Virgin America's Biggest Risk Could Be Pricing

Courtesy of Benzinga.

In a report published Tuesday, Stifel analyst Joseph DeNardi suggested that Virgin America Inc (NASDAQ: VA) faces near-term downside risk.

Shares were initiated at Hold with no assigned price target.

According to DeNardi, Virgin America has found a “successful niche” serving corporate and higher-end leisure traffic out of San Francisco and Los Angeles, while being opportunistic in acquiring gates at capacity-constrained airports such as Dallas.

The analyst said that Virgin America has demonstrated an improved profitability over the past few years, it will take delivery of 10 A320 airplanes between the second half of 2015 through the first half of 2016 while targeting 8 percent to 10 percent average ASM (available seat miles) growth at a time when ASM growth has slowed.

Virgin America is also facing “fairly material” labor cost pressure this year, which limits margin expansion relative to its peer group.

Bottom line, Virgin America has not yet proven it can duplicate the success it has had in San Francisco and Los Angeles outside of the two markets. In addition, some of the markets the analyst expects the company to target (including Atlanta, Minneapolis and Denver) are tightly controlled by a legacy airline, putting in to question how dilutive growth will be initially.

Posted-In: A320 airlines Joseph DeNardi Stifel Virgin AirlinesAnalyst Color Initiation Analyst Ratings