MIAMI — Virgin America is now in its waning days, after it was purchased by Alaska Airlines. Thought the deal is still pending regulatory approval, Virgin’s days as an independent carrier are more or less over, and now will begin the long and arduous process of integrating two airlines with markedly different fleets, products, and corporate cultures. With Virgin America’s days of plying the American skies numbered, let’s take a look at the good, the bad, and the ugly of Virgin America’s first eight-plus years as an independent airline.

The Good – Product

If there is one area in which Virgin America’s track record was unassailable, it had to be on the product and in its passenger experience. Following in the footsteps of fellow Branson baby Virgin Atlantic, Virgin America carved out a unique space in the market with its ample legroom, mood lighting, and world class Red in-flight entertainment (IFE) system. This was matched by a soft product rivaling those of Southwest and JetBlue in the domestic space for caliber of service, perhaps enabled by an à-la-carte service model enabled by Red. Put together, this led to Virgin America winning the title of “America’s best airline,” with an undisputed leadership in the unquantifiable metric of “treating passengers like human beings.”

The elegant and inviting cabin of Virgin America's Airbus A320. (Credits: Virgin America)
The elegant and inviting cabin of Virgin America’s Airbus A320. (Credits: Virgin America)

The shine has come off of Virgin’s product somewhat in recent years as rivals have caught up or even superseded Virgin’s offering. Red is now more or less matched by streaming or seat back systems on American, Delta, United, and Southwest’s, and its GoGo based WiFi system has been left in the dust by the gold standard of JetBlue’s Fly-Fi. The First Class product, which effectively offered angled-lie flat seats that are better than regional business class cabins in widebody aircraft on a lot of the world’s airlines, has also been left in dust by JetBlue’s Mint cabin (a consistent theme). But despite these (slight) black marks, Virgin America will leave behind a legacy of having a spectacular product.

The Good – The airline’s very existence

No one has been harder than I have on Virgin America’s flaws, driven primarily by my fundamental skepticism that the mass passengers will ever put their money where their mouths are and pay more for a better product. Irrespective of whether I am right or wrong on that front (Virgin America’s financial results say that I’m probably right), there is something to be said for the fact that Virgin America even made it this far in the first place. In fact, Virgin is the only new, non-regional airline in the United States to have survived for more than five years since JetBlue took flight back in 2000. Independence Air, Skybus, the ExpressJet, standalone operation , the carcass of PEOPLExpress – Virgin managed to pull off the feat that all of these carriers were attempting and that many startups (such as California Pacific) never even got to try.

The reasons for the dearth of successful startup airlines are myriad, though I believe that they can mostly be traced back to the expanded regulatory requirements of the FAA (including more onerous starting capital requirements) and increased savvy amongst potential investors into the space. But regardless of why others have failed, Virgin’s (relative) success is something to be cheered. Vigorous competition is always good for the economy as a whole and for consumers, and Virgin, I fear, may be the last new airline (always the best source of such competition) to offer that for some time.

The Bad – The airline’s network

Despite the quality of its product, Virgin’s biggest strategic weakness was definitely its network, specifically the reliance on San Francisco and Los Angeles. Even amongst the two hubs, there was a distinct first and second tier, as really only the San Francisco hub was truly viable (my understanding is that even in today’s fuel environment, only SFO is profitable and LAX is merely treading water). California is the market with the best cultural fit and largest population of customers that fit Virgin’s ideal buyer profile, but it was always disappointing that Virgin didn’t do more in other markets around the country that could support more flights (Austin, Texas in particular comes to mind as a good fit).

Virgin America Route Network. (Credits: Virgin America)
Virgin America Route Network. (Credits: Virgin America)
 The Dallas Love operation is really Virgin’s only attempt at doing anything in the middle 80% of the country (and there the Love Field – Austin route was a spectacular failure), though there have been a couple of point-to-point routes out of Las Vegas as well. Virgin’s distinct lack of a network in the middle part of the country (even from San Francisco and Los Angeles) and inability to make short haul routes work well meant that the airline was stuck between a rock and hard place in the long run before getting bailed out by Alaska’s buy. And even there Alaska was more buying the assets (planes, gates, and slots) than it was the route network per se.

The Bad – Making a return for investors

The only reason this isn’t marked as “The Ugly” is that Alaska’s investors, led at the time of the merger by private equity firm Cyrus Capital and Richard Branson’s Virgin Group, managed to cash out at both the November 2014 initial public offering (IPO) and after the $2.6 billion gift from Alaska’s shareholders. Thanks to a fortunately timed drop in fuel prices, both of these events ended up being a lot more positive for Virgin’s valuation than the underlying financial fundamentals would suggest, and the investors made out okay. But for the hundreds of millions of dollars that investors plowed into the airline in startup costs and accumulated net losses, the return on invested capital has been mediocre even by airline standards (see JetBlue for a point of comparison), let alone by the present standards of so-called “unicorn” startups.

The Ugly – The overall business model

From 2007 to 2010, Virgin America lost $270 million in accumulated net losses, and in 2011 and 2012 added $100.4 million and $145.4 million to that net tally. The carrier finally broke even in 2013, making a tiny net profit of $10.1 million enabled by debt holders (who were also investors in the company) taking a massive haircut. 2014 saw improvement in financial results due to deferral of growth (which will come due for Alaska Airlines but would have harmed results tangibly in 2016 and 2017 otherwise) and the beginnings of the fuel swoon which finally powered a $340.5 million net profit in 2015 and profits in the first quarter of 2016.

But the thing is that arguably even Skybus could have made money in the current fuel environment. Virgin would just broken even in 2014 and 2015 without the benefits of lower fuel prices, and the underlying business excluding fuel actually plateaued in 2015 after improving across 2013 and 2014 on a fundamental basis. At the end of the day, Virgin America was trying to build a business based on product differentiation in a commoditized space. It had aggressive growth and fleet commitments that would have constrained cash flow in the latter part of the decade, a product advantage that was evaporating in the face of targeted investments by JetBlue and the legacies, and a network that was susceptible to network and legacy competition with no presence in 80% of the country. Despite its golden parachute from Alaska, Virgin America was nowhere close to a highly successful airline with a viable business model.