Virgin America Shareholders Cash Out, Airline Reports Negative 25 Percent Fourth Quarter Margin

(MoneyWatch)  Things are not looking good for Virgin America now that the airline's two major US-based shareholders have apparently returned their stakes in the carrier to Virgin Group. If Virgin Group is still holding on to those stakes, then the carrier will be in violation of US-ownership requirements. If Virgin Group has found another US stakeholder to take over, then the feds will likely enter into a lengthy review of the new arrangement to see if it satisfies the law.

In light of that information, Virgin America reporting a a $27 million loss in the fourth quarter 2008 sounds like good news. CEO David Cush crowed, "These results have exceeded our expectations, and show steady quarter-over-quarter growth in unit revenue and margin improvement since our launch in August 2007," but I don't think I'd be so thrilled.

There's no question that these results are far better than what they had reported in previous quarters. But now that the airline is becoming more mature, it's hard to see how they're going to reach profitability in the face of a severely weakening economy, and that makes finding new American investors a very difficult prospect right now.

During the quarter, the airline saw an 81.2 percent load factor. That's a very healthy load, but it means that there isn't a ton of opportunity to put more people on the plane. Instead, they have to increase their unit revenues to reach profitability. So far the unit revenue growth has been good, but that is slowing quickly.

Unit revenue in the fourth quarter of 2008 was up 87 percent versus the fourth quarter of 2007, and up 5.3 per cent versus the third quarter. Previously, the airline reported that quarter-over-quarter unit revenue improved by 28 percent in the first quarter of 2008, 26 percent in the second quarter and 10 percent in the third quarter.

As you can see, unit revenue growth in the fourth quarter vs the third quarter slowed significantly, probably because they left the high summer demand levels and came back down to fall demand levels. But demand has only gotten weaker in this industry, and I would be surprised if they could keep increasing their unit revenues at all in this climate.

This is a very small sample, but I can buy a $48 one way flight from LA to San Francisco for travel tomorrow. On those same days, I can get to New York for $118 each way. So yeah, unit revenue growth is going to be difficult.

They do have $68 million of cash on hand after the last infusion, so there is at least something of a cushion for them for now. But if demand doesn't start to pick up soon, they'll end up needing another infusion. Then again, if the government decides that they are no longer US-owned, they've got much bigger problems.