Virgin America Continues Toward an IPO -- United Continental Beware!

Virgin America's earnings continue to improve, putting it on track to file an IPO soon.

Jun 29, 2014 at 12:00PM

Last week, Virgin America reported that its earnings improved yet again in Q1, although it still posted a loss in the seasonally slow quarter. Following the company's first-ever annual profit in 2013, this puts Virgin America in good position to pursue an IPO at some point in the next year.

An IPO would provide Virgin America with cash that could support additional growth. In the long run, United Continental (NYSE:UAL) has the most to lose if Virgin America ramps up its growth plans again, as Virgin's two main bases (San Francisco and Los Angeles) are also United Continental hubs.

Losses turning to profits
Virgin America first took off in 2007, but profits remained elusive until last year because of a combination of tough competition, high oil prices, and the 2008 Great Recession. In early 2013, Virgin America's creditors exchanged a significant amount of its debt for stock, cleaning up the company's balance sheet and reducing interest expense.

Virginamerica Plane

Virgin America significantly cleaned up its balance sheet last year. Photo: Virgin America.

This was followed by strong improvement in the company's operating performance during the rest of 2013. As a result, Virgin America was profitable for each of the last three quarters of 2013, which allowed it to post a full-year profit of $10 million, compared with its $145 million loss from 2012.

Virgin America posted a much smaller earnings improvement in Q1 of 2014. The company reduced its net loss from $46 million to $22 million, but that was almost entirely driven by the 2013 debt restructuring. Virgin America narrowed its operating loss just slightly, from $15 million to $13 million.

This isn't a sign that Virgin America is returning to its money-losing ways, though. The first quarter is always the toughest for airline profitability. Additionally, Virgin America's earnings were hurt by a fourfold jump in flight cancellations caused by severe winter weather, as well as the calendar shift of Easter from March to April. Virgin America is still on pace for strong earnings growth this year.

Expansion plans
Virgin America grew extremely rapidly in the first few years of its existence. In late 2012, the company made a decision to take a temporary pause in growth and canceled orders for 20 current-generation A320 aircraft. As a result, it has added just one plane to its fleet since mid-2012.

However, Virgin America will start to grow again next year, as it is scheduled to take delivery of five new A320s in the second half of 2015, followed by another five in the first half of 2016. After that, its next scheduled deliveries are 30 A320neos coming between 2020 and 2022.

Images

United Continental has been the biggest loser as Virgin America has grown.

In the past, United Continental has been the biggest victim of Virgin's growth. Virgin America set up its main bases at two United hubs (San Francisco and Los Angeles) and focused its service on key business markets. It has won the loyalty of many frequent business travelers who might otherwise fly United through superior customer service.

A look into the future
For the moment, Virgin America is focusing its capacity growth on Dallas Love Field, where it recently won the right to use two gates. Virgin will be moving its flights to San Francisco and Los Angeles to Love Field in October. It also plans to start service to New York, Washington, and Chicago -- along with increased frequencies to San Francisco and Los Angeles -- in the next year.

Dallas is not a United hub, but all five markets that Virgin America plans to serve from Dallas are United hub cities. As a result, Virgin's growth in Dallas will continue to put pressure on United, though it won't be as problematic as some of the carrier's other recent expansions.

Looking ahead, Virgin America is planning to use its 2015-2016 aircraft deliveries to support service from San Francisco and Los Angeles to Hawaii. It also wants to enter some more key business markets, including Denver, Phoenix, Houston, and Atlanta.

With just 10 planes on order between now and the end of the decade, there's only so much harm Virgin America can do to an airline the size of United, which has nearly 700 mainline aircraft. However, an IPO could give Virgin America the financial flexibility to ramp up its growth plans. Given the U.S. airline industry's tight supply situation, there should be plenty of opportunities.

Foolish wrap
Virgin America is never going to return to its 30% growth rate of just a few years ago. However, its rapidly improving earnings may allow it to move to a somewhat more aggressive growth posture compared with the status quo.

Virgin America is definitely looking to go public soon, possibly as early as this fall. Its newfound earnings power and growth potential -- not to mention its potential appeal as an M&A target -- should make it an appealing target for investors in an IPO.

The people who shouldn't be excited about Virgin America's trajectory are United Continental investors. Virgin America has set up shop in United's backyard, and its premium amenities and superior customer service are helping it gradually steal some of United's most profitable customers. Further expansion by Virgin America in San Francisco and Los Angeles will make it even harder for United to retain its grip on the corporate travel market there.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Adam Levine-Weinberg is short shares of United Continental Holdings. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers