Is Virgin America's IPO a good investment opportunity?

 Virgin America offers a strong onboard product. But is it a good investment opportunity? Photo: Virgin America.

Virgin America offers a strong onboard product. But is it a good investment opportunity? Photo: Virgin America.

What's wrong with Virgin America?

I don't mean the product. That's still OK, though Virgin America's mood lighting and in-seat televisions are no longer as cutting edge as they were in 2007. In fact, they might be a bit dated.

No, the problem with Virgin America is its upcoming IPO. While there likely will be plenty of buyers for the stock -- the Virgin brand is strong and airlines overall are doing well because of relatively stable fuel prices -- many airline industry analysts are skeptical of Virgin America's chances as a public company. They note that the airline has posted just one profitable year in its seven year history -- last year, when it made about $10 million. Virgin America lost a combined $245 million in the two years prior.

I wrote about the skepticism in this week's Aviation Week.  While I can't give away too much of what I learned -- you have to subscribe for the details -- I'll summarize key issue IPO concerns: 

  1. Virgin America is too small. With just 53 aircraft, Virgin America obviously cannot compete with Delta, United, American and Southwest. But Virgin America is also only about a quarter of the size as JetBlue. At that size, analysts wonder whether Virgin America has enough aircraft to compete. 
  2. Virgin America aims to serve the business traveler with a schedule that does not cater to corporate traffic. Airlines like business travelers because they tend to pay high fares. In return, business travelers usually want one thing: Frequency. They want many flights a day to choose from so that if the meeting ends early, they can get home sooner. But Virgin America flies many routes only once, twice or three times per day, when other airlines fly 12 or 15 times per day. Virgin also doesn't fly into many important business cities, like Miami and Minneapolis. 
  3. Virgin America has bad hubs. Virgin America has hubs in San Francisco and Los Angeles. San Francisco is dominated by United, which appears to finally be regaining some of its swagger. United is not going to let Virgin America grow profitable routes. Los Angeles is different because no airline dominates it. But Southwest, American, United and Delta all have large operations in L.A. And those airlines will not let Virgin America dominate in L.A. either.  So Virgin America is trying to grow elsewhere, such as in Dallas, but that will be a slow process.

What do you think? Is Virgin America a good buy?

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