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Virgin America Posts First Full Year Profit

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Virgin America Posts First Full Year Profit

Virgin America Posts First Full Year Profit
March 26
15:13 2014

MIAMI — Virgin America posted a net annual profit of $10.1 million for 2013 on Wednesday. The numbers represent a huge improvement over 2012’s net loss of $145.4 million, and follow on the heels of three consecutive profitable quarters, including a $14.2 million net profit in the fourth quarter.

Crucially, it is the company’s first ever full year net profit, breaking a pattern of successive net losses that have plagued the Bay Area carrier since it began operations in 2007. A declines in operating expenses paired with increased passenger revenues and the maturation of its route network to engineer the reversal in fortunes.

On the revenue side of the ledger, passenger revenues increased to $1.28 billion year over year (YOY), up 6.1%. Passenger revenue per available seat mile increased 8.4% YOY to 10.53 cents, reflecting a 7.2% YOY growth in yields to 13.14 cents. In the case of its unit revenues, Virgin America is benefiting from a pair of trends. Across the entire North American airline industry, air fares are rising, which has created more of a buffer zone for Virgin America to raise prices to cover the costs of its excellent on-board product.

The second trend is much more applicable to the Bay Area and San Francisco than it is to LA, which is suffering from a bit of a competitive bloodbath. Namely, Virgin America’s two biggest competitors in the Bay Area, Southwest and United, are both suffering from rising costs. In Southwest’s case, the time horizon is a longer one; over the past eight years, rising costs have made Southwest’s operations at secondary Bay Area airports like Oakland and San Jose relatively uneconomical (due to their lower fares), thus resulting in moderation of capacity growth in the Bay Area from Southwest despite the rapid economic growth of recent years. Meanwhile. United underwent a merger with Continental Airlines that increased its cost structure (thanks to new labor contracts), and the combination of these two factors has strengthened Virgin America’s competitive position in the Bay Area.

Operationally, the carrier maintained a load factor of 80.2%, a one percent increase from 2012, bolstered in part by decreasing capacity as measured in available seat miles (ASMs) by 2.2% YOY. Shorter stage lengths versus 2012 also represent a move away from the aggressive growth and longer transcons that characterized the carrier’s earlier years and toward adding shorter routes in a more stable and mature route network overall.

Operating expenses fell 1.5% YOY to $1.34 billion. The reduction was led decreasing fuel expenses, down 5.7% YOY to $507.0 million and a 14.7 decrease in aircraft rent expenditures to $202.1 million. The reduction in aircraft rental costs is interesting because Virgin America’s fleet size actually grew by one aircraft to 53 airframes during 2013, which implies that Virgin America has made some sort of progress towards re-negotiating its current aircraft lease deals. On the reverse side, salary, wage, and benefit expenses jumped 11.5% to $196.5 million reflecting the aging of Virgin America’s workforce. This challenge of rising maturity of the workforce has befallen JetBlue in recent years, and is a significant challenge for Virgin America moving forward because aging workforces cost more in benefits and salaries (thanks to steady raises over time).

vx-economy-cabin1

(Credits: Virgin America)

Despite the overall decrease in expenses, the carrier’s cost per available seat mile (CASM) still rose to 10.96 cents. Excluding fuel the airline fared even worse, posting a 3.3% YOY rise to 6.83 cents, reflecting higher salary expenses and landing fees.

On an operating basis, Virgin America recorded a $80.9 million operating profit for an operating margin of 5.7%, a strong reversal from an operating loss of $31.7 million and operating margin of -2.4% during the year prior. This first full year operating profit is an even better signal than headline profit that the underlying business model of Virgin America has some merit.

Overall, Virgin America’s financial performance in 2013 is certainly encouraging. That being said, it’s important to note that in the best revenue environment post-deregulation save 1998, and in an environment where fuel prices have been held down thanks to Delta’s purchase of the Trainer Refinery and closing of the crack spread, Virgin America was only marginally profitable. Luckily for Virgin America, the airline intends to go public at some point this year. And its finances have improved right as it builds up to the IPO. It will be up to investors whether they interpret this small net profit as a validation of the business model, or as the effects of a rising tide in the overall airline industry.

 

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