Virgin America Stocks Take Off

Virgin America Inc  was one of the most anticipated IPOs for November. The San Francisco-based carrier is going by the ticker VA, and the company is looking to raise over $300 million. This IPO comes at a particularly fortuitous time for the airline industry. Virgin America Inc made its debut in 2007, but it struggled to keep its head above water in the highly competitive US market. However, 2014 has turned Virgin America Inc.’s fortunes around, and the company went from the red into the black. For the first 9 months of this year, Virgin America Inc has generated in excess of $60 million in profit. This is 16 times greater than the $4 million loss the company racked up for the same period in 2013.

The Branson Effect
Virgin America Inc is part owned by the inimitable Sir Richard Branson. According to Securities and Exchange Commission (SEC) requirements, foreign entities can only own a minor stake in US listed companies. As it stands, Sir Richard Branson and VX Holdings LP owns 24.8% of Virgin America. More importantly, when the company filed with the SEC, it was made clear that the brand is closely connected to Branson, regardless of his stake in the company. Branson and Cyrus Holdings agreed to sell over $52 million in shares to PAR Investment Partners LP. This deal was done on the basis of the share price remaining below $24.

Virgin America Inc employs 2200 people, and its CEO is David Cush. In line with the Virgin Group's policy vis-a-vis employees, the company believes strongly in developing its human resources. To this end, David Cush offered employees shares at the IPO listed price through Loyal3 securities Inc. At the low end, shares were made available at $100, with a ceiling of $10,000 with no fees or commissions attached.

Virgin America Inc Sitting Pretty In 2014
Despite the fact that the company has struggled since 2007, it has remained one of the most desirable airlines on the West Coast. Travel and Leisure bestowed the honour of Best Domestic Airline Award on Virgin America Inc for several years in a row. The company offers amazing perks, a rewarding frequent flyer program and a unique flying experience. For example the Virgin fleet offers passengers leather seats, incandescent lighting, wireless Internet, TV on the backs of seats and electrical sockets for handheld devices.

This year has seen the price of oil drop from over $110 per barrel to under $80 per barrel. At the time of writing, West Texas Intermediate crude oil was $77.18 per barrel and Brent crude oil – the international benchmark was $80.38 a barrel. These cost reductions have have allowed Virgin America Inc, and all other airlines, to widen their profit margins. This year has been exceptionally bullish for the airline industry, and it shows in the bottom line.

Moving forward, Virgin America Inc is looking to expand its list of destinations in the US. In so doing, it will have to pick up many more passengers, because Southwest Airlines carries almost 20 times more passengers than Virgin does. This could present a problem to Virgin America Inc if a price war breaks out between these carriers. In 2013, 108 million people flew on Southwest Airlines while 6.2 million people flew on Virgin America. To its credit, Virgin America costs have decreased by 6% since 2012, and it has been able to maintain low costs since the bulk of its aircraft are less than six years old. This means that less money needs to be spent on maintenance, facilitating greater earnings per share for existing shareholders.

The Final Word: To Invest or Not to Invest?
At least in the short term (1-3 years) Virgin America Inc could be a lucrative investment opportunity for traders. By 2016, Virgin America is hoping to add an additional 10 Airbus A320 planes to its fleet. These planes will be equipped with wingtip devices that allow for greater cost savings. Since 2011, the company has increased its fares by 8% with an average flight cost of $204. Southwest Airlines average fares are markedly lower at $160. If Virgin America Inc. can keep its price advantage intact and its costs down, the company will benefit immeasurably from its public listing. 

About the Author:
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Brett provides in-depth analysis and consultancy to the critically acclaimed spread betting and CFD trading provider, InterTrader.com.