Virgin America's Best Route: Teaming Up With A Travel Related Company

| About: Virgin America (VA)


Virgin America has struggled with revenue growth and will likely continue to, absent getting certain supports to its current upscale business model.

Cost control may produce better earnings results temporarily, but not sustainable profitability when frills services and expansion dictate continued future spending.

Teaming up with a travel company may help bring in more travelers to fill up its seats, especially one with potential tour operations.

The partnership can be of a mutual interest as an in-house airline would certainly boost a travel company's ability to provide flight accommodations for its tourists.

Virgin America (NASDAQ:VA) can remain as a "decent airline" with its hip and premium image intact and doesn't have to be gobbled up by a competitor, despite the operating difficulties it has faced. But the company does need a heavy lift from someone on the outside, as high costs associated with its business model of running an upscale airline have been weighing down its profitability. Eventually, the lack of earnings come to affect its long-term survival, let alone success.

The key to meaningful earnings improvements is for Virgin America to bring in much more revenue on a larger economy of scale to absorb the investments it has to make continually to provide premium services. However, the company hasn't been able to come up with enough flights from its limited, expensive markets, with revenue up-ticking only a couple of percentage points in 2015. Meanwhile, the airline industry as a whole has had an average sales growth rate of about 10% in the last five years.

Cost cutting may help shore up earnings a tad in the interim, which Virgin America has resorted to and actually seen some success with. But this very action undermines the company's vision for its hip, mood-lit existence in the first place, designed to be a contrast to the dismal, nickel-and-dime flying experience from many of its competitors. The company eventually has to spend again to keep its premier status and can't cut its way out of the growth challenge.

Tying up with another airline would make Virgin America lose its identity and in the end just become really another airline. Since a critical issue for the company is how to get more affluent travelers to fly with it for all the in-flight amenities it can offer, having access to a travel company's unique customer data and then connecting some travelers directly to board its flights would be potentially a real boost to the company's quest for revenue growth.

One such fitting travel company could be TripAdvisor Inc. (NASDAQ:TRIP) with Web operations that facilitate travel planning. The company has relatively comparable sales and equity levels to those of Virgin America even though it commands a much higher market valuation. Other online travel companies such as Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE) are much larger on both measures. It would be a merger of equal, more or less, for Virgin America and TripAdvisor, making it a plausible deal between an airline and travel Website.

Like all online travel companies, TripAdvisor helps potential travelers to find hotels, flights, restaurants, etc. But the company also offers something that others don't, which is to promote extensively and in detail about trip ideas. Being proactive to stimulate travel demand and potentially generate more sales from newly planned trips would help Virgin America the most in its efforts to fill up the seats. Furthermore, any tours organized for luxury traveling by TripAdvisor could go right into Virgin America's business route.

A business combination between a small, exclusive airline and a travel company featuring touring is a natural extension for both operations. The boutique nature of Virgin America's business model makes it ineffective to sell blindly to even selected markets such as its targeted services in San Francisco, Austin, Hawaii, Denver, etc. At some point, the company is better off to have a controlled source of travelers and flyers, and having a travel company that organizes tours and then feeds the tourists onto its flights could provide steady and secured bookings. Any sales to the general travel market would then be a nice addition, instead of a struggling fight for competition.

A greater success of such a partnership may hinge on what the travel company can really do in the tour organizing business, besides facilitating travel accommodations. Among its peers, TripAdvisor has the most potential to also become a tour operator as it already actively introduces would-be travelers to many tour destinations. Having an airline ready for its own use would make its future tour business more competitive. One day, there might be travel companies that would own everything from an airline to hotels, restaurants, etc.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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