B5829

Dat e: J u l y 1 5 , 2 0 1 6

ADAM BERMAN

Virgin America (B)

Fly Like a Boss.
—VIRGIN AMERICA TAGLINE ON COAST-TO-COAST FLIGHTS, 2013

In mid-April 2014, David Cush, the president and CEO of Virgin America, quietly stood among
the guests near Gate 25 of the airline’s Terminal 2 at San Francisco International Airport (SFO)
and waited to board a non-stop flight to John F. Kennedy International Airport (JFK) in New
York City. As he has done many times before, Cush would then often be seated near the front of
the Main Cabin Section so that he could discreetly collect his own intelligence on how his fellow
“teammates” did and hear what other guests said.

On this particular summer afternoon, however, Cush also reflected on Virgin America’s
accomplishments during 2013. As in prior years, Virgin America continued to be recognized for
its outstanding customer service. Travel + Leisure had ranked Virgin America as the top U.S
airline for the sixth consecutive year1 and a recent Consumer Reports survey of 16,663 readers
listed the airline as the top carrier, with a score of 89 out of a possible 100.2 But unlike prior
years, Virgin America achieved another important milestone: becoming profitable. After
incurring cumulative start-up losses of $675 million over its first six years, Virgin America had
finally realized a net profit of $10.1 million for a full year in 2013 (Exhibit 1). This was largely
accomplished through increased passenger loads in its existing markets and reduced interest
payments on its outstanding debt. Now Cush wondered what he and his executive team needed to
do next so that Virgin America would continue on this path of growth and profitability, setting up
a possible future IPO3.

The Continued Building of Virgin America

1
Virgin America Press Release, “Virgin America Ranked Top U.S. Airline in Travel + Leisure World’s Best Awards
for Sixth Straight Year,” July 2, 2013.
2
Richtel, Matt, “A Fine Line Between Pizzazz and Profits,” The New York Times, September 8, 2013.
3
Ibid

Lecturer Adam Berman, with assistance from Case Writer Dickson L. Louie, prepared this case study as the basis for class discussion
rather than to illustrate either effective or ineffective handling of an administrative situation. .

Copyright © 2016 by University of California at Berkeley Haas School of Business. All rights reserved. No part of this publication
may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means without the express
written permission of the Berkeley-Haas Case Series.

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 VIRGIN AMERICA (B) 2

Sticking to the original business model. During 2013, Virgin America continued to focus on its
segment of passengers, who were interested in obtaining the “high-touch, low-cost experience” of
flying between major metro markets. The airline continued to boast of its ability to offer Wi-Fi
on every flight and the largest in-flight entertainment library. The airline’s revenue per average
seat mile (RASM)—a key industry metric—increased by 9.3 percent, from 10.65 cents in 2012 to
11.64 cents in 2013, (see Exhibit 2). This was the largest year-over-year RASM increase among
all major airlines in 20134.

Going a “mile-deep” its existing markets. During 2013, Virgin America had added two year-
round destinations—Austin, Texas and San Jose, California 5—and one other seasonal destination
– Anchorage, Alaska6 —to the list of markets served, choosing instead to focus on increasing the
frequency of its passengers now flying within its existing 19 destination markets. A decision to
slow Virgin America’s pace of expanding into new markets was made in November 2012, when
the airline opted to delay the purchase of several new Airbus planes by three-to-four years.
“Slower growth ensures our survival over the long-haul,” wrote Cush in a letter to employees.
“This move to defer growth will immediately improve our financial results and provide a stronger
foundation for the company.” 7 Because of the airline’s association with Virgin Atlantic and
Virgin Australia—both separately owned entities—Virgin America already had a high brand
awareness of nearly 90 percent in its markets. Instead of continued expansion by entering new
markets as they had done in prior years, the airline decided to go a “mile-deep” in their existing
markets to increase passenger load. As an example, the airline introduced coast-to-coast flights
from Newark International Airport (EWR) to both San Francisco and Los Angeles (LAX), with
its “Fly Like A Boss” campaign (Exhibit 3), in March 2013 to increase the frequency and
number of business travelers - the Legacy Elites—flying between those markets. This was also
part of the airline’s long-term strategy to have business travelers account for 50 percent of their
revenue. Virgin America’s most frequent flyers accounted for one percent of its guests but 11
percent of the revenue8. Other marketing initiatives to increase the number of guests flying
aboard Virgin America included the tweeting of last-minute fare prices9 to its 500,000 Twitter
followers. As a result, the passenger load for the airline increased to 80 percent in 2013 after
averaging 79 percent during 2012 (Exhibit 2).

