Article:
http://online.wsj.com/article/SB10001424127887323420604578652484201833550.html#articleTabs_comments
This article provided insights into Virgin America’s performance and financial results of the second quarter of 2013. The newly released income statement showed that Virgin America made a net income of $8.8 million in that quarter. This was an exciting news for the company because this is the only second profitable quarter since its 6 years (24 quarters) operation. The article led us to take a closer look at the Income Statement to see where this black number on the net income came from.
Link to the Second Quarter of 2013 Financial Result :
As we can see, Virgin America operating revenue was $376 million, an increase of 8 percent from the second quarter of 2012. At the same time, it reduced its operating expenses for 1 percent from 351 million to 348 million. As a result, the operating income was revised to a positive 27 million from negative 4 million.
We can learn from the article that Virgin America has put many efforts, such as adding new route on profitable market, relocating capacity from existing markets, and increasing capacity of each airplane, to increase the operating revenue. On the other hand, comparing to the same period of last year, Virgin Airline operated 5% more flights while the cost of fuel dropped by 6%, thanks to the decrease in the fuel price. Meanwhile, Virgin America slowed down its growth rate and suspended buying more airplanes to until 2015 to reduce the operating expense. This strategy helped the company to improve the operating income. Considering Virgin America already has hundreds of millions of losses (Accumulated Deficit) since it started in 2006, it is crucial for the company to improve its financial performance. Otherwise, it may be dangerous for both the creditors and the shareholders.
Virgin America has a $800 million of debt, thus the account “Other expense” had included interest expense of $30 million per quarter. In this May, Virgin Airline reduced the interest obligation by restructuring its debt. It converted $290 million of the debt (one third of the total) into equity to the investors once the company goes public. As a result, the company reduced “Other expense” from 27 million to 19 million, a 31% decrease. And in the end, this all added up to a 8.8 million net income compared to a year-ago loss of $31.8 million.
By walking through this article and Virgin America’s income statement, we can have a deeper understand about the airline industry and where the net income comes from. As we have learnt from the Northwest Case, Flight Equipments usually are the most expensive assets of the airline company. During the past years, Virgin Airlines expanded quickly by purchasing many airplanes (now it has a fleet of 53). However, this fast growth rate incurred large operating expense and a huge debt. In order to improve the financial performance, Virgin Airline began to control its growth rate while improving the profitability. At the same time, it also reduced its financial expense through debt restructuring. We think Virgin Airline is doing the right thing – airline company shall pay close attention to its financial situation while planning its business strategy. Business growth is good only if the company survives.
In addition, only good financial result can attract investors to fuel the company. In Virgin America’s case, if it wants an IPO, one single profitable quarter is not enough, it has to produce consistent good performance.
Other resources:
http://www.cntraveler.com/daily-traveler/2013/07/virgin-america-airline-not-seeing-profit