Virgin America (VA) CEO David Cush said Dallas remains a weak spot for the airline but the weakness is being offset by growth in other markets and also, over the long term, by new Airbus A321neo aircraft that will begin to arrive in 2017.

In fact, the entire U.S. airline industry is engaged in a systematic effort to hedge against future oil price increases, using today's profits to invest in a new generation of more fuel-efficient aircraft, Cush said.

Virgin America will take delivery of 10 A321neos from the first quarter of 2017 through the third quarter of 2018. Including other new airplanes like Boeing's 787 and 737max and the Airbus A350, "Any of these new generation airplanes is a natural fuel hedge," Cush said in an interview.

"They are a positive for our company and our industry: We will use 20% less fuel than competitors with conventional airplanes," he said. "In the future, the impact of price spikes in fuel will be much less than it was."

Cush said the earnings  were negatively impacted by intense competition in Dallas, but he pushed back against a line of questioning by Wolfe Research analyst Hunter Keay, who asked, "Why not just leave?" and "Why do you guys even need to be there?"

Virgin America starting flying to Dallas Fort Worth International Airport in 2010. In 2014, it moved to Love Field, jumping in just as Southwest was boosting service due to the sunset of the Wright amendment, a law that governed traffic at Love Field. Meanwhile, Spirit (SAVE) was growing at DFW, where it began flying in 2011. And American (AAL) does not look the other way when competitors cut fares.

The result has been a colossal airline price war that has diminished every participant.

In the case of Virgin America, Cush said fourth-quarter passenger revenue per available seat mile in Dalls declined just 3% but that was on top of declines in the same quarter a year earlier. "We had hoped Dallas would turn positive in the fourth quarter," he said. In response, Virgin has cut back on Los Angeles and San Francisco service.

Fourth-quarter fares from Dallas were as low as $41 to LaGuardia and $30 to Los Angeles International Airport; half of all American and Southwest fares to LGA and LAX were under $100.

The fares "are not explained by supply and demand {and} I don't know who is matching whom," Cush said. "But American is very clearly in a market share war. They do not want to cede anything to Spirit; they are willing to match to preserve market share."

 

Virgin America is taking the approach that it will not match the rock-bottom fares offered by ultra-low-cost carriers, he said. "We are small enough that we don't have to," Cush said. "We do not plan on introducing economy minus or whatever people are calling it" to compete with ultra-low-cost carriers.

"Dallas, long-term, is a valuable market, the fourth-largest corporate market in the U.S.," he said. "We have been there since 2010 and we are willing to wait this out."

In the meantime, Virgin America can make money on transcon flights, which account for about 50% of revenue, and in the West, which accounts for about 40%. (Dallas accounts for about 11% of revenue). 

Virgin America is in all of the top 10 markets from San Francisco and nine of the top 10 from LAX. The 10th one, LAX-Denver, could be in the cards if newly started SFO-Denver does well.

"West Coast short-haul is not really impacted by ULCCs yet," Cush said, during the earnings call. Spirit will soon fly LAX-Seattle, a head-to-head market for Virgin, but in general the West Coast "seems to have been insulated and it's doing extremely well for us," he said. "Fares are better on the West Coast than in the rest of the country."

Flights from San Francisco to Hawaii are doing well and bookings on planned flights from LAX to Hawaii are strong, Cush said. Asked about Alaska's recent move to ramp up San Jose flying, he said San Jose is "a decent market that likely is underserved," but a San Jose-LAX flight by Virgin had the impact of cannibalizing Virgin's SFO traffic.

 

 

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.