Skift Take

Virgin will need to argue that it will put the IPO dollars towards expanding its coverage rather than lavishing on new perks for passengers.

As Virgin America prepares to go public, the question is, will investors like it as much as passengers?

Virgin, based in Burlingame, ranked No. 1 in the past two years in the Airline Quality Rating analysis of airline performance conducted by Wichita State and Embry-Riddle universities. It was also named the best U.S. airline by, based on a reader survey and performance statistics.

But being popular with passengers is no guarantee of success on Wall Street. In fact, it can sometimes be a hindrance.

Spirit Airlines is the most complained-about airline by far, according to a report released in April by the U.S. PIRG Education Fund. Yet its stock is up 283 percent since the beginning of 2013, more than any publicly traded airline in the report, which included the largest 13 carriers by passengers. (Virgin ranks 14th and was not in that study.)

JetBlue, the airline most often compared with Virgin, is up only 99 percent over the same period. “Some analysts view them as focusing more on the customer rather than the shareholder,” says Stifel analyst Joseph DeNardi.

Virgin filed a registration statement on Monday, but it did not specify how much money it plans to raise or when.

It’s picking an opportune time to go public. Airline stocks have been soaring since the beginning of last year, thanks to an improving economy, industry consolidation and a fee-frenzy that has carriers charging for everything from carry-on bags to talking with a reservation agent.

Today, only four airlines — United, American, Delta and Southwest — control 80 to 85 percent of the domestic market, down from about nine airlines in 2000, DeNardi says. Consolidation has allowed the big carriers to maintain a balance between supply and demand and created “a favorable pricing environment,” he says.

The U.S. airline industry posted record profits last year, which allowed Virgin to turn a small profit for the first time since it took off in 2007, despite having one of the lowest operating margins in the industry, says Seth Kaplan, an analyst with Airline Weekly.

Virgin eked out a $10 million profit last year after losing $145 million and $100 million in 2012 and 2011, respectively.

Kaplan says it’s hard for a hybrid airline like Virgin to make money.

The most profitable airlines today are either super-low-cost carriers such as Spirit, Allegiant and Ryanair in Europe, or comprehensive airlines with global networks, corporate contracts and “monster frequent flier plans,” Kaplan says.

Although Southwest is not as spartan as Spirit, it still offers low-cost fares, has a lean cost structure and a network that is “impenetrable,” Kaplan says. “They monopolize hundreds of markets,” mainly into and out of smaller markets on short flights that generate a lot of revenue on a per-mile basis.

Virgin doesn’t have super low fares, a global network or an enviable route system. Unlike other smaller carriers such as Alaska or Frontier that target smaller cities and secondary airports, Virgin primarily flies popular routes — such as San Francisco to New York — where it competes directly with the major carriers.

It has managed to build a “cult like” following among passengers who like its mood lighting, in-flight entertainment, leather seats and Internet access on every flight, says George Hobica, president of

And although they are willing to pay a premium, it’s not big enough to make up for Virgin’s higher cost structure. Kaplan points out that Spirit crams at least 20 percent more seats on a similar-size plane than Virgin.

“There aren’t a lot of airlines that look like Virgin that make good money,” Kaplan says.

Even so, given the interest in IPOs and airline stocks, the Virgin offering is likely to be popular with investors, says Kathleen Smith, a principal with Renaissance Capital, which manages IPO funds.

She points out that companies that went public last year outperformed the market as a whole, and although they are lagging this year, their returns are still positive.

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Tags: ipo, low-cost carriers, spirit airlines, virgin america

Photo credit: Virgin America flight attendants line the red carpet at Love Field in Dallas, Friday, April 25, 2014. David Cush and Chairman Don Carty discussed the future of flights from Dallas Love Field during a special "open plane" event. Max Faulkner / Fort Worth Star-Telegram/MCT)

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