Shares of California-based airline Virgin America Inc. VA gained 13.2% to close the Mar 23 trading session at $34.72. The surge followed a Bloomberg news reportthat the company has been considering options to put itself up for sale (either fully or part of it).
The report suggested that the carrier, which is partly owned by British billionaire investor Richard Branson, “is reaching out to potential buyers”. People familiar with the situation, on conditions of anonymity, stated that the low-cost carrier is in the process of consulting a financial advisor after an unnamed suitor expressed interest in buying it. The Bloomberg report also stated that nothing has been finalized as yet and there is every chance that the carrier may ultimately decide against putting itself up for sale. Some market watchers even suggested that in the event of Virgin America going ahead with the matter, JetBlue Airways Corporation JBLU and Delta Air Lines DAL may emerge as the likely suitors.
We remind investors that Virgin America had made an impressive debut on the Nasdaq in Nov 2014 raising more than $300 million through the offering. However, shares of Virgin America have shed almost 4% over the last six months in the face of intense pricing pressure as it competes with fellow carriers like Southwest Airlines LUV in key markets like Dallas. In the fourth quarter of 2015, average airfare at the carrier plunged almost 9%, resulting in passenger revenue per available seat mile (PRASM: a measure of unit revenue) falling 5% as the company reported lower-than-expected revenues in the quarter.
PRASM pressure is likely to hurt the company going forward too, as can be made out from its forecast that the metric will decline in the band of 3% to 5% in the first quarter of 2016. The carrier expects capacity to increase in the range of 14% to 16% in the first quarter of 2016 on a year-over-year basis.
With reports emerging that Virgin America is considering options to put itself up for sale even as it continues with its plans to expand, we believe investors will keenly await further updates on the issue.
Zacks Rank
Virgin America currently carries a Zacks Rank #3 (Hold). Investors interested in the airline space may consider China Eastern Airlines Corp. Ltd. CEA, which sports a Zacks Rank #1 (Strong Buy).
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