Things in the Sky

Virgin America made waves yesterday when the airline announced it is the launch customer for the new A320neo, with an order for 30 of the type. Deliveries are slated to begin in 2016, while 30 A320s with sharklets will be delivered from 2013 through 2016. A few hours after the announcement in the wee hours of the morning here in the United States, I was able to chat with David Cush, Virgin America’s CEO, about the new fleet growth.

David was pleased that Airbus decided to upgrade an existing fleet type that Virgin already flies. “We’re a single-fleet operator. We get tremendous cost efficiencies and operating efficiencies out of that,” he said. David added that the neo allows Virgin “to preserve our single-fleet characteristics while gaining the improvements from the technological advances in engines.”

Virgin America CEO David Cush, Airbus COO Customers John Leahy, Virgin Group Founder Sir Richard Branson, and Airbus CEO Tom Enders celebrate Virgin America’s order for the A320neo. Photo Credit: Virgin America.

Virgin has yet to announce a selection on engines for either part of the order. The sharklet-equipped aircraft from Airbus are sold with the existing CFM56 (used on Virgin’s current fleet) or IAE V2500, while the CFM LEAP-X or Pratt & Whitney PW1000G geared turbofan will power the A320neo.

“You generally like to have an engine decision two years in advance,” said David. Because the first phase of 30 deliveries starts in 2013, an engine selection would be “about a June decision, at the latest, under the best of circumstances.” Virgin has more time to decide on an engine for the neo, but David told me that it is the airline’s “desire is to get both of these issues closed out at the same time and hopefully within the next four months or so.”

Virgin’s order was based on the carrier’s original memorandum of understanding with Airbus that was announced a few months ago at Farnborough. Under that deal, Virgin would be getting about 10 aircraft annually for a few years. The  growth announced in the order yesterday seemed to be a bit less than that. David told me that the fleet growth is “slightly slower, but that’s more based on the availability of the neo…it’s really based on how quickly they [Airbus] can get the neo’s production rate up.”

“We’ll keep basically the same rate of growth, it’s just that we’ll go out to the lessor community and find the additional aircraft we’ll need for growth,” he added. David later mentioned that Virgin is planning to grow its fleet by 17 aircraft this year and next. The airline currently has 34 aircraft flying. With my math, Virgin would have 51 aircraft at the end of 2012, so the 60 from this order bringing the total fleet to 111 frames by 2019.

I was also interested in fleet mix – the airline’s A319s currently make up roughly 30% of the fleet, and that share will decrease if Virgin keeps taking on A320s. “The performance capabilities of that aircraft, given our long-haul network, are important,” David said. “I think as the performance of the 320 continues to be improved, that’s really our aircraft of choice,” he added.

Not surprisingly, our discussion moved to the benefits of the A320neo. The new engines on the aircraft are more fuel efficient, reducing environmental impact and providing cost savings. In yesterday’s news release, Virgin noted “it is estimated that the A320neo’s fuel efficiency will yield an average annual savings of $1.1 million per aircraft.”

Photo Credit: Virgin America.

One benefit of the A320neo is that it will provide approximately 500 nautical miles in additional range, which David says will allow Virgin “to operate our current network more efficiently.” A specific example cited by David was Boston to San Francisco, Virgin’s longest route (2,704 miles). David said that currently, Virgin “simply will not fly a 320 from Boston to San Francisco during the winter because if you have strong headwinds, which are the case about 30-40% of the time, you can take a 30-40 seat payload restriction on that route.” But the additional range from the A320neo will let Virgin “to fly our longest-haul routes during the winter, during the heavy headwinds, without a payload restriction.”

Naturally, the range increase also opens up new markets for Virgin. David noted that Virgin is “interested in serving Hawaii,” for example. “The sharklets alone probably give us the ability to serve Hawaii beginning in 2013, but perhaps with some limitations. The key thing is the neo in 2016 gives us full payload capability in both directions…and in particular for Maui where you have a short runway and some runway obstructions that require additional performance,” David explained.

