature", according to Cush.

Virgin has also "fined tuned" it's internal processes in recent months, improving its revenue management capabilities and selling more inventory through Sabre Airline Solutions.

Virgin partnered with Sabre two years ago in a move to sell inventory through global distribution systems and to attract more business travellers.

"We are driving a lot more corporate revenue, [which is] easier when you are in Sabre," he says.

At the same time, Virgin added more interline partners, including three in the second quarter: China Eastern Airlines, Etihad Airways and Scandinavian Airlines. Virgin now has 26 interline partners.

In addition, Virgin has focused on reaching agreements with corporate travel managers, which has been made easier as Virgin has tweaked its route map, Cush says.

During the second quarter, Virgin cut flying on some less-profitable, leisure-focused markets and deployed aircraft on new business-focused routes.

Chief among those are the carrier's three daily flights between Newark, New Jersey and both Los Angeles and San Francisco, launched in April.

Cush says those routes make "the entire network more attractive" to business travellers.

So far, the Newark flights are performing better than Virgin forecasted and its share of revenue on the flights exceeds its share of capacity, says a 7 August media release.

Other new routes include San Jose, California to Los Angeles and San Francisco to Austin, Texas, launched in May, and seasonal service between San Francisco to Anchorage, Alaska, launched in June.

"The interline revenue is growing sequentially month to month and corporate penetration is improving as we improve the utility of our market," Cush says.

Debt savings

Virgin has made strides in reducing its costs thanks to a financial restructuring completed in May, the airline says.

Virgin converted some of its debt to "conditional equity", which vests when the company goes public.

In addition, Virgin reset the interest rate it pays on its debt, bringing the rate down to the "mid-single digit" range from the "mid-to-high teens" range, Cush says.

Those efforts eliminated more than $300 million of existing debt and accrued interest and reduced Virgin's interest expenses to roughly $10 million quarterly, according to Cush.

Before the restructuring Virgin's payments were $20 million quarterly.

Going public

Cush says Virgin's improved finances are a milestone on its path toward an initial public offering, which has long been in the airline's master plan.

"We need to establish a track record of consistent and meaningful profitability before we can go public. The results are a start down that path, but we need to stack a number of [profitable] quarters on top of that," Cush says.

A public offering will give Virgin access to public equity and debt markets, which Virgin can use to slash aircraft debt payments and further finance growth, Cush says.