Virgin America, Inc. - University of Oregon Investment Group

Transcription

February 26, 2016
IME
Virgin America, Inc.
Ticker: VA
Recommendation: Outperform
Current Price: $31.02
Investment Thesis
Key Statistics
52 Week Price Range
$30.73-$31.40
1.15
Estimated Beta
M arket Capitalization
3-Year Revenue CAGR

As an award-winning airline with modern ideas and quality service, Virgin
America’s current and future route structure makes it well positioned to
penetrate new markets, build customer loyalty, and establish itself as a
premier airline for business and leisure travelers.

Virgin America’s low cost structure and premium brand offering provides it
with the opportunity to be a price setter in the industry when competing
with legacy carriers and stimulate demand while maintaining route
flexibility.

Current and future technological initiatives to increase offering and
effectively price ancillary products will grow revenues and improve
margins.
$30.66
50-Day M oving Average
Dividend Yield
Price Target: $46.88
$1,738
2.40%
Trading Statistics
Diluted Shares Outstanding
44.00 mm
One-Year Stock Chart
Average Volume (3-M onth)
702,670
Institutional Ownership
57.40%
Insider Ownership
17.16%
$45.00
4000000
$40.00
3500000
$35.00
3000000
$30.00
3.73x
EV/EBITDA
2500000
$25.00
2000000
$20.00
Margins and Ratios
1500000
$15.00
Operating M argin
15.60%
1000000
$10.00
EBITDA M argin
15.37%
$5.00
Net M argin
13.81%
$0.00
Feb-15
Debt to Enterprise Value
500000
0
Apr-15
Jun-15
Volume
0.12
Aug-15
Adjusted Close
Oct-15
50-Day Avg
Dec-15
200-Day Avg
Covering Analysts:
Phoebe Hsieh: [email protected]
1
University of Oregon Investment Group
Business Overview
Figure 1: Virgin America Revenue
Breakdown
Virgin America was founded in Delaware in 2004 and went public on November
13, 2014. Their first flight was offered in 2007 and today Virgin America is a
premium-branded, low-cost airline based out of California. As of December 31,
2014, they provide service to 21 airports in the United States and Mexico with a
fleet of 53 aircrafts. Virgin America’s founder, also founder of the Virgin brand,
Sir Richard Branson, targets guests who value high quality products and
services. Meanwhile, Virgin America also strives to maintain a low-cost
structure using a point-to-point network and a uniform fleet of aircrafts. In this
way, Virgin America aims to compete with legacy carriers on quality and low
cost carriers (LCCs) on cost.
10.90%
89.10%
Passenger Revenue
Other Revenue
Source: Virgin America 10-K
Figure 2: Virgin America Revenue and
Gross Margin
$300.00
20.00%
$252.49
$239.96
$250.00
15.00%
$200.00
10.00%
$150.00
$96.42
$100.00
$80.88
5.00%
$50.00
0.00%
$-
2012
$(50.00)
2013
2014
2015
2016E
-$31.74
-5.00%
Revenue
Operating Margin
Aircrafts
Virgin America differentiates itself from the rest of its competition through the
quality of the aircrafts they operate. There is a distinct appearance onboard
every aircraft. There is mood lighting within the cabins to create a calming, lowstress environment as well as custom-designed leather seats to provide comfort.
Furthermore, Virgin America’s flights offer wireless Internet access and has
built in power outlets in every flight. Each guest also has access to an
entertainment system, which allows them to watch free, live television and prerecorded channels, on demand movies and a free music library. This inflight
entertainment system also allows guests to track their flight and order and pay or
food and beverage items for themselves or guests during the flight. Finally, the
Red system features a chat function, which allows guests to communicate with
other passengers or send drinks or food during the flight. Unlike other carriers
who operate different types of aircrafts with varying amenities on each aircraft,
Virgin America offers its customers consistency and guarantees that these
services can be expected on every flight.
Passenger Revenue
Passenger revenue makes up the vast majority of Virgin America’s sales. Virgin
America had a key strategy in mind when they launched by operating their
flights out of San Francisco and Los Angeles to other major hubs. Throughout
their expansion, they have targeted routes that are highly popular and would
have the highest chance for success. Today, VA has presence in 23 airports
throughout North America and fly to 24 destinations in the United States and
Mexico.
Ancillary and Other Revenue
Ancillary and Other revenue make up 10.8% of Virgin America’s revenues.
These revenues do not come from the direct purchase of airfare.
