High Losses For Low-Cost Start-Ups
It costs a lot to start an airline... especially when you make
an effort to keep ticket prices low. That's a lesson Virgin America
and Skybus -- two low-cost carriers that began operations earlier
this year -- found spelled out in stark relief on their profit/loss
statements recently.
The carriers reported significant losses in their first quarters
of operation. Virgin America posted an operating loss of $35
million in that time, reports The San Francisco Chronicle, while
Skybus lost $16 million in the three-month period that ended
September 30.
Both airlines were quick to point out they expected such losses
in the quarter. As Virgin America spokeswoman Abby Lunardini put
it, the reporting period reflects 92 days of operating expenses...
but only 53 days of revenue.
"You have incredibly high overhead costs when you start an
airline," said Lunardini. "We did not expect to turn a profit this
early in our plans... [i]t is not likely to be anytime soon. Our
shareholders are aware of that."
Airline analyst Henry Harteveldt echoed Lunardini's sentiments,
saying start-up costs for an airline are substantial. "Anyone who
looks at the report and says the airline is failing is wrong,"
Harteveldt said, before adding "but I wonder if they are succeeding
to the degree they anticipated."
In contrast, industry insiders weren't as gracious with Skybus's
posting of a $16 million loss for its first quarter of operation,
though airline spokesman Bob Tenenbaum told The Associated Press
the results were "in line" with expectations.
"In fairness to them, this is their first quarter, and the
traffic growth has been quite impressive," said former United
Airlines pricing analyst Joseph Schwieterman. "But their costs may
not allow selling so many seats at nominal prices."
As ANN has reported,
ultra-no-frills Skybus has made its name by offering seats for as
low as $10 on each of its flights -- though most of its tickets are
in-line with other LCCs -- and by selling impulse-buy items on its
flights. The airline also cut its costs by selling all tickets
online, charging for such niceties as checked luggage and onboard
food and drinks, and flying into out-of-the-way airports.
Analyst Mike Boyd flatly said Skybus, which had its first flight
in May, needs to change how it operates. "This is just not a very
good plan, but that doesn't mean they can't turn it around by
scrapping the model," Boyd said.