Virgin America caps the theme for US carriers in 2Q2011: falling profits on rising revenues

Even so, airlines are weathering the storm well with good summer metrics and dramatic capacity cuts for the fourth quarter. They were even able to implement the first fare increase since April as part of the strategy to offset fuel increases.

While most carriers reported declining profits in the second quarter, Virgin America joined American and Hawaiian in posting losses for the quarter. Both Virgin and Hawaiian are in growth mode, which compounded rising fuel.

Profitability for the remaining carriers dropped dramatically - as much as 58% for Delta and 51% for Alaska. United managed an 11.9% drop in profitability from 2Q2010. Spirit Airlines managed the only increase in profits for the quarter posting a USD6.9 increase over the USD10 million it posted in the second 2010 quarter.

Operating revenues for US carriers also rose dramatically for some carriers. Virgin and Spirit posted 48.5% and 55.6% increases while JetBlue's operating revenue increased 22.4% and Southwest's jumped 30.6%. Spirit, Virgin, JetBlue and Southwest all bested Allegiant's 19.1% increase.

Virgin and Southwest also posted the largest increases in operating expenses at 48.5% and 40.1%, respectively. Spirit, Hawaiian and Allegiant also experienced dramatic increases although not as high.

While legacies kept available seat miles (ASMs) in check, low-cost carriers did not. All are in growth mode, with Southwest's ASMs up 23.5%, despite the fact it is pulling back dramatically in the fourth quarter and promising flat ASMs next year. Hawaiian, expanding into Asia, had a 21.2% increase in ASMs while Alaska, expanding to Hawaii and smoothing out its seasonality, experienced a 7.2% growth in ASMs. Spirit was up 27.3% and Virgin was up 30.1%.

American, Delta, United, Frontier and Allegiant - suffering from higher fuel - were all under 3% if not flat as with Frontier, which is now dropping its presence at its Milwaukee hub.

Yield was up across the board, although Southwest's was nearly flat up only 0.3% to USD 14.67 cents. US Airways had the highest yield, up 6.5% to 16.30 cents. It was followed by Delta which was up 11.5% to 15.67 cents. JetBlue also experienced double-digit yield growth, up 13.9% to 13.60 cents. Allegiant had the highest growth with a 27.3% increase but with the lowest yield at 10.7 cents. Virgin's yield growth was up 12.1% to 12.17 cents, the second lowest.

Interestingly, both American's and Spirit's costs rose 9.8% although Spirit's cost per available seat mile rose to 9.70 cents compared to American's 14.52 cents, a key competitive advantage Spirit likes to tout.

The largest CASM increase was at Hawaiian and Allegiant, which posted increases of 31.6% to 15.59 cents and 30.1% to 11.40, respectively. Legacy costs range from 12.97 cents per available seat mile at United to 15.59 cents at Hawaiian. Delta, American and US Airways costs came in at 14.42 cents, 14.52 and 14.59, respectively. It is interesting that US Airways has higher costs than America, although that can be attributed to shorter stage lengths.

Virgin's CASM rose 14.1% to 11.21 cents, a tad lower than JetBlue, lower than Allegiant but higher than Spirit. Frontier comes in higher than Southwest, which does not bode well for Frontier as it is in pitched competitive battles at both Denver and Milwaukee. Southwest CASM is 12.49 compared to Frontier's 12.69 cents. When Republic first acquired Midwest and Frontier airlines it reported much lower costs than either Southwest but it has clearly since lost that advantage.

Virgin cited its new aircraft and infrastructure growth during the period, increasing aircraft in revenue service by 36%, or 10 frames, compared to 2Q2010. It also added 125 full-time equivalent employees during the quarter resulting in increased recruiting and training costs. FTEs rose 23% increase year on year. This year, Virgin America expects to grow its fleet from 28 to 46 by the end of 2011 and to 52 by the end of 2012.

At the end of the quarter, the carrier had USD26 million in unrestricted cash and USD53 million in total liquidity.

Delta continues to be the top earner in terms of ancillary revenues having increased such revenues by 50% to USD998 million. However, Southwest increased its ancillary revenues by 88.1%, the highest increase in the industry, to USD224 million. Spirit's ancillaries also rose over 50% - 55.6% - to USD95 million. Virgin's was up 27% to USD21.4 million, while Hawaiian's ancillaries were up 38.1% to 4.6 million, illustrating how far it has to go to catch up to its peers.

Other legacies - Alaska, American, United and US Airways - were all under 7.4% in increasing ancillaries. United, the second highest earner, was virtually flat at 0.9% to USD780 million despite its acquisition of Continental.

Virgin follows industry in rising revenues

Virgin America's revenue growth, a 46% increase in operating revenue year on year, was not enough to overcome the 62% increase in fuel and a 26% increase in the average cost per gallon year on year. The second quarter results came on a 11.9% year-on-year growth in total revenue per available seat mile to 10.97 cents. Revenue per available seat mile rose 13.4% to 10.09 cents.

Excluding new routes added in the past 12 months, RASM in the carrier's established markets improved by 19% year on year. During the quarter, the carrier's scheduled capacity increased by 30%, compared to the domestic industry's average capacity increase of 2% for the same period. The airline's mature routes (those flown for more than 12 months) were solidly profitable on an operating basis for the quarter. Virgin America reported year-on-year increases in traffic, bookings and average fares. Its average fare rose 11% to USD192.79.

Costs rose 14.1% during the quarter to 11.21 cents while non-fuel cost per available seat mile increased by only 8%, high compared to 1%-5% increases of its US low-cost its peers. However, costs at Allegiant rose faster than Virgin America's CASM ex fuel at 21.6%.

Comparative statistics: 2Q2011

2Q 2011 vs 2101	ALK	AMR	DAL	HA	JBLU	LUV	UAL	LCC	ALGT	Frontr	SAVE	Virgin
Profit USD	28.8 down 50.9%	(286M) vs (11M)	198M down 58%	(50M) vs (49M)	25M vs 31M	161M up 43.8%	538M down 11.9%	92M vs 279M	11.9M down 32%	NA	16.9M vs 10M	(21.6M) up 39.7%
Op Revs USD	1.1B up 13.7%	6.114B up 7.8%	9.1B up 5%	395M vs 315M	1.1B up 22.4%	4.1B up 30.6%	9.8B up 10.3%	3.5B up 10.5%	200.4M up 19.1%	461.8m up 11.2%	275.8 up 55.6%	268.5M up 48.5%
Op Exp USD	1B up 21.5%	6.192B up 13%	8.6B up 19%	465.1M vs 291.8M	1B up 26%	3.9B up 40.1%	9.1B up 12.1%	3.3B up 18.8%	179.3M up 28.1%	NA	240.9 up 37.2%	274.5M up 48.5%
ASMs	7.4B up 7.2%	39.2B up 2.1%	60.1B up 2.5%	2.9B up 21.2%	9.4B up 8.7%	31.4B up 23.5%	56.4B up 1.1%	19.1B up 3.3%	1.5B down 1.5%	3.8b down 0.2%	2B up 27.3%	2.4B up 30.1%
LF	84.3 up 2.4 pts	83.6% down 0.3 pts	83.7 down 1.3 pts	83.9% down 1.7 pts	81.5% down 0.5 pts	82.3% up 3.3 pts	84% down 0.9 pts	83.8% up 0.9 pts	88.9 up 0.3 pts	87.4% up 1.5 pts	85.9% up 6.1 pts	82.9% up 1 pts
Yield Cents	14.39 up 3.9%	13.90 up 4.6%	15.67 up 11.5%	14.12 up 7.2%	13.60 up 13.9%	14.67 up 0.3%	14.46 up 10.3%	16.30 up 6.5%	10.8 up 27.3%	NA	NA	12.17 up 12.1%
Prasm Cents	13.58 up 6.8%	11.62 up 4.9%	13.12 up 9.9%	11.85 up 5.1%	11.08 up 13.2%	12.32 up 4.1%	12.15 up 9.1%	13.66 up 7.6%	12.71 up 20.9%	11.47 up 10.4%	11.37 up 22.1%	10.90 up 13.4%
CASM Cents	NA	14.52 up 9..8%	14.42 up 15.7%	15.59 up 31.6%	11.28 up 16%	12.49 up 13.4%	12.97 up 10.7%	14.59 up 15%	11.40 up 30.1%	TCASM 12.69 up 17.6%	9.70 up 7.8%	11.21 up 14.1%
CASM ex fuel/ Cents	8.46 down 3.1%	9.36 up 1.4%	8.46 up 4.8%	11.05 up 27.6%	6.62 up 1.7%	7.63 up 3.8%	8.17 up 3%	9.14 up 0.9%	5.92 up 21.6%	7.56 up 4.6%	5.41 down 10.3%	6.59 up 8.2%
Anc/Other Revs USD	66.9 up 7.4%	659M up 5.5%	998M up 50%	41.6M vs 38.1M	105M up 17%	224M up 88.2%	780M up 0.9%	345M up 3.9%	54.2M up 7.2%	21.6M up 13.1%	95.4M up 55.6%	21.4M up 27%

Source: Centre for Aviation
Consolidated operations except AMR, Alaska Airlines
ALGT yield for scheduled service only, PRASM # is actually RASM, CASM #s are total system