Virgin America Inc., the low-fare airline partly owned by Richard Branson, will trim capacity by 3 percent in the first quarter and is offering voluntary short-term leave to employees to cut costs, citing a weaker outlook.
The company, which reported a wider net loss for the second quarter, is seeking voluntary reductions through short-term leave and flex scheduling ahead of an anticipated drop in traffic in the first three months of 2013, Chief Executive Officer David Cush wrote in a letter to employees last week. The Burlingame, California-based company, which employs about 2,600, hasn’t said how many workers are involved.
Closely held Virgin America, which ended the second quarter with $82 million in unrestricted cash, may need to pursue a “major restructuring” to survive, said Hunter Keay, an analyst at Wolfe Trahan & Co. in New York. Virgin America has competition on every route, such as San Francisco to New York. Each of the 11 other airlines Keay follows has a monopoly on at least 25 percent of their routes, he said.
“A combination of cash burn and network missteps into highly trafficked markets” is hurting Virgin America, Keay said in a telephone interview. “They had an assumption that consumers would choose product quality over price and convenience and network carriers responded with force.”
Keay questioned Virgin America’s ability to survive in a client note today and said the carrier’s failure would benefit Alaska Air Group Inc. and JetBlue Airways Corp. the most.
Jennifer Thomas, a Virgin America spokeswoman, declined to comment on Keay’s report.
In the letter, Cush cited recent unit-revenue figures by competitors including United Continental Holdings Inc. and Southwest Airlines Co., calling them “lackluster projections” that “point to a softening environment” and necessitate Virgin America’s cutbacks.
Earlier this month, United said revenue for each seat flown a mile fell 2.5 percent to 3.5 percent for September and Southwest reported revenue on that basis dipped 2 percent to 3 percent.
“The forecast for the first quarter of 2013 indicates it will be a tough winter for the industry,” Cush said.
Virgin America reported a net loss of $31.76 million for the second quarter, 46 percent wider than the same period a year earlier.
The January to March period is “challenging” for the industry, especially because Virgin America’s coast-to-coast routes often “underperform in the winter months,” Cush wrote in the letter. The airline’s network doesn’t allow it to easily shift planes to shorter north-south “sun routes” that are more popular in the cold months, he said.
Virgin America will eliminate some flights that are traditionally unprofitable during the first three months of the year such as red-eyes and midweek flights, and will restore that service in April when demand typically improves, he said.
The airline, which started service in August 2007, has a fleet of Airbus SAS A320 jets and flies to cities including San Francisco, Los Angeles, Las Vegas, New York’s John F. Kennedy airport and Boston.