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Actionable news in VA: VIRGIN AMERICA Inc,

An In-Depth Analysis Of Virgin America

Summary

Virgin America investors have been on a roller coaster from $26 at the IPO to $45 and back to $28.

Virgin America maintains a loyal following and has a fantastic onboard product.

Virgin America, however, has many negatives I feel need fixed before I would be confident to buy.

In this article, I do an in depth analysis of the current issues facing Virgin America (NASDAQ:VA), how they affect Virgin America, Virgin America financials and risks going forward.

Overview

Virgin America is a premium low cost airline based in San Francisco, California. It strives to offer a premium product to passengers while offering them at a low cost. It operates hubs out of San Francisco International airport alongside Los Angeles International and has a focus city in Dallas Love Field. It operates flights mainly within the United States and from the United States to Mexico.

Fig 1: Virgin America Aircraft Interior

Oil

Analysts are concerned that oil prices will rebound and cause airlines to be unable to stay profitable. Goldman Sachs, however, came out with a report last month predicting $45 oil by October, citing cheap capital, imbalances that are not solved, and a surplus of crude for the reasons it sees $45.

Virgin America has hedged 44% of its oil consumption for the current quarter and anticipates an overall cost of $2.45-2.55 per gallon for the current quarter, a bit of a premium to the current market prices.

Fundamentals

I go into detail on both positive and negative fundamentals for Virgin America below:

Positive

  • The business model of Virgin America, focused on making flying affordable, sexy and fun maintains a loyal following.

  • Virgin America does not own any aircraft, instead operating them on operating leases. This allows for a lot of flexibility to cut capacity at little cost in any sort of downturn.

  • Virgin America is maintaining capacity growth of under 1% in 2015, which is less than US GDP growth. (GDP growth is the general guideline for the rate at which airlines should expand.)

  • Virgin America and JetBlue (NASDAQ:JBLU) were the only US airlines to report significant RASM (revenue per available seat mile) increases in Q1 2015 as the rest of their competitors saw RASM declines. This shows people are willing to pay more to fly on Virgin America.

  • Impressive ancillary revenue growth (see below).

Fig 2: Growing Ancillary Revenue at Virgin America

Negatives

  • Early rumors suggest new Virgin America flights between Dallas and Austin may be flying with as low as a 10% load...


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