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Virgin America will be well pleased with its timing in accessing the public markets as airline stocks are currying favor with investors after consistent capacity discipline and lower fuel prices have drawn attention to airline stocks, driving up the sector’s performance during CY2014.
The airline is enjoying a trading price well above expectations after recording a profit for the third quarter and the nine months ending September 2014, setting the stage for its second consecutive year of profitability. Much of Virgin America’s recent financial success rests on capacity reductions and debt restructuring, so arguably the real test of its ability to generate profits is yet to unfold.
Virgin America becomes a newly traded public company at an interesting time in the U.S. airline business as the completion of consolidation among the major airlines creates space for smaller airlines to fill gaps created by those mergers. It is not totally clear how Virgin America intends to position itself in the new environment, but it could scarcely have chosen a better time to be exploring new territory, much of it newly vacated.
One key target area for the newly public airline will be higher yielding corporate travel
It is not certain how Virgin America intends to carry out that expansion; but it does have a stated goal of increasing its share of corporate travellers. That suggests Virgin America is likely to focus on domestic expansion into markets where it can increase its corporate share.
Virgin America recently stated that it has contractual relationships with more than 250 major corporate customers and travel agents, and during CY2013 corporate travellers booking through a global distribution system generated average fares for the airline that were 65% higher than those booked through other channels.
In CY2013 Virgin America estimates that passengers booking within 14 days of departure represented 30% of its guests in CY2013 and 40% of its revenues.
Virgin America CEO David Cush considers that Virgin America’s planned growth rate for the next couple of years should not be “upsetting to the industry”, and that the company could achieve that growth while maintaining or growing margins, which on an operating basis were nearly 8% for the 9M ending Sep-2014.
Virgin America has already taken advantage of consolidation among the US majors through the acquisition of gates at Dallas Love Field, Washington National and New York LaGuardia airports in its quest to expand its corporate traveller base. Unlike Spirit and Frontier, and to a lesser degree Allegiant, which are looking to fill gaps at hubs downsized by major US airlines as a result of US consolidation, Virgin America is growing in major metro areas, where the rest of the industry also intends to grow.
Virgin America does not shy away from competing with the major airlines; but the key is determining if there are profitable opportunities in those markets, and if it has the wherewithal to survive the competitive response from those larger airlines. It has not pulled out of many markets since its debut in 2007, showing a consistent form; however, it has only been profitable one year of its existence.
For more on this analysis, read “Virgin America’s powerful market debut” on CAPA.
This story originally appeared on CAPA – Centre for Aviation, a Skift content partner.
Additional links from CAPA: