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San Francisco-based Virgin America is an American LCC, owned by VAI Partners and The Virgin Group. With its fleet of Airbus narrowbody aircraft and a popular low-cost product, Virgin America operates a network of services along the US West Coast, as well as trans-national services services between major cities on the East and West Coasts of the US. Virgin America's largest base is at San Francisco International Airport.
Location of Virgin America main hub (San Francisco International Airport)
LCCs will continue to evolve into hybrids of the original core model. CAPA and OAG consider Virgin America fits the LCC profile and it is included in our reporting on this basis. Please note: when reporting for an airline is changed from or to LCC the historical data is not affected and it can lead to a distortion in the current reported data. Contact us if you have any queries.
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Seattle is emerging as a confronting new battleground for partners Alaska Air Group and Delta Air Lines as Alaska Airlines appears to be quickly answering Delta’s latest moves in key US domestic markets by fortifying its leading position on those routes – Las Vegas, Los Angeles and San Francisco.
Alaska appears poised to add frequencies on those routes beginning in Mar-2014 and continuing through Jun-2014. The move follows Delta’s declaration of launching new service from Seattle to San Francisco in Mar-2014 and adding frequencies in Los Angeles and Las Vegas during 1H2014.
The build-up in those markets by both carriers is occurring even as Alaska remains a key strategic partner for Delta in Seattle, and as Delta adds more international service from the airport buoyed by feed from Alaska’s vast domestic network. The heightened competition between the two carriers alongside their powerful partnership reflects the reality that loyalty only goes so far when revenue maximisation is the ultimate end game for any carrier, and Alaska’s efforts to maintain its passenger concentration in key west coast markets shows that it is willing to strike back at any carrier’s encroachment – even if its originates from an important revenue sharing partner.
JetBlue’s decision to introduce a premium product on a sub-fleet of its Airbus narrowbodies pegged for operation on highly contested transcontinental US markets marks a new era in the carrier’s hybrid evolution. As all carriers are amping up their products on transcon routes from New York to retain and steal coveted, high-yielding passengers, the outcome of JetBlue’s gamble is tough to predict.
While the creation of its strategy to attract higher-yielding customers has likely been under development for quite some time, JetBlue’s formal introduction of its premium product occurred shortly after the airline reported 2Q2013 financial results that featured continuing cost inflation and falling unit revenues, and warnings that it will not see a reprieve in cost pressure during the current quarter.
Obviously JetBlue’s forging into new territory with its premium cabin is a long-term endeavour; but in the short-term it will need to be prudent with a significant investment of this nature as its costs continue to rise - with yields meanwhile probably lagging the new investment. The carrier recently revised its 2013 unit costs estimates upwards, driven in part by a small decrease in capacity.
Virgin America leapt out from the red during 2Q2013 to post a second quarterly profit in the company’s five-year history. The swing to profitability is no doubt a relief to the carrier’s management, which appears to be pressing forward with plans to take the company public.
The carrier turned a decent performance in operating metrics during 2Q2013 as yields and total unit revenues grew 1% and 7.8%, respectively. Top-line revenues increased 8% while overall expenses grew just 1%, helping Virgin America to reverse an operating loss of USD4.1 million during 2Q2012 and record a USD27.8 million operating profit for 2Q2013. At the same time its unit cost dropped 1.4%.
A return to profitability after a long hiatus (it was only profitable in one other quarter – 3Q2010) is a positive development for Virgin America, but a single quarter is far from constituting a trend, and given its consistent string of unprofitability the carrier still has somewhat of an uphill climb to prove it has staying power while building its liquidity. Virgin America still posted a USD37.5 million loss for 1H2013, which is a major improvement over the USD107 million loss for the year prior, but with a balance sheet restructure complete and a decision to put the brakes on growth, perhaps Virgin America finally has some financial stability within its sights.
Typically low-key Alaska Air Group has opted to aggressively promote its plans to issue a healthy USD0.20 quarterly dividend that supports a pledge by the company to return roughly USD325 million to shareholders between 2013 and 2014. Alaska’s impressive financial performance has largely been undervalued by the financial community at large as some of the carrier’s growth targets may have spooked would-be investors that view capacity discipline as a key driver in the long-term viability of US carriers in the maturing North American market place.
At the same time it revealed its shareholder reward package, Alaska’s management also moved to allay concerns about its proposed 4% to 8% annual growth rate during the next few years, explaining moves it is making in Hawaii and the US transcontinental market to improve its unit revenue performance, which executives admit have lagged the industry average for the last two quarters.
United’s assertive response to encroachment by familiar rival Virgin America on core markets from United’s Newark hub to Los Angeles and San Francisco does not seem to be significantly affecting the network carrier's 2Q2013 revenue performance as its current unit revenue projections are in line with those issued by its largest rival Delta.
Previously United executives had warned that the new competition from Virgin America in those two key trunk Newark transcontinental markets would pressure its unit revenues for the current quarter, but the 0.3% to 1.3% rise in that metric forecast by United is roughly on par with the flat unit revenue performance forecast by Delta.
After Virgin America introduced its thrice daily service from Newark to Los Angeles and San Francisco in Apr-2013, United crafted an interesting response – a huge capacity increase accompanied by undercutting the fares offered by its smaller rival. Given the new found capacity discipline and the abandonment of chasing market share by the US major carriers, United’s response to Virgin America’s market entry in Newark seems to come from an old airline playbook, which has raised some eyebrows. But after a tumultuous 2012 United’s aggressive counter offensive is somewhat understandable as it has a campaign under way to win back corporate customers who fled during operational meltdowns a year ago.
This is the second report in a two part series examining the ultra low-cost carrier and hybrid business models in the US market place. The first part focused on ULLCs, including Spirit Airlines and Allegiant Air.
Similar to their ULLC peers, North American hybrid airlines stand at an interesting crossroads as consolidation creates opportunities for possible traffic, notably product differentiation. Carriers such as Alaska Airlines and JetBlue Airways that target higher-end leisure customers and more cost conscious business travellers will need to evaluate their products, and decide how to evolve as their competitive overlap with the three remaining legacy carriers (once American Airlines and US Airways complete their merger). The impact on them will be more pronounced than on ultra low-cost leaders Allegiant and Spirit.
JetBlue has already shown some signs of its potential evolution through its decision to create a premium section on daylight transcontinental flights in 2014 in order to cement its hybrid status and offer medium frills as its legacy transcontinental competitors all prepare to offer lie-flat seats on those flights and Virgin America already offers a dedicated first class.
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