Virgin America (San Francisco) has reported another quarter in the red. The airline reported its financial results for the first quarter of 2012 yesterday. With overall fuel costs higher by 47 percent year-over-year, the financial pressure of the airline’s industry-leading capacity growth and a revenue shortfall associated with the carrier’s transition to a new reservations system, Virgin America reported a first quarter operating loss of $49 million on revenues of $267 million. Top line growth continued to outpace the expanding airline’s capacity growth. Year-over-year, total revenue grew by 33 percent for the first quarter on a 29 percent increase in Available Seat Miles (ASMs), at a time when the rest of the industry reported flat capacity. The airline ended the quarter with $111 million in unrestricted cash.
Virgin America reported 2.2 percent year-over-year RASM growth, versus the double digit RASM percentage increases reported in 2010 and 2011. This was driven by significant capacity growth and systems issues associated with the Company’s transition to a new reservations platform. The growing airline’s rate of entry into new markets created margin pressure which offset revenue gains in more mature markets. While capacity was up 29 percent year-over-year, total capacity increases were up 59 percent over the past two years. This rapid growth established Virgin America’s core network and provided an important base for the carrier’s future success. This planned phase of accelerated growth will wind down in mid-2012, until the airline’s next major fleet order begins delivery later in 2013. At the same time, website issues and revenue management challenges associated with the Company’s transition to a new Sabre reservations system reduced first quarter revenue by $10 to 15 million.
Virgin America’s results were also adversely impacted by high fuel prices. Had fuel prices remained flat year-over-year, the airline’s fuel costs would have been $15 million lower for the quarter. The cost-per-gallon of fuel increased by 14 percent in the first quarter. In late 2011, Virgin America resumed a structured fuel hedging program to help manage the impact of fuel price volatility. Approximately 70 percent of the airline’s fuel consumption in the first quarter of 2012 was hedged at prices slightly below market levels, resulting in a fuel expense for the quarter that was approximately $2 million below market prices. The carrier has hedged approximately 33 percent of its expected fuel consumption for the remainder of 2012. Since April 2012, fuel prices have dropped significantly. Under Virgin America’s hedging program, the Company will not realize the full benefit of falling prices until the second half of 2012.
Virgin America continued to drive significant growth in the quarter: expanding its fleet from 38 aircraft in March 2011 to 51 aircraft by the end of the first quarter 2012 (today, the carrier operates 52 aircraft). Virgin America took delivery of five Airbus A320 aircraft in the first quarter, capping a remarkable expansion over the past two years. The airline has acquired 23 aircraft since the first quarter of 2010, an 82 percent increase. This phase of accelerated growth comes to an end in mid-2012, with deliveries under the carrier’s next major fleet order not starting until later in 2013. In 2011, the carrier announced a major fleet order – including the first commercial order for the A320neo.
Clearly Virgin America is under pressure to return to the black during the upcoming quarters.
In other news, Virgin America has launched its first codeshare – with sister-branded airline, Virgin Australia, selling tickets as of July 4 in Australia on Virgin America flights from Los Angeles to Boston, Chicago, Dallas/Fort Worth, Fort Lauderdale/Hollywood, Philadelphia, Portland (Oregon), Seattle/Tacoma and Washington (Dulles). This is the first-ever codeshare agreement for the California-based carrier, building on a 2009 interline agreement with Virgin Australia.
Copyright Photo: Brian McDonough.