MIAMI — Virgin America announced a net profit of $28.1 million for the fourth quarter of 2014 last week, marking its first financial reporting season as a publicly traded airline with record figures. For the full year, Virgin’s net profit was $84.4 million, excluding special items, and $60.1 million on a GAAP basis.
Even considering that this is perhaps the strongest environment for U.S. airline profitability since deregulation, Virgin’s financial results represent an excellent turnaround for an airline that many feared would never reach profitability.
One of the more encouraging signs from Virgin’s 2014 results was its excellent unit revenue performance. Passenger revenue per available seat mile (PRASM) rose 3.1 percent year-over-year (YOY) for the full year, and 1.5 percent YOY in Q4. Virgin America’s revenue performance has been a pleasant, if expected (given that they finally discovered capacity control) development, and with capacity growth flat for the full year and down 0.3 percent in the fourth quarter, Virgin America appears to be on a similar path in 2015. Even the recent buildup at Dallas Love Field has come via reallocating planes from other flights, and as long as Virgin tapers growth, profitability is within its grasp.
On the note of revenues, the California markets that form Virgin America’s core might be in for a choppy 2015, and while for the moment I don’t see wholesale market shifts occurring this calendar year, there are a few worrying signs. In the Los Angeles market, both American and Delta are pouring resources into the market and thanks to their capacity additions, Virgin could see pricing pressure.
Moreover, both airlines are likely to offer substantial incentives to draw in new customers, which could reduce demand for Virgin’s product on the margins. San Francisco, as a market, is mostly bulletproof, with only an insipid United as competition. But the only thing that hangs over the market in the Bay Area is the question of when the tech market will enter another downswing. We’re not necessarily in a 2000-style tech bubble, but we are probably close to the peak for Silicon Valley firms. If and when those firms are hit, Virgin America could be in trouble. For whatever reason, I think that 2015 might be the year that we start to get an inkling of that.
Beyond the financial figures and revenue concerns, here were some other highlights for the quarter:
- Q4 2014 was Virgin’s ninth consecutive quarter of earnings growth;
- Virgin had the second-highest stage length-adjusted PRASM growth in Q4;
- Virgin has cultivated an extremely loyal flyer base – with 3.4 million Elevate members – and people willing to pay a premium to fly the airline;
- Virgin’s IPO was the second-largest airline IPO in U.S. history;
- Virgin added $214.4 million in cash through the IPO, leaving it with unrestricted cash of $395 million;
- Transcon markets are reportedly a bit “messy,” with JetBlue still finding its niche with Mint;
- Virgin does not believe that not having a lie-flat seat on transcons hurts it. The cabin is small, and Virgin has no problem filling it;
- Initial signs in the Dallas market are choppy – as with any route launch, it will take time to settle in. Currently it is recording a small net loss;
- Virgin sees Dallas–Austin as a good opportunity, and estimates that existing high market fares will decline 30-40 percent as a result of its entry;
- Virgin is keeping a close eye on Hawaii. But nothing will happen in that market before October 2015, when more aircraft are available to Virgin;
- Instead of typical profit sharing, Virgin’s incentive pay for employees is based in part on efficiency and ROIC achieved per aircraft;
- Ancillary revenues grew 25.5 percent YOY in Q4;
- As of December, the entire fleet is equipped with GoGo’s next-generation ATG4 Wi-Fi;
- Virgin has 32 interline and four codeshare partnerships, which are driving good incremental income; and
- Virgin launched launched a branded credit offering which provided a nice boost in ancillary revenue.