“needs a track record of profitability,” but not necessarily a full-year profit before the privately held carrier makes an initial public offering (IPO), CEO David Cush tells Aviation Week.
That performance could consist of six to eight quarters in which the carrier is “making money consistently and generating acceptable returns,” Cush said in a May 13 interview. He expects that to begin with a net profit over the second half of this year and an operating margin for the full year that is higher than half the operators in the U.S. airline industry.
Virgin America has lost money in almost every quarter since its launch in 2007. But Cush believes the situation will change thanks to big unit revenue gains, the maturing of existing markets, a commitment to slower growth that includes no new aircraft deliveries until 2015 and a new agreement with investors to restructure the carrier’s debt.
Cush foresees an initial public offering by 2015, and perhaps even by late 2014.
Virgin America’s CEO says this goal is helped by an agreement this month with the airline’s investors to convert $290 million of the operator’s $800 million debt to equity, and to lower the interest rate on much of the remaining debt. The company expects its interest payments for the second half of the year to be reduced by a third year-over-year, to $20 million.
Cush describes the restructuring as a necessary step on the path to an IPO, while also removing a drag on earnings. “We’ve had a capital structure of a private company, which generally is much heavier in debt and much lighter in equity, which in turn has driven up our interest expense,” he says. That has forced a bigger public focus on attaining an operating profit, he says, but “going forward we’ll be talking a lot more about net profit.”
Virgin America did not come close to achieving that in the financial results it released yesterday for the fourth quarter of 2012 and first quarter of 2013. The airline did, however, report its first-ever operating profit for October-December, $5.1 million, and a 69% decline in its January-March operating loss to $15 million.
The carrier also highlighted its gains in passenger revenue per available seat mile (PRASM), which grew 9% in the fourth quarter and 18% in the first quarter.
But the airline still reported a net loss of $25 million for the fourth quarter, $145.4 million for all of 2012 (45% worse than the prior year) and $46.4 million for the first quarter (a 39% improvement). Unrestricted cash reserves fell to $58 million as of March 31, but the company has since closed on an additional $75 million in debt financing.
Cush counters that “the story for the fourth quarter and first quarter is a revenue story for us, particularly a RASM story,” noting that the fourth and first quarters are traditionally the carrier’s weakest.
In releasing its first-quarter results on May 13, the company is breaking with its tradition of releasing results only for the quarter that is about to be publicly disclosed by the U.S. Transportation Department. CFO Peter Hunt says that change also is part of the IPO preparation that the carrier to be “more focused on having a more normalized process.”