Of course, Virgin needs to pay for all of these fancy new narrowbodies, so I briefly asked David about financing them. “Our key financing needs are really around aircraft,” said David, who continued: “We can support our growth right now with internally-generated cash flow, however the aircraft are expensive…our key focus, is making sure we can finance our aircraft. We’ve had no problem up to now.” David noted that Virgin was able to finance “four aircraft just about four weeks ago, so the debt markets are open.”

Thanks as always to David for taking to the time to speak with me!

I have a few of my own thoughts on the deal. I think this a smart move. By becoming the launch customer, Virgin gets a nice little cost advantage out of the gate, though moves by other carriers will determine how long that lasts. The only airline to have something similar is Republic’s CS300 order, though competition between Frontier and Virgin is limited. And we’ll have to see if any other American carriers decide to order the CSSeries, which is currently slated to enter service about three years before the neo.

But, if Airbus’ predicted 15% reduction in costs comes to fruition, that can improve Virgin’s margins, might make some routes viable, and conceivably gives it more pricing power due to a lower cost base. Meanwhile, the lower aircraft cost provides a nice cushion as other costs (such as labor) potentially creep up as Virgin matures.

That being said, Virgin America continues to face challenges. Many of these, like weak economic growth and high oil prices, are macro factors that will affect the entire industry. But Virgin is still a new player in many of its markets, and those already have fierce competition. The fact that Virgin posted its first net profit in the third quarter is certainly encouraging, but it was a strong quarter across the industry. Virgin’s fourth quarter results should provide additional insight, of course.

I’m back with another portion of my recent interview with Virgin America CEO David Cush (you can see the first installment here). Virgin has been adding a few routes over the past few months, so I decided to ask David for some updates on their performance.

For context purposes, the interview took place on December 22nd.

A few weeks ago, Virgin launched service to Cabo San Lucas, its second international destination, from San Francisco. David says the route is “doing quite well straight out of the gate,” and noted there we strong bookings for the holidays through January and February.

David also noted that while Virgin only had a Mexico schedule loaded through May, Cabo service would be expanded to year-round.

Virgin will be adding its second Mexican destination, Cancun, later this month. David said that “my expectation is that will be year-round, but we’re trying to decide what the split is between San Francisco and LA.” He also noted that Virgin’s arrival time in Los Angeles from Cancun is pretty late due to the slot they received for customs clearance, and the carrier is “trying to improve that.”

“Once we have those answers, we’ll decide on Cancun,” he said.

Virgin’s latest domestic destination, Dallas-Fort Worth, launched in December with twice-daily service from Los Angeles and San Francisco. Even though the station was only running for a few weeks, I was very interested in how Virgin was performing at American’s fortress hub so far.

“It’s tough to tell because of the holidays,” said David. “It’s obviously full, we’re getting good prices, but a lot of that comes down to the fact that it’s holiday travel and everything’s full and everything’s getting good prices. So it’s performing the way the way the rest of the network is right now.”

He added that “the real test” for Dallas will be January and February, as those are soft periods for demand. But David said that Virgin is “pretty optimistic.”

In October, Virgin inaugurated Orlando service with one flight each to LAX and SFO. David tells me the market is “doing very well. It’s a big, strong market. We’re happy with how it’s developed and how quickly it’s developed.”

Before Orlando came Virgin’s first international city — Toronto. “We are going through a tough winter,” David said of the market. He elaborate further, noting that Virgin is “looking forward to it being over, and having our loads return to what was a very strong summer.” He also says “the results that we have were not unexpected.”

Yesterday, the DOT released international traffic numbers for July, the first full month of Virgin’s service. This data indicates Virgin had a 68.9% load factor on its Los Angeles route, while San Francisco flights were 69.2% full.

I always appreciated David’s commentary on routes, and hopefully we’ll get the chance to do it again soon!