Praise for the product and overall passenger experience on Virgin America has snowballed during the airline’s five year existence, with the number of accolades growing exponentially each year from entities ranging from the Passenger Choice Awards and Conde Nast Traveller to green living guide Greenopia. But the plaudits have not been accompanied by a single annual profit since Virgin America operated its first flight in 2007, and the latest quarterly loss has triggered a freeze in the carrier’s growth.
The airline’s losses widened significantly year-on-year during the third quarter of 2012 from $3 million to $12.6 million. Generally for US-based airlines the third quarter is one of the strongest as it falls during summer travel high season. During that busy period Virgin America’s operating profit fell 2.4% to 15.8 million and its operating margin slid 1.3 percentage points to 4.3%. Over the course of five years Virgin America has only recorded a single quarterly profit, and has yet to turn a positive result on a yearly basis.
The stark contrast between Virgin America’s stellar reputation in providing a top-notch passenger experience among leisure and corporate travellers alike and its weak financial performance begs a single question – what is preventing a young carrier with presumably lower labour costs of turning a profit when its legacy counterparts in the US are producing consistent and in some cases record-breaking financial results?
Atmosphere Research Group co-founder and chief researcher Henry Harteveldt believes Virgin America’s challenges in gaining financial traction stem from its business strategy. He remarks that the carrier’s major bases in San Francisco and Los Angeles are not true hubs given the former is dominated by United Airlines and the latter is one of the most fragmented markets in the US. He remarks that Virgin America carries almost no connecting traffic, which is key for attracting and retaining lucrative business customers.
Virgin America’s smaller size also hampers the carrier’s ability to offer favourably timed flights in the markets where it competes with larger legacy carriers, which is the case in virtually every market where the airline operates. Providing a real-world example, Harteveldt said he was recently browsing the options for a trip from San Francisco to Dallas, and on the return leg from Dallas Virgin America did not offer a nonstop flight after 15:30 EST. Even though San Francisco is not a cornerstone market for American Airlines, the airline has the capacity to offer more nonstop flights from Dallas than Virgin America, giving the legacy carrier an advantage over its smaller rival. Harteveldt concludes that Virgin America’s network is somewhat deficient for the business traveller.
Harteveldt praises Virgin America’s passenger experience as excellent, but cautions “you cannot ignore the fundamentals in this business. If the passenger experience dictated what airlines would succeed Braniff would still by flying and Southwest, Spirit and Ryanair would have never gotten off the ground”.
Virgin America has declared its attention to cut its annual supply growth during the next few years to the single digits after recording explosive growth of 73% between the third quarter of 2010 and the same time period in 2012. The slowdown is driven by an agreement Virgin America reached with Airbus to cancel 20 of 30 current generation A320s the carrier had on order, and deferral of 30 A320neo deliveries.
Harteveldt believes canceling and deferring aircraft deliveries will allow Virgin America to preserve its cash in the short term, and he is also encouraged by the carrier’s recent appointment of John MacLeod as SVP of planning and sales, a post MacLaeod held at Canadian carrier WestJet. He believes MacLeod needs to be given time to scrutinise Virgin America’s network to make the necessary changes to offer more utility to business customers.
Citing Virgin America’s consistent on-time performance, low rates of lost baggage and motivated frontline staff, Harteveldt concludes the airline needs to now address the fundamentals of its network. While Virgin America conclusively does many thing well, there are other things it needs to improve, says Harteveldt, who concludes: “It is a tough challenge for them.”