On Monday November 3, 2014 Virgin America announced its plan for an initial public offering (IPO). The company plans to sell 13.1 million of the 13.3 million shares in the IPO to raise about $320 million. The shares are expected to be priced at $21 to $24 per share, which would value the company at approximately $1 billion. According to the filing with the Securities and Exchange Commission, the raised capital will be used for expansion of new routes and improving inflight entertainment systems.
The company has worked diligently over the last two years to improve its financial performance and prepare itself for the anticipated IPO. Its performance over the first five years since incorporation in 2007 made it nearly impossible to go public. It reported its first yearly profit in its sixth year, earning $10.1 million on $1.4 billion in operating revenue.
Sir Richard Branson, who owns 22 percent of Virgin America via Virgin Group, shared his vision of the faster transcontinental air travel future earlier this year and stated that now is the best time to invest in the airline industry. After a chaotic price war among the airline companies, with many of them having gone bankrupt, he believes the market is heading in a new direction of healthier development. Now there is less competition, cheaper fuel and higher fares.
Some believe expectations about Virgin America’s stocks are too high. The company has managed to shift resources from certain routes to address strong competition in the coast-to-coast market, including strong rivals such as American (AAL), Delta (DAL), and United (UAL). But in August the flight attendants of Virgin America voted to join the Transport Workers Union, and Virgin America also announced an employee profit-sharing plan. Increasing employee expenses will add to high operational costs, and thus make the anticipated IPO even more crucial.
The airline industry seems to have followed exactly the natural path of development, from competition on price and costs to market concentration and merger and acquisition. Subject to anti-trust regulations, winning on merit is the only way to beat the competition. Being the first for a U.S. commercial passenger airline since Spirit Airlines Inc. in 2011, Virgin American has taken the first step to initiate the capitalization process for expansion and upgrading. Time will tell whether it finds its market position and competes with other airlines.
Virgin America Announces Plan For Initial Public Offering (PDF)