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ANALYSIS: Virgin America Adds Utilization Flying in Las Vegas and New York

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ANALYSIS: Virgin America Adds Utilization Flying in Las Vegas and New York

ANALYSIS: Virgin America Adds Utilization Flying in Las Vegas and New York
October 01
14:40 2014

MIAMI — Virgin America is adding point-to-point (p2p) utilization flying in the Northeast this winter, adding seasonal nonstop service from New York JFK to Fort Lauderdale and Boston to Las Vegas. The San Francisco based leisure airline will also boost its offering on seasonal nonstop service between New York JFK and Las Vegas. New York JFK – Fort Lauderdale will be served daily, Boston – Las Vegas will be served four times per week, and New York JFK – Las Vegas will be boosted from daily service to nine flights per week. Both Las Vegas flights will be operated by Airbus A320 aircraft seating 146 passengers in a three-class configuration ( 8F / 12Y+ / 126Y ), while the New York JFK – Fort Lauderdale flight will be operated by an A320 seating 149 passengers in a similar three-class configuration ( 8F / 12Y+ / 129Y ). Flight schedules for the new services and their operational dates are as follow:

12/18/14 – 4/28/15
VX 501 ~~ JFK – FLL ~~ D: 0800 A: 1105 ~~ Daily
VX 500 ~~ FLL – JFK ~~ D: 0915 A: 1155 ~~ Daily

1/8/15 – 4/28/15
VX 913 ~~ BOS – LAS ~~ D: 1030 A: 1340 ~~ 1567
VX 910 ~~ LAS – BOS ~~ D: 1450 A: 2240 ~~ 567
VX 262 ~~ LAS – BOS ~~ D: 1535 A: 2325 ~~ 4

1/5/15 – 4/28/15
VX 253 ~~ JFK – LAS ~~ D: 1135 A: 1425 ~~ 34
VX 258 ~~ LAS – JFK ~~ D: 1510 A: 2300 ~~ 1
VX 258 ~~ LAS – JFK ~~ D: 1535 A: 2325 ~~ 3

The primary rationale behind these additions is clearly aircraft utilization. During the winter, air traffic demand between Virgin America’s hubs at Los Angeles (LAX) and San Francisco (SFO) and the Northeast declines, and the airline needs a place to fly its fleet of 53 Airbus A320 family aircraft ( 10 A319s, 43 A320s ). Meanwhile, winter demand to Las Vegas is more stable, and for South Florida, the winter is actually the peak O&D season. LAX/SFO – JFK/BOS are more expensive to operate than JFK – FLL, and JFK/BOS – LAS because the flights from California are longer and those airports are more expensive to operate from. Furthermore, New York JFK, like many slot-controlled airports around the world has a “use it or lose it” provision. Under prevailing rules,  airlines have to utilize a certain percentage of their slot portfolio in order to preserve control over their slots (which are otherwise forfeited). Thus the eighteen new weekly flights (and existing daily services to Las Vegas and Palm Springs) from New York JFK allow Virgin America to keep control of its slots at JFK that are used during the summer season to operate more than 12 daily flights to LAX and SFO.

Virgin America Utilization Flying Competition. (Credits: Author)

Virgin America Utilization Flying Competition. (Credits: Author)

Virgin America will face ample competition on these routes. The table to the left shows flight schedules for the New York – South Florida (Miami, Fort Lauderdale, and Palm Beach), New York – Las Vegas, and Boston – Las Vegas city pairs for Thursday, February 19th (the peak day for daily departures in each market). The New York – South Florida market has an astounding 113 daily departures, while New York – Las Vegas, and Boston – Las Vegas are a lot more modest. There is competition from several airlines on most routes, but the majority of the competition comes from legacy, full service airlines like Delta, United, and American, who have higher costs than Virgin America. There is limited ultra-low cost carrier (ULCC) competition in South Florida from Frontier Airlines on Miami – New York La Guardia and Spirit Airlines on Fort Lauderdale – New York La Guardia, but for passengers looking for a more upscale option, Virgin America is well positioned with only JetBlue competing head-to-head in its segment of the market. The same is true of the flights to Las Vegas.

And Virgin America will be drawing on markets with high O&D demand. The air travel market between New York City and South Florida generates an enormous 10,504 passengers per day each way (PDEW), with an average one-way fare of $206.08 and an average yield of 18.4 cents. Even though the route is lower yielding, Virgin America should have zero trouble filling its single daily flight in America’s second largest air travel market. JFK – Las Vegas is similarly low risk. Even up against 15 competing daily flights (excluding its own), Virgin America can tap into an O&D market of 1,695 passengers PDEW with a respectable average one-way fare of $319.08 and an average yield of 14.0 cents. Boston – Las Vegas would appear to make less sense. The market is much smaller at 632.5 passengers PDEW, and the average one-way fare and yield are low at $270.65 and 11.4 cents respectively. Virgin America will likely lose money on this route (the other two are likely to at least break even), but less money than if it had to operate a longer haul route from Boston.

While the new routes outside of Virgin America’s core operations at Los Angeles and San Francisco are welcome additions to the network, they do not signal any sort of substantial shift towards a more point-to-point (p2p) network model for the carrier. Even including the yet-to-commence nonstop service from Dallas Love Field to New York La Guardia and Washington Reagan, just six (16.2%) of Virgin America’s 37 nonstop city pairs do not involve Los Angeles or San Francisco, and less than 5% of its capacity (measured in available seat miles) meets the same criteria.

Beyond simple aircraft utilization there is another benefit for Virgin America. After years of financial misfortune, Virgin America’s investors appear to be pushing the airline towards an initial public offering (IPO). The present investing environment for airlines is reasonably positive, but in recent months, performance of airline stocks has lagged a little bit due to concerns over revenue growth (Delta and America were most noticeably affected with ~15% declines in valuation over the past month). This is a signal that airline investors are focused on top-line growth as a key area of evaluation. For Virgin America, the winter would normally be a time of poor revenue generation and growth, but with this additional utilization flying, Virgin America has a low risk way to boost its revenue without diluting its margins to a substantial degree. This revenue boost, while temporary, could make Virgin America’s financials more attractive for potential investors in an IPO.

 

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