Bear Of The Day: Virgin America (VA)

Low fuel prices had lifted airlines’ stocks last year but the outlook has turned negative this year thanks to overcapacity, terrorist attacks, currency headwinds and plunging fares. Most airlines have reported disappointing earnings for the recent quarter.  Virgin America has seen a sharp plunge in analyst estimates after lackluster results, which sent the stock to a Zacks Rank #5 (Strong Sell).

About the Company

Launched in 2007, Virgin America (VA - Free Reportis a California-based airline. Richard Branson's Virgin Group is a minority share investor in Virgin America but the airline is an entirely separate company from the British airline Virgin Atlantic founded by Branson.

The airline is known for providing a quality flying experience, with mood-lit cabins, custom-designed leather seats and advanced entertainment system. They have won a number of awards for excellence.

Lackluster Second Quarter Results 

Despite low fuel costs, the airline suffered about 40% decline in profit during the second quarter. Adjusted earnings of $0.93 per share missed the Zacks Consensus Estimate of $1.17 and were down 36% year over year.

Revenues of $426 million were also short of the Zacks Consensus Estimate of $447 million.

Falling Estimates

Zacks Consensus Estimates for the current and the next year have plunged to $3.06 per share and $2.90 per share, from $3.45 and $3.29 respectively before the report.


Merger with Alaska Air Group
Virgin America is scheduled to be acquired by Alaska Air Group (ALK) per a $2.6 billion deal signed in April. The merger is expected to be completed by the fourth quarter of 2016, subject to regulatory approvals.
The merger was approved by Virgin America shareholders in July.
The Bottom Line
While low fuel prices benefit airlines’ earnings, they also put pressure on pricing, particularly due to heavy discounting mainly by low-cost carriers. Many airlines expanded capacity in the wake of lower fuel prices which has now led to a fare war,
Airlines industry is currently ranked 197 out of 265 Zacks industries (bottom 26%). Investors looking to play this industry could look at Copa Holdings (CPA) which carries a Zacks Rank #1 (Strong Buy).

Disclosure: None.

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