Virgin America Cuts Airbus Order, Delays Jets to Survive
Virgin America Inc., the low-fare airline partly owned by Richard Branson, will cut one purchase of Airbus SAS jets by two-thirds and delay deliveries of a newer model as it focuses on long-term survival over expansion.
The carrier will now take 10 Airbus A320 planes, down from its original order for 30, in 2015 and 2016, according to a statement today. Those 10 aircraft are the last of the original batch, as the first 20 were to be handed over to the Burlingame, California-based airline from 2013 through 2015.
Deliveries of 30 upgraded A320neo-model jets will be pushed to 2020 through 2022 from a range of 2016 through 2019. The fleet changes followed last month’s disclosure for a capacity pullback from January through March, the first such reduction since Virgin America began flying began in 2007, and were announced as the airline posted a wider third-quarter loss.
“You can expand yourself into oblivion,” said George Hamlin, president of Hamlin Transportation Consulting in Fairfax, Virginia. “If you’ve been around for five years and you’re still losing money at a time when a lot of other carriers are reporting improved results, it suggests you might not be able to make that up in volume.”
Virgin America projected annual increases in available seat miles to be an unspecified mid-single-digit percentage for the “next several years,” down from the 28 percent rate of the past three years.
“Slower growth ensures our survival over the long-haul,” Chief Executive Officer David Cush wrote today in a letter to employees. “This move to defer growth will immediately improve our financial results and provide a stronger foundation for the company.”
The airline now flies 52 single-aisle A320s. The A320neo model is Airbus’s latest variant of the plane and is due to enter service in late 2015. Carriers typically buy at a discount to list prices, which are $88.3 million for the A320 and $96.7 million for the neo, according to Airbus.
There were no financial penalties associated with the cancellation, Virgin America said.
“During the summer we started looking at whether it still made sense to grow as fast as we were planning on, given fuel prices and what I’ll say is a modest economic growth climate in the U.S.,” Cush said in a telephone interview. “You don’t invest the capital if you can’t earn an adequate return.”
Virgin America said its quarterly net loss widened to $12.6 million from $3.3 million a year earlier. Revenue jumped 27 percent to $368 million. The closely held company ended the period with $75 million in unrestricted cash.
Cush told employees in his letter there would no furloughs or layoffs and called the slowdown in growth “a smart business decision that will improve our financial results and help keep your jobs secure.”
Capacity will be trimmed by about 3 percent in the first quarter to cut costs, Cush told employees in an October memo in which he also offered voluntary short-term leave to employees.
A surplus of employees took the leaves for the first quarter and will return to work in April, Cush said in the interview. He declined to specify the number of employees. The company has about 2,400 employees, according to today’s statement.
Virgin America will eliminate some flights that are traditionally unprofitable during the first three months of the year such as overnight and midweek flights, and will restore that service in April when demand typically improves, Cush said.
The airline doesn’t plan to drop any cities, though it will reduce the number of departures in cities including Boston, Cush said in the interview. Virgin America flies to cities including San Francisco, Los Angeles, Las Vegas, New York’s John F. Kennedy airport and Boston.
“They went into large markets because of the traffic, but that also meant there were numerous other participants,” consultant Hamlin said in a telephone interview. “They had gotten to the party very late.”
For 2013, the airline expects capacity to be unchanged to slightly larger than in 2012, Cush said. Virgin America will end this year with capacity up 28 percent from 2011.
“The simple math out of that is we think we’re big enough right now for the time being,” Cush said. “The rapid growth we’ve had for the last few years is going to come to a stop.”
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