Virgin America Inc (NASDAQ:VA) has found the sweet spot in the air travel space.
Many East Coasters have not had the pleasure of flying Virgin America and enjoying the first-class amenities — VA has built its route tree out of hubs in LA and San Francisco.
But you don’t have to be a frequent Virgin America flier to see that when you consider how the company is positioned — maximized price points, efficient growth in its fleet and routes — and throw in the fact that fuel prices are at near record lows, VA stock is a great buy.
Virgin America: Budding Business
VA stock holders were smiling ear to ear this week when the boutique airline released its Q4 earnings report. Net income jumped from roughly $4 million to more than $60 million. Adjusted earnings of $1.16 per share easily cleared analysts’ estimates of 82 cents.
Virgin’s success is due in large part to its sharply focused business model, targeting business travelers and expanding its service to major cities where business traffic is highest.
VA does offers vacation flights with routes connecting New York and Florida along with Boston to Vegas, but these flights are the exception rather than the rule. By focusing on business travelers, VA is able to keep a consistent stream of customers and doesn’t need to rely on the whimsical, inconsistent nature of vacation flyers.
Virgin America also retains travelers by putting customer comfort first. Every VA flight features Wi-Fi, power outlets at your seat and touchscreen seatback entertainment. Consumers have responded — Virgin has been named both the best U.S. airline in Condé Nast Traveler’s Readers’ Choice Awards and best domestic airline in Travel + Leisure’s World’s Best Awards for seven consecutive years.
VA Stock — The Three Bears Approach
Virgin America isn’t trying to beat the big boys or become the next budget carrier. VA is just the right size.
VA currently services just 20 U.S. cities and boasts a modest fleet of 53 planes, but 43 of those planes are the super-efficient Airbus A320. These planes make the VA fleet 25% more fuel-efficient than other domestic fleets. When you compare Virgin America’s cost per seat mile (CASM) to airline monster United Continental Holdings Inc (NYSE:UAL), United spends 2 cents more than VA on every seat, every mile. That’s a whopping 28% difference.
When comparing VA to budget carrier Spirit Airlines Incorporated (NASDAQ:SAVE), Spirit naturally beats VA with lower costs (about a penny a seat or 8%), but VA has a higher RASM (revenue per available seat mile) than Spirit. And while the RASM numbers for VA are up 4% over last year, Spirit is trending down 1% from 2013.
Bottom Line
Virgin America hasn’t been trading on the public markets for every long — VA had its initial public offering in November, raising more than $214 million (much of which went toward paying off Virgin’s debt). And after a spike near the end of last year, VA has significantly cooled off, now trading for just 8 times projected earnings.
Of the nine analysts polled, six have listed VA stock a “buy” or “strong buy.” The remaining three have labeled it a “hold.” The median target price is a nice $44 with a high target of $53 — considering VA stock is trading over $36, that means the experts are expecting gains of anywhere between 20% and 50%.
Low oil prices continue to lift the travel sector as a whole, and VA stock is among one of many boats benefiting from a rising tide. Don’t wait — Virgin America is a buy now.
As of this writing, Scott Michnick did not hold a position in any of the aforementioned securities.
