Virgin America released its S-1 filing ahead of its IPO, and the headline is something like: Costs are a bit lower than mainline carriers, but revenue isn’t anywhere where it needs to be. Basically, it’s not cheap enough to compete with Allegiant or Spirit, and it can’t generate enough revenue to have a top line that looks like Delta or American. It’s mostly like JetBlue, which has been squeezed in the same way – a decent cost structure, but not low enough to compete on the bottom end (while mainline carriers have reduced their cost structure significantly to where there’s not much difference between the Uniteds and JetBlues of the world), but passengers aren’t willing to pay a high enough premium for the free TV and free checked bag (which is why JetBlue will likely be charging for the first bag soon).
The number that jumped out at me in the filing is around Ancillary Revenue. If your costs are OK, but you’re not getting enough credit from consumers in the form of higher average airfares, then you need to make it up with ancillary revenue. Virgin America’s Ancillary Revenue per Passenger is $19.71, or 8.8% of their revenue. United Airlines, which is not exactly at the forefront of innovation in terms of ancillary revenue streams, earned $21 per passenger in Q4 2013. On the other hand, Allegiant racked up $46.99 in ancillary revenue per passenger in Q1 2014, making up about 1/3 of their passenger revenue.
Virgin America competes on low-fare leisure routes, and highly competitive business routes. They don’t have enough flights or a strong enough premium product (especially on transcons) to generate a revenue premium versus their established competitors. They need to make up the shortfall with ancillary revenue, and unfortunately there doesn’t appear to be a major focus on this (it warranted a half-assed sentence in the filing). Without a major push into additional fees, they will continue to struggle to be profitable.