Virgin America's nice, but no money-puller
Passengers like Virgin America for its mood lighting, live TV, fancy cocktails and friendly flight attendants. That nice-guy approach to air travel wins awards and attracts a cult following, but may not fly with Wall Street.
For all the accolades, Virgin America has lost $US400 million ($A432.78 million) since its founding in 2007.
As Virgin America weighs a public offering there are warning signs for potential investors. Its brand-new aircraft come with a hefty debt load and the airline has failed to attract big-spending business travellers. To increase revenue - and satisfy shareholders - the airline might eventually be forced to take action, such as raising fees, which risk alienating passengers.
After all, the darlings of Wall Street are Spirit Airlines and Allegiant Air - two of the most unpleasant airlines to fly. Their seats don't recline and legroom seems nonexistent. Using overhead bins costs extra. But their profit margins, north of 10 per cent, are the best in the business.
Meanwhile, there is JetBlue Airways. Once a customer favourite, it's now - amid lagging profits - facing relentless market pressure to add bag fees and cram more passengers onto planes.
Style, not profits, has been the focus for Virgin America. The company declined to comment for this story, but in 2011 chief executive David Cush told The Associated Press that his airline hoped to "make a few hours out of people's day a little bit nicer, more pleasant".
Loyal passengers say Virgin America makes flying enjoyable. But that hasn't translated into a financial windfall because the airline fails to collect the higher fares - or fill as many seats - as other airlines.
For every 1,000 miles (1,609 km) Virgin America flew in the first half of 2014, it collected an average of $US106 ($A114.69) for each available seat. By that same measure, Southwest Airlines took in $US135; Delta Air Lines reaped $US166 on its domestic routes.
"They're producing a product that people do really like but aren't willing to pay enough for," says Seth Kaplan, managing partner of industry newsletter Airline Weekly.
Most Virgin America flights start in either San Francisco or Los Angeles, including highly-competitive transcontinental routes to New York. Those routes are loaded with business travellers who tend to buy expensive, last-minute tickets. They just aren't flocking to Virgin America.
Those customers want frequent flights so if a meeting ends early or runs late they can adjust their plans. They also want a worldwide network so the same airline that takes them from San Francisco to Chicago can also take them to Tokyo or Cleveland. Virgin America flies to just 21 cities in the US and Mexico - some routes only have one daily flight. Finally, there's no chance at a free upgrade to first class.
That's the crux of the problem.
"They don't offer the convenience of larger carriers such as Southwest or the global reach of airlines like Delta or United," says Henry Harteveldt, of travel advisory firm Atmosphere Research Group.
Virgin America's first flights, in August 2007, came at the onset of the Great Recession. Fuel prices spiked just as Americans stopped flying. Low introductory fares helped fill jets but didn't pay the bills. Virgin America lost $US395 million ($A427.37 million) in its first four years flying.
Executives froze expansion plans and finances improved. Last year brought the first annual profit: $US10.1 million. In 2014's first half, the airline lost $US9.4 million, a fraction of past deficits.
A public offering will help pay off some of Virgin America's $US654.4 million debt - some of which carries a 17-per cent interest rate. The airline also has to spend $US470.4 million in the next two years on new planes. Cancelling orders isn't an option - it could lose $US69.1 million in deposits with Airbus. Lastly, its initial investors, including Sir Richard Branson's Virgin Group and New York hedge fund Cyrus Capital, have waited a decade to get their cash back.