Restructuring the balance sheet and lowering the interest payments. In addition to its
continued customer focus, Virgin America’s bottom line during 2013 also benefitted from the
restructuring of its debt, which cut its interest payments by almost one-third. In May 2013, Cyrus
Capital Partners, one of its key investors, agreed to convert its ownership of $290 million of the
company’s overall $800 million debt to an equity position10 and the company negotiated lower
interest on the remaining portion. The lower interest payments were expected to result in almost
$35 million in annual savings.

“Staying focused on creating a significantly better travel experience for customers and
capitalizing on strong route network helped [Virgin Airline] achieve 9.3 percent unit revenue

4
Virgin America Press Release,” Virgin America Reports Fourth Quarter 2013 and Full Year 2013 Financial Results,”
March 26, 2014..
5
In 2013, Anchorage, Alaska, was added as a seasonal market and Newark was added as another location to the
existing New York City market.
6
Ibid.
7
Stilwell, Victoria, “Virgin America Cuts Airbus Order, Delays Jets to Survive” Bloomberg News, November 26,
2012.
8
Richtel, Matt, “A Fine Line Between Pizzazz and Profits,” The New York Times, September 8, 2013.
9
Ibid.
10
Ibid.

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 VIRGIN AMERICA (B) 3

growth,” said Cush. “[RASM} is a critical measure of our success, and our impressive
performance in this area, coupled with our efficient cost structure, led to three consecutive
profitable quarters and our first full year of net income.11”

Conclusion

As Cush settled into his seat for the five-hour flight to New York City, he thought about other
ways on how to make Virgin Airlines profitable without losing the unique personality that had
endeared the airline to many of its frequent fliers. Cush still believed that Virgin America’s
revenue and cost approach (Exhibit 4) would continue to differentiate it from other legacy and
low-cost carriers. Now, the need to balance future growth and profitability would be an ongoing
challenge for Cush and his executive team, despite the constant uncertainties of fuel prices and
the state of the economy, as an IPO was still under consideration.

11
Virgin America Press Release,” Virgin America Reports Fourth Quarter 2013 and Full Year 2013 Financial
Results,” March 26, 2014.

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 VIRGIN AMERICA (B) 4

Exhibit 1 Virgin America Income Statement, Full-Year 2013 and 2012 (in thousands)

2013 2012
Full Year Full Year Percentage
Increase
Ended 12/31 Ended 12/31 (Decrease)
Guest Revenue $1,289,268 $1,215,178 6.1
Other Revenue 135,410 117,659 15.1
OPERATING REVENUE $1,424,678 1,332,837 6.9

Aircraft Fuel 507,035 537,501 5.7

Aircraft Rent 202,071 236,800 14.7
Salaries, Wages and Benefits 196,477 176,216 (11.5)
Landing fees and other rent 122,621 110,165 (11.3)
Sales and marketing 106,599 107,136 0.5
Aircraft maintenance 61,854 58,934 (5.0)
Depreciation & Amortization 13,963 11,260 (24.0)
Other 133,177 126,558 (5.2)
OPERATING EXPENSE 1,343,797 1,364,570 1.5

OPERATING INCOME $80,881 ($31,733) NM

Other Expense (1) 70,420 113,640 38.0

Income (loss) before taxes $10,461 ($145,373) NM

Income tax expense 317 15 NM
NET INCOME (LOSS) $10,144 ($145,388) NM

Note: (1) Other Expenses includes interest expense

Sources: Virgin America Press Release, March 26, 2014.

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 VIRGIN AMERICA (B) 5

Exhibit 2 Virgin America, Key Operating Metrics, Full-Year 2013 and 2012

2013 2012
Full Year Full Year
Ended 12/31 Ended 12/31
Available Seats Miles (ASM) (millions) 12,243 12,514

Average stage length (miles) 1,474 1,567

Aircrafts in service (average) 53 52

Fleet Utilization (hours per day) 11.1 11.9

Guests 6,329 6,219

Load Factor 80.2% 79.2%

Average Fare $203.70 $195.38

Total Revenue Per ASM (cents) 11.64c 10.65c

Passenger Revenue Per ASM (cents) 10.53c 9.71c

Yield per passenger mile (cents) 13.14c 12.26c

Cost Per ASM (cents) 10.96c 10.90c

Cost Per ASM, excluding fuel (cents) 6.83c 6.61c

Fuel Gallons (thousands) 159,326 161,404

Fuel Price Per Gallon $3.17 $3.33

Teammates 2,482 2,395

Sources: Virgin America Press Release, March 26, 2014.

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 VIRGIN AMERICA (B) 6

Exhibit 3 Virgin America 2013 Advertising Campaign

Source: Virgin America.

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 VIRGIN AMERICA (B) 7

Exhibit 4 Virgin America Revenue and Cost Approaches Against Other Airlines

Source: Virgin America.

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