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Is Virgin American on the ropes??

Posted by on in | 297 Views | 17 Responses

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.

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17 Responses

  1. Explore
    Explore at |

    I don’t think most travelers care about “service quality”, whatever that is, on domestic flights. Let’s face it, the flights are only a few hours, many doze, while others bring their own food and entertaiment which offer more than VX can ever provide. You have to scrunch your knees on Virgin just like any carrier, while settling for inferior service frequencies and less IRROPS protection. Personally, I don’t care for the whole Branson style-over-substance approach, inferior FF program, and call center outsourcing.

  2. Kris Ziel
    Kris Ziel at |

    When I saw that cash on hand number earlier this week, I was shocked. United has less than 14 times as many planes, but their cash on hand is 100 times that of VX. Not a good sign for them.

  3. Phudnik
    Phudnik at |

    VX added one of my commonly flown routes (PHL-LAX and vv) several months ago. They did manage to force DL off of that route, but US has been undercutting VX pretty substantially since then by matching their non-refundable fares and selling F for less than VX refundable Y.

    I’d like to try VX out, but don’t want to spend more of my clients’ money to do so. Of course, the minute VX folds or drops this route, US will be back to the pre-VX state of affairs, charging $1300 o/w for refundable Y tix.

  4. Ryan
    Ryan at |

    I have always been curious to try them out just for some variety. But the fact I don’t live in one of their few cities served always put a damper on that. The fact their FFP is of low utility in comparison, is another thing keeping me away at least. However I have hoped they would be successful and grow, if nothing else than to introduce some new blood into the airline scene. Not sounding very good for them right now, though

  5. ed
    ed at |

    Differential price for differential product is sound, but most people don’t have a means of incremental income, and aren’t aware of the differences even if they value them. That’s why everything heads towards Chinese/Walmart quality. Sometimes it doesn’t matter, other times it does, but it’s expensive figuring out which. In this case, I do know the difference and for my money, Virgin America is a better value for sure — EXCEPT that I’m heavily invested in the loyalty programs. For my business, they’d need to operate better there.

  6. eponymous_coward
    eponymous_coward at |

    What possible routes could VX fly from SFO/LAX that would give them “a monopoly on at least 25 percent of their routes” that could support anything resembling decent frequency and fill A319s/A320s?

    A monopoly on LAX-ICT or SFO-LBB is not particularly useful. And we’ve seen what happens when companies try to jumpstart service from places people don’t actually live: anyone remember Skybus?

    VX’s problem was that they wasted a bunch of time on stations like YYZ, where you just went “huh? Did you throw at a dartboard to pick that?”, and their business plan was predicated on $30/bbl oil, not $100/bbl oil. They burned through their VC way too fast because of that.

  7. Nick
    Nick at |

    I suspect they are part of the reason for UA’s lower PRASM. If they could offer more value through their FF program and some upgrades I would be tempted, but as is I would rather just stick to United.

  8. Carl
    Carl at |

    I don’t see how VX can survive. They aren’t allowed to raise foreign capital due to foreign ownership rules (not that I think those rules are a good thing, but I doubt there’s any political chance to change them). They have never figured out a defensible business strategy. They have been burning through cash since they were formed. They brought on too much capacity. And eventually their non-fuel costs will be rising faster as employees and planes age. There is nothing going in their favor.

    When they go – and they will go, whether by merger or liquidation – it will give a significant boost to UA, AA & AS.

    I’d assume VX leases its aircraft and they’ll just go to other A320-family operators.

  9. eponymous coward
    eponymous coward at |

    f they could offer more value through their FF program and some upgrades I would be tempted

    In other words, if they bribe you and lose MORE money than they already do, they become more attractive?

    “Hey, we lose money on every sale, but we make it up in volume!”

  10. Jeff Yablon
    Jeff Yablon at |

    And then, there’s the customer service problem: http://answerguy.com/2012/10/17/virgin-america-customer-service/

  11. Nick
    Nick at |

    @eponymous_coward You see part of their problem is the average road warrior is solidly middle class and can’t expense upgrades and can’t really afford 90 of them out of pocket per year either. I dont think they did enough focus groups and market research in general. Trendy and cool is one thing attracting business travelers who buy last minute fares somehow isn’t that important to them.

  12. eponymous coward
    eponymous coward at |

    “You see part of their problem is the average road warrior”

    The average road warrior can’t fly an airline that only has a handful of destinations to start with.

  13. eponymous coward
    eponymous coward at |

    Oh, and that customer service post is a hoot. DYKWIA? What a pompous jerk.

  14. Nick
    Nick at |

    I think that’s part of the problem – they have an identity crisis. Perhaps it would be better if they focused more on leisure markets. What about focusing more on LAX as well, where none of the legacies are particularly strong, like how about LAX to CJD/PVR, or LAX to SJO? Taking on routes heavily served by more than 1 legacy carrier is always going to be difficult.

  15. eponymous coward
    eponymous coward at |

    The problem with focusing on leisure markets is it won’t pay for that nice shiny IFE and fill those 8 F seats. I’d like to point out that the carrier that’s blowing up in Hawaii is AS, who roundly gets panned for having poor F seats and hard product, and the carriers that expanded the most the last few years are G4 and NK, who are pretty much the diametric opposite of VX.

    I still say it all comes down to fuel and some really poor route choices early on.

  16. JCK75
    JCK75 at |

    I can’t say I’m surprised. I’ve never understood their business model. While their IFE and First Class is better than the rest, how many travelers are actually willing to pay $2500/rt for a transcon these days? And how many of those travelers care so little about their FF miles to ditch an established airline? And how many people choose an airline based in IFE alone?

    I want Virgin to succeed. Quality can succeed (see JetBlue), but you need a reasonable business plan first.

  17. Virgin America sets their sights on Newark - The Wandering Aramean
    Virgin America sets their sights on Newark - The Wandering Aramean at |

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