Virgin Airlines company operations and business model

Virgin Airlines -- Financial and Strategic Assessment

Financial Assessment

Virgin America has quickly established itself as one of the premier airlines operating throughout North America, generating $760M in Operating Revenues as of the close of its latest fiscal period reporting a Net Loss of $19M and operating margin of -1.6%. As Virgin competes in a very price-driven and capital-intensive industry, their latest financial results the exceptionally high pressure on new entrants into commercial aviation. Their latest financial results are shown in Appendix A: Virgin America Consolidated Statement of Operations and Appendix B: Comparative Operating Statistics, both obtained from the company's website.

Analyzing their financial condition indicates just how challenging the launch and successful operation of an airline is. Their fuel costs increased 66.9% for the nine months between September 30, 2010 to September 30, 20112, and Aircraft Maintenance increased 51.5% in the same period. Both of these figures are shown in Appendix A. To reduce the costs of operations many commercial aircraft service providers also rent jets to mitigate the costs of purchasing them. The use of value-based and time-based pricing optimization pioneered by Virgin in the Australian and Asian markets has given the company an advantage in managing its cost of capital requirements as well (De Roos, Mills, Whelan, 2010).

Virgin is expanding aggressively into new markets and this is costing the company a significant amount of their cash as well. In the nine months from September 10, 2010 to September 30, 2011, Virgin spent 26.4% more on landing fees and other rents. The total invested in the first nine months of 20-11 was $63M, a significant amount by any standard of commercial aviation (Hazledine, 2011). This also created the need for a high spending level in Guest Services, which jumped by 30% in the same time period, reaching $31M. Virgin continued to invest in these areas with the goal of ramping up their freight and third party logistics businesses, which are significantly smaller in their revenue contributions that the main Guest revenues. For the latest nine-month fiscal period, Virgin generated $62.14M in revenues, a 26.4% increase in these non-passenger revenue business models. The high prices Virgin is paying for aircraft rents, maintenance, increased landing fees and operating expenses were important to establishing their freight businesses. Virgin however is finding the growth of their 3rd party logistics and non-passenger revenue slow in the business-to-business (B2B) markets globally.

In conclusion, Virgin is in better financial condition than its other global competitors, as the company has invested heavily in fuel hedging as a means to trim back the 66.9% increase in fuel costs. The company has also been able to attract 28.7% more passengers through aggressive marketing, serving 3.6M in the first nine months of 2011. The cost per seat mile has risen drastically, jumping from 9.54 to 10.83 in the nine months recently reported. In the long-term, Virgin will need to find an approach to better optimize their route networks if they are going to become profitable and gain market share. Appendix B provides insights into their comparative operating statistics. With fuel costs drastically increasing the company will need to trim back unprofitable flights and increase their logistics and non-commercial traffic significantly.

Executive Implementation of Strategic Plan

Virgin is predicated on unconventional, non-conformist branding and messaging to significantly differentiate the brand from competitors., Richard Branson has concentrates on creating a very unique, differentiated customer experience, which has helped the company to expand rapidly throughout Europe, a market known for commoditization of user experience (Vlaar, De Vries, Willenborg, 2005). In addition, Virgin spent above industry average on marketing and sales, with a 44.1% increase in spending over the first nine months of 2011 compared to comparable periods. Virgin just recently released these figures used in the analysis, and they are shown in Appendix A of this document. Highly nonconformist and creative branding and advertising however is very expensive, as is shown the 44% increase in expenses (De Roos, Mills, Whelan, 2010).

Virgin's executives are primarily focused on growing the potential revenue per seat in addition to increasing the load factors by flight, two metrics shown in Appendix B. To their credit, the executives at Virgin are very adept at managing their brands and also gaining market share through aggressive marketing (Kirby, 2005).

To increase the revenue per flight, Virgin has invested in one of the most advanced entertainment systems available in addition to a series of technologies that allow fro quick upsell and cross-sell of services, all from the passenger seat of their planes (Pillot, 2005). The focus of how to streamline e-commerce and purchases online also differentiates this airline from many others, as Virgin is highly effective in the use of on-board electronics and telematics to further differentiate the passenger experience (Goldsborough, 2006). All of these factors are also used to determine how the best approach can be used to increase yield or gross margin per passenger mile, a key metric senior management at Virgin relies on in evaluating their overall performance.