Virgin America, a privately owned carrier in its fifth year of operation, reported its financial results for the 1st quarter of 2011. Virgin America, which posted its first profitable quarter in last years Q3, has never actually reported a full year net profit.
Operating income for the quarter was – $29.5 million, 36.4% higher than the same quarter last year. When other financial charges are taken into account, the overall net loss becomes -$44.6 million; up 25.5% from Q3 2010. The carrier ended the quarter with $25 million in unrestricted cash and $54 million of overall liquidity.
Of course there are a couple of things to consider here. Firstly, Q1 is generally the weakest for airlines because it combines the winter lull in business traffic with a dearth of major holidays (ie: Christmas or Thanksgiving). Also, the traditionally travel heavy Easter period fell in Q2 this year (Last year it was partially in Q1), hurting year over year comparisons. And honestly, no one is making money in this operating environment; most major US carriers (besides Southwest and Alaska Airlines) reported losses for the quarter. With the run up in fuel prices during the quarter, it was almost expected that Virgin America would show a loss here.
However, there are some more numbers to look at here. Total revenue was up a cool 37% to $201 million. Passenger unit revenue jumped 12% (outpacing gains by most other US carriers) on a 13.2 % jump in yields and just a 0.2 point drop in load factor. The airline also reported that its “mature markets” (ie: those where it has been operating for an extended period of time) outpaced this growth with a 20% jump year over year.
On the Costs side CASM was up 11.6%. A large part of that increase was fuel; the price they paid for fuel rose 25.6% while consumption rose 21.6% due to all of the new flying that they have added. CASM excluding fuel also rose 5.3%.
The airline noted that its CASM ex. fuel rose because of “investment in the Company’s growth (training, people and aircraft in modification) and the sale and leaseback of two A319 aircraft in December 2010.”
Also on the subject of CASM; the airline is trying to keep its fuel costs down by hedging; 77% of their fuel requirements for Q1 were hedged at $82/bbl and roughly 50% of their overall 2011 fuel needs are hedged as well.
However, these financial results do give reason for pause as well. I noted earlier that Virgin has only had one profitable quarter in their entire history! After 5 years of operation, this would indicate that something is wrong with their business model. Yet they persist in expanding (Chicago service was announced, Cancun started, and Dallas upgauged); with capacity up 23% in Q1 (as opposed to an average of 1% for all of the other US carriers). However the RASM growth in mature markets does yield some hope.
The other issue I have with Virgin is that they might not have enough places to send their airplanes. The airline plans to grow its fleet from 35 frames in Q1 2011 to 52 frames in Q1 2012 (mostly A320s); a 48% increase in lift. Especially in today’s high-fuel environment, I’m not sure Virgin can profitably operate these aircraft. The low hanging fruit (intra-West, NYC, now Chicago) is all gone, and they’ll have to increasingly diversify their destination portfolio and operate more marginal routes.
Either way, it was another fiscally underwhelming quarter from Virgin. While the RASM growth is nice to see, their continued insistence on expanding capacity could put serious pressure on the bottom line. $25 million in unrestricted cash is dangerously low for an airline of that size, and any sort of extended emergency (major LA T-storms, etc) could bring the carrier to the brink of bankruptcy.


