Following an announcement from their CEO that Virgin America will be cutting roughly 3% of its capacity in Q1 2013 and also that the company is offering employees voluntary short-term leave to reduce costs at least one analyst says the outlook is grim for the carrier. The company had a reported $82mm on hand as of the end of Q2 ’12 following a loss of nearly $32mm in that quarter. The capacity cuts will be focused on redeye transcons and mid-week flights, the operations which tend to not fill up very well in periods of lower demand.
As to why the carrier is struggling, analyst Hunter Keay is suggesting that the company has made some critical errors in their growth plans. Their attempts to fight with legacy carriers on routes where the latter are firmly entrenched has left the upstart with a limited foundation on which they can stabilize their efforts. Or, as Keay said in the Bloomberg interview:
They had an assumption that consumers would choose product quality over price and convenience and network carriers responded with force.
Also of interest is that one of the main reasons cited for cutting the capacity is uncertainty in the market and the expected softening of demand. That softening is based on recent PRASM results from United Airlines and Southwest. Both carriers reported 2-3% drops in the most recent month versus the prior year. Other carries reported growth in their PRASM numbers so it isn’t entirely clear if these two are somehow more representative than the others or more important for some reason, but they are the reference Cush cited in breaking the news to Virgin America employees.
Just competing on product quality is very, very hard to do in the US aviation market; the pressure to compete on fare is incredibly strong. Companies like RouteHappy are doing yeoman’s work in helping customers to identify the more comfortable or more enjoyable travel experience. Seems most customers either don’t know or aren’t willing to pay for those experiences. And just competing on price is a good way to go out of business, especially as costs grow over time.