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The One Number in Virgin America’s S-1 Filing That Should Concern Investors

Virgin America released its S-1 filing ahead of its IPO, and the headline is something like: Costs are a bit lower than mainline carriers, but revenue isn’t anywhere where it needs to be. Basically, it’s not cheap enough to compete with Allegiant or Spirit, and it can’t generate enough revenue to have a top line that looks like Delta or American. It’s mostly like JetBlue, which has been squeezed in the same way – a decent cost structure, but not low enough to compete on the bottom end (while mainline carriers have reduced their cost structure significantly to where there’s not much difference between the Uniteds and JetBlues of the world), but passengers aren’t willing to pay a high enough premium for the free TV and free checked bag (which is why JetBlue will likely be charging for the first bag soon).

The number that jumped out at me in the filing is around Ancillary Revenue. If your costs are OK, but you’re not getting enough credit from consumers in the form of higher average airfares, then you need to make it up with ancillary revenue. Virgin America’s Ancillary Revenue per Passenger is $19.71, or 8.8% of their revenue. United Airlines, which is not exactly at the forefront of innovation in terms of ancillary revenue streams, earned $21 per passenger in Q4 2013. On the other hand, Allegiant racked up $46.99 in ancillary revenue per passenger in Q1 2014, making up about 1/3 of their passenger revenue.

Virgin America competes on low-fare leisure routes, and highly competitive business routes. They don’t have enough flights or a strong enough premium product (especially on transcons) to generate a revenue premium versus their established competitors. They need to make up the shortfall with ancillary revenue, and unfortunately there doesn’t appear to be a major focus on this (it warranted a half-assed sentence in the filing). Without a major push into additional fees, they will continue to struggle to be profitable.

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  1. Yeah, Virgin America has always seemed like an airline in search of a business plan. It seems to only exist because Richard Branson wanted to have a USA airline. That said, a rising tide lifts all boats, and Virgin now seems to be afloat. With the tide still coming in, it will probably stay profitable for awhile, which undoubtedly is the reason for the IPO here.

    I do wonder if the deterioration of the majors’ frequent flyer programs could help Virgin America. I would think that customers on transcons will become less loyal next year when they see how little their loyalty is worth the DL, UA, etc. That might cause some of them to choose Virgin’s slightly better inflight experience. That said, my guess is that’s it’s the lower paying pax who are most likely to jump, not the higher fare customers that Virgin actually needs.

    • JetBlue has the most to gain from non-loyal premium fare transcon travelers. VA’s premium class transcon product is now (except for UA from EWR) the worst in the sky (it’s fine, but everyone else has gone to flat beds). And how long can they go on charging $2000 when JetBlue is charging $1200? They’ve got a long way to go….

      • Yeah, the big boys seem genuinely concerned that they could lose the premium transcon traffic, which seems to explain why they’re investing in lie flat seats on those routes. But I think there’s still a risk that some of the coach pax will defect to JetBlue, Virgin America etc. when they see how little they get for being loyal to the legacy carriers. That said, this isn’t the most profitable part of the business, and it probably won’t affect folks travelling on corporate contracts.

        • I don’t think it’s “jetblue, virgin america, etc” — I think it’s JetBlue. MINT could be a game changer if people defect from the majors (I don’t think they will, but let’s assume you’re correct). The B6 product is excellent and MUCH cheaper than VX. I’m not sure I see how VX survives longterm.

  2. I am still surprised the Government is not working harder to get their piece of the pie (taxes) from the ancillary revenue. Since only the base fare is taxed, approximately 8.8% of the revenue goes untaxed.

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