Four Challenges to Virgin America's Long Term Success

Last Updated Nov 12, 2010 5:04 PM EST

As I wrote yesterday, Virgin America has finally posted its first quarterly profit and that's good news. But we're in a golden time right now where every airline is making money. There are a lot of threats looming on the horizon, and Virgin America will need to address all of these to ensure that it has a shot at long term success.

A Whole Bunch of New Airplanes Possibly the biggest threat to the airline in the near term is its hyper-growth plans. After standing still on the number of airplanes in its fleet for awhile, Virgin America has decided to go into overdrive. The airline expects to grow from 28 to 90 airplanes in just a few short years. This presents all sorts of problems.

JetBlue (JBLU) is a poster-child for what happens when you grow too fast and the organization can't keep up. You'll remember the Valentine's Day snowstorm in 2007 that paralyzed the airline, I assume. It has taken years for JetBlue to fix its problems to get to the point where it is today. Growing from a small company into a big one is very difficult and it requires time, money, and effort. This will need to be a huge focus for Virgin America at a time when everything else is clamoring for attention as well.

Another issue with taking all these airplanes is figuring out where to put them. So far, Virgin America's route map has been like a dartboard with a random mix of short haul, long haul, business destinations, and leisure destinations. The last route announcement of Dallas/Ft Worth was the first city added in a long time that I thought made sense. And now, it sounds like Virgin America is talking about Chicago/O'Hare (yes, again), Houston, Philadelphia, and Atlanta. Those are the markets that Virgin America should be serving, but they are also major hubs for Virgin America's rivals. There is going to be a massive fight here, and it could turn ugly quickly for the little guy.

The Cost of Maturing Besides there being a cost to growing big, there's also a cost to growing old. Virgin America has all new airplanes and that means that they don't require as much maintenance yet. That will change as the airplanes age. Also, Virgin America has a junior workforce, but every year that passes, those people become more senior and get paid more. Rapid growth is a great way to counteract the increasing costs of seniority, but that can't continue forever.

Virgin America has been lowering its unit costs by getting more efficient, but we'll have to keep an eye out for cost creep as things progress.

Oil Prices Unfortunately, one of those costs that will be creeping is oil. Jet fuel is currently at just over $2.25 per gallon on average and that's almost 10 percent above the price a year ago. There isn't much Virgin America can do about this other than trying to play the dangerous hedging game, but it's something that has already bumped the airline's costs up.

Another super-spike could be devastating.

The Economy While cost creep is one issue, another one is on the revenue side. The airlines are riding high right now, but that doesn't mean that demand will continue at this pace. With the recession continuing to drag on and more economists predicting a long, drawn out recovery, it's unlikely that demand will stay at this level. It fluctuates, and we're at a high point today. If demand fades, Virgin America will have a tougher time than others because it's trying to grow at the same time as demand contracts. And that's not a great position.

As you can see, there are several issues with Virgin America being a sustainable business in the long run. Making a profit is a good start (even if it took 3 years), but now the hard part is coming.

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