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Virgin America Wants More Than Love Field

Stocks in this article: DAL LUV

SAN FRANCISCO (TheStreet) -- Virgin America's seventh year could be a defining one, as the carrier -- recently grown into profitability -- seeks new routes in key aviation markets and also looks to an initial public offering by the end of 2014.

As for the IPO, "we are watching the markets," said Virgin America CEO David Cush, in an interview. "They're a little bit choppy, which bodes well for waiting until they're in good shape. We think the company will be ready later this year."

In the third quarter, Virgin reported net income of $33.5 million, an operating margin of 11.5% and revenue per available seat mile growth of 9.4%, highest in the industry. Fourth-quarter results will be announced this month. Why the late reporting? "We are last in line with Ernst & Young," Cush said. "They do the public ones first."

By next year, that could be a problem Virgin no longer has.

The IPO could conceivably come as Virgin ramps up service at three new airports, all made available by the divestitures required in the merger of American Airlines (AAL) and US Airways. Virgin will have four daily departures at Washington Reagan National and six at New York LaGuardia. Now it wants in at Dallas Love Field, where American is required to divest its two gates.

The expansion plans mark the first time Virgin would offer flights not involving LAX and its hub at San Francisco International, with the exception of a JFK-Las Vegas flight.

The new airports represent one big chess game for Virgin. Right now, Southwest (LUV) has 16 gates at Love, ExpressJet has two and American has the two it must give up. Delta (DAL) , Southwest and Virgin are all seeking those two.

Virgin America can make a compelling case to the Justice Department that only it can fulfill the dream of having a new entrant low-fare carrier at all three airports. But American, which will sell its Love gates, and Dallas officials will also play a role in selecting the new Love occupants.

Cush told TheStreet that if Virgin America does not get the Love gates, it would not use its new National and LaGuardia gates to serve Dallas-Fort Worth International Airport, its current home in Dallas. It will move operations to Love Field if it gets the gates. But "if things don't work out at Love, plenty of other airports would like service," he said. He would not specify what alternatives he is considering.

Aviation consultant Robert Mann said he anticipates the Justice Department would likely choose to award the gates to Virgin, creating a story line involving "a brash new entrant upstart at DCA and Love Field -- that makes it a win-win-win for them." Love Field "is not going to get bigger," he said. "You do something now or not have an opportunity to do it again."

Mann noted, however, that only Delta could provide connecting service from Love to longhaul international destinations. Delta said Wednesday that it "welcomes the opportunity to compete with Southwest and Virgin America at Dallas Love Field and believes the airport can accommodate all three carriers." Delta said it would serve both DFW and Love field, with non-stop service from Love to its hubs in LaGuardia, Los Angeles, Atlanta, Minneapolis, Detroit and Salt Lake City.

But Cush said that Delta "is a $40 billion airline with strong monopoly positions -- it is not the mouth that needs to be fed through these divestitures."

While Virgin would not offer any destinations not served by Southwest, it does bring a different style of flying, combining low fares with an emphasis on luxuries including three classes of service, Wi-Fi, in-seat power outlets and touch-screen seatback entertainment including live TV.

Mann said Virgin America, like JetBlue (JBLU), has a cult following of loyalists inspired by its high service levels. Virgin's fans are largely West Coast techies, he said. "The key is our product," Cush said. "Everywhere we go, people love the product, the full gamut of services."

Mann also questioned whether an expansion push will help Virgin's IPO. Virgin began to show profits only after it slowed growth in 2012. Between the second quarter of 2010 and the second quarter of 2012, Virgin took delivery of 25 Airbus A320 family aircraft. Then, with the fleet at 53 planes, deliveries were curtailed until 2015. "Does a lot of expansion represent a positive or a negative for the IPO?" Mann asked. "In the past, every time they've grown, they've lost money? Is this another one of those?"

Cush responded that the carrier had been growing capacity at 35%, but "that is not the profile going forward. We have not grown for a year and a half, and we're looking at 8% or 10% a year going forward. That is very achievable."

Written by Ted Reed in Charlotte, N.C.

 To contact this writer, click here.

Follow @tedreednc

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