Originally Posted by
Toofewmiles
I'm going to come out of retirement to respond to this, having just matched status and flown VX long haul for the first time this last weekend to see what the fuss was all about. Call it my thanks back to the people posting on the Elevate forum, since those posts are what convinced me to hop on board.
I could go into a long dissection of airline microeconomics, but while I've not been around FT for a while I'm sure there are already probably multiple threads and posts on them. I've got better things to do on a workday then post a detailed explanation, but those might be worth searching for, since most of the concerns people unfamiliar with the industry post about revolve around things that might affect RASM.
Turns out that's not that important. Balance sheet structure and CASM what people who know the industry care about, and VX isn't in bad shape with either. VX isn't in WN territory on CASM - I won't bore you with the details of how and why - but they're definitely below legacy standards, it's not going up, and as they continue expanding they should get some economies of scale to drive it down.
As far as the balance sheet, one thing to also keep in mind is that Virgin Group can't own equity past 25% - but that does not mean that if a liquidity crunch arises (which it doesn't look like they're in danger of at this point) that a debt investment can't be made. Whether or not it's in VG's best interest as a separate entity to make such a debt contribution on terms that don't provide appropriate returns is a legit question, but there are some advantages in being private and tightly controlled so that shareholders can't howl if you do such a thing.
VX has some work to do, but no, they're in no real risk of going under anytime soon.
Please. Do some homework before posting.
VX has burned through north of $600 million in CASH since it started. $99 million in CASH in the last four reported quarters. VX has had in excess of $700 million in funding since it started, the latest round of funding being $150 million in December 2011.
Here are the last 4 reported quarters' cash burn rates:
Q4 2011: $14 million
Q1 2012: $49 million
Q2 2012: $29 million
Q3 2012: $7 million
Cash. It's the lifeblood of all businesses. VX had $75 million cash/equivalents remaining at the end of Q3 2012. I don't know how you could possibly think that there aren't potential liquidity issues.
And anyone familiar with bankruptcy filings will tell you that you have to shut down a company prior to the cash balance reaching zero.
Balance sheet structure:
VX leases all of 53 of its aircraft. In spite of that, VX had $823 million of long term debt at the end of Q3 2102. They can convert some of that to equity in an IPO but they aren't going to be able to convert all of it to equity; that's a bridge too far.
The reason why there's so much debt on the balance sheet is that all of the subsequent rounds of funding have been debt instruments rather than equity issuance. This is fairly transparent to see on DOT form 41s.
CASM:
CASM has been declining but that trend will now reverse because VX is not taking delivery of any more aircraft until 2015. VX's Q3 2012 CASM was low at 10.44 cents/ASM (6.2 cents ex-fuel) but their PRASM was extremely low at 9.99 cents/ASM with a 79.6% load factor.
Based on Q4 2012 average fares, it looks like VX has finally started to price their tickets where the PRASM plus ancillary revenues is equal to CASM. Finally. If they continue to increase ticket prices, they will be able to survive. But Q4 2012 is only one quarter; it's not a pattern yet and Q1 2013 is going to see a higher CASM due to seasonal flying reductions.
Your suggestion that RASM doesn't matter is simply the airline equivalent of saying, 'we're losing money on every sale but we're making up for it in volume'. I've seen that strategy across multiple industries. Either the companies fix expenses and/or revenues or they go out of business. No business can survive long term by selling their product at below cost.