The San Francisco-based carrier’s results were “driven by continued unit revenue outperformance as compared with the domestic industry and the benefit of lower fuel costs,” Virgin America president and CEO David Cush said. It is the airline’s eighth consecutive quarter of profitability.
Proposed Alaska Air Group merger
Virgin America’s net income excluding special items charged in the 2016 first-quarter was $18.4 million, up 74.5% year-over-year (YOY). The special charges were primarily related to the proposed merger with the Alaska Air Group, which was announced April 1, the day after the quarter ended.
Virgin America’s first-quarter operating revenue was $364 million, up 11.5% YOY; total operating expenses for the quarter were $332.1 million, up 6.8% YOY. Operating profit for the quarter was $31.9 million, more than doubling the airline’s 1Q 2015 $15.4 million operating income.
First-quarter traffic was up 15.9% YOY to 2.62billion RPMs on 15.8% YOY capacity growth to 3.27 billion ASMs, producing a load factor of 80.1%, flat from 1Q 2015. The airline carried 1.77 million passengers during the quarter, up 16% YOY.
Virgin America’s aircraft fuel expenses decreased 24% YOY to $67.3 million. The carrier’s first-quarter operating margin was 8.8%, up 4.1 points YOY. Yield declined 3.7% YOY to 12.34 cents. PRASM fell 3.8% YOY to 9.88 cents.
Major growth regions
Virgin America SVP-planning and sales John Macleod outlined the airline’s major growth regions during the quarter.
“Q1 was our first full quarter serving the San Francisco to Honolulu and Maui markets, and … in Q1, which is the low season for the California-Hawaii market, we turned an operating profit,” Macleod said. The airlines will add service to Honolulu and Maui from Los Angeles in the 2016 second quarter.
“Our transcontinental routes—JFK to San Francisco and JFK to Los Angeles—saw [our] capacity increase 31% and 22%, respectively, but despite this growth these markets actually outperformed the rest of the network on YOY PRASM,” Macleod said. “Additionally we saw impressive performance on our Newark routes with revenue increasing on flat capacity. So much so that Newark now has similar PRASM performance to our JFK markets which are among our most profitable.”
“Our West Coast routes performed very well this quarter with PRASM up 5% on 12% capacity growth,” Macleod said. “San Francisco to Los Angeles is the fourth largest market in the country and is by far the largest O&D market on the West Coast. We are well-positioned and now hold the number one revenue position in this important anchor West Coast market.
“With respect to the rest of our network, as is the case with the rest of the industry, we continue to see very aggressive pricing strategies by the legacy carriers on ULCC [ultra low-cost carrier] routes and this is having a continued impact on both business and leisure fares in our network. And it is dragging PRASM down,” Macleod said.
Influence of Virgin America on US airline industry
“It’s truly remarkable how the industry has changed in the last eight years or so [not only] in terms of structure, but also in terms of product and quality. We think we’ve been a big part of that,” Cush told analysts and reporters during the airline’s quarterly conference call.
“Before Virgin America started operating the default flying experience was dismal; it was pretty consistent and with very little product differentiation across the industry. There wasn’t much focus on the customer experience and there wasn’t much attention paid to pushing the envelope on entertainment and technology. It was basically a drab generic experience regardless of what airline you traveled on,” Cush said.
“Today in large part to Virgin America we believe things have changed. We’ve shown the industry that the notion that you either have to be a legacy carrier with a legacy cost structure and legacy fares or you can be a no-frills, low-cost carrier [is] a false choice,” Cush said. “We’ve shown that you [can] provide a premium product and experience and you can create an airline people actually want to fly, and provide that experience at lower fares than the other guys offer and basically by running a highly efficient operation, which we have done,” Cush said.
“This is an attribute that we share with our new partners from Alaska Airlines. Over the past several years, they have reduced their cost structure and invested in their product to have a similar impact out of their home in the Pacific Northwest. We look forward to joining forces with them to bring more high-quality, low-fare service to more markets across North America,” Cush said.