If Virgin America was not expected to merge with Alaska Airlines, analysts likely would fret about Virgin America's falling unit revenue. But since Virgin America is now in limbo, waiting to see if it can close its merger, it's not clear how much the unit revenue decrease matters.
Virgin America made a profit of nearly $52 million with an operating margin of 20.4 percent in what airline executives hope is the company’s last quarter as a stand-alone ailrine, according to a Securities and Exchange Commission filing released Wednesday.
The filing comes as Alaska Airlines’ planned acquisition of Virgin America has hit a slight snag, with federal regulators still not announcing whether they will clear the deal, or possibly file suit to block it. The U.S. Justice Department may be asking Alaska for concessions to ensure the airline industry remains competitive, as it has done in previous airline mergers. The government sometimes asks airlines to divest gates and slot holdings at competitive airports, with those holdings often going to low cost competition.
Virgin America said little in the filing about its Alaska deal, long slated to close in the final three months of the year.
“The Company … anticipates that it will complete the transaction in the fourth quarter of 2016,” Virgin America said in its quarterly filing. “However, the Company cannot predict with certainty whether and when any of the remaining required closing conditions will be satisfied or if the Merger will close.”
On Alaska’s third quarter earnings call on Oct. 20, CEO Brad Tilden said the two airlines and the Justice Department were “not quite there yet.”
“The scope of the issues that remain with the Justice Department is manageable,” Tilden said. “But they are important matters, and we want to take the time that is necessary to work through them.”
The Justice Department’s inquiry is not the only legal matter Virgin America is handling. It is also the defendant in a private antitrust lawsuit in San Francisco federal court brought by 34 consumers seeking to stop the proposed merger. According to Virgin America, a trial could take place as soon as December. The court is also requiring that it receive notice seven days before Virgin America and Alaska plan to close their merger, assuming it happens.
“We believe this lawsuit is without merit and we intend to defend against it vigorously,” Virgin America said in the filing.
As a stand-alone airline, Virgin America is facing many of the same revenue challenges as its competitors.
The company said passenger revenue per available seat mile, or PRASM, an industry metric measuring how much revenue a carrier makes for each seat it flies one mile, decreased 7.3 percent, year-over-year. Like other airlines, Virgin America said fare discounts are to blame for the revenue decrease.
Virgin America is still making money in part because it is paying 24 percent less per gallon of fuel than in the third quarter of 2015. The airline’s non-fuel unit costs also fell 5.6 percent, year-over-year. Virgin America said it was the only U.S. airline to report a unit cost decrease.
Virgin America is a considerably larger airline than it was a year ago, as the airline flew eight more Airbus aircraft than in the third quarter of 2015. Virgin America increased capacity 16.7 percent year-over-year. But it is filling more seats than a year ago, with third quarter load factor up 3.4 points to 85.9 percent.
Virgin America said it was one of only carriers to report a year-over-year pre-tax margin increase, and an airline spokesman noted the carrier’s margin is “is now above industry average.”
Photo credit: Virgin America made money in the third quarter even though unit revenues decreased. But the big question is whether the government will clear its merger with Alaska Airlines. John Decker / Reuters