Figure 2: Virgin America Revenue and Gross
Margin
200.00
150.00
Major ancillary revenue products include checked baggage fees, ticket change
fees, and priority boarding and security access. If reservations are made through
Virgin America’s reservation call center, there is an additional fee as well.
Certain products from their partners such as travel insurance and co-branded
credit card program are also included. Finally, meals, snacks, alcoholic and nonalcoholic beverages, movies, headphones, and sleep kits also contribute to
ancillary and other revenue.
100.00
50.00
0.00
2010
2011
2012
2013
2014
2015
2015
Other Revenue
UOIG 2
Industry
Figure 4: 2014 US Airline Market Share
There are three main factors on which companies in the airline industry can
differ. There are ultra-low-cost carriers (ULCCs), low-cost carriers (LCCs), and
legacy carriers, point-to-point or hub-and-spoke, and a choice of aircraft.
ULCCs and LCCs are the carriers who charge very low ticket prices but add
charges for any additional services. They have higher flight frequencies and are
typically shorter flights. Legacy carriers are the larger, well-known carriers who
fly longer, more expensive routes with a little more provided by way of inflight
amenities.
17%
22%
4%
16%
5%
8%
15%
13%
Delta
American
Alaska
Southwest
US Airways
Other
Overview
United
JetBlue
Another differentiating factor is whether an airline flies point-to-point or uses a
hub-and-spoke model. The point-to-point model flies direct from one place to
another and makes most of its profits by flying very full flights and managing
the costs of maintaining their flight crews in different airports. Meanwhile, the
hub-and-spoke model creates a central hub that an airplane flies to first before
flying larger routes. Legacy carriers typically employ this type of model using a
few central hubs from which they fly their routes.
The final differentiating factor is the type of aircraft or aircrafts an airline
chooses to fly. Carriers can choose between purchasing or leasing aircrafts and
decide on the size, age, and type of the aircrafts. The goal is to maximize
available seat miles and load factor.
Source: Market Realist
Industry Operating Metrics
Figure 5: Corporate Profit
Available Seat Mile (ASM) – One seat flying one mile
$2,400.00
Revenue Passenger Mile (RPM): The Basic Measure of Production- A paying
passenger flying one mile
$2,200.00
Load Factor: Production Compared to Capacity - RPMs divided by ASMs.
Passenger revenue per available seat mile (PRASM) – Passenger revenue
divided by ASMs,
$2,000.00
$1,800.00
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Operating Revenue per available seat mile (RASM) – Operating Revenue
divided by ASMs.
Source: IBISWorld
Average Stage Length – The average number of miles flown per flight.
Figure 6: Airline Industry Structure
Life Cycle Stage
Revenue Volatility
Capital Intensity
Concentration Level
Regulation Level
Technology Change
Barriers to Entry
Industry Globalization
Competition Level
Mature
Medium
High
High
High
Medium
Medium
High
High
Yield – Scheduled service revenue divided by scheduled
Macro Factors
Corporate Profit
Airlines depend on corporate profits to varying degrees depending on whether
they are an LCC or a legacy airline. Typically, when corporate profits are
higher, demand increases for legacy airlines, which serve business customers in
the regions in which they fly. LCCs tend not to fly in the same or as many
regions, and therefore do not experience this benefit. Since corporate profits are
expected to rise in the next few years, Virgin America is in a strong position to
capitalize off of this growth.
Source: IBISWorld
UOIG 3
Security Concerns
Due to terrorist attacks or fear of terrorist attacks, citizens have become
increasingly cautious and anxious about flying, decreasing the demand for air
travel. Security and safety precautions have been tightened, which often delays
and belabors the process of going through security. These security measures
prompt some customers to seek out alternative modes of transportation during
short trips to avoid these inconveniences.
Figure 7: Price of Oil
$120.00
$90.00
$60.00
$30.00
$0.00
2013
2014
2015
2016
2017
2018
2019
2020
Source: Knoema
Price of Oil
Airlines are heavily dependent on oil to operate. Even small changes in market
fuel prices heavily impact an airline’s profitability. The price of oil has fallen
more than 70% since June 2014 and as a result, airlines have been able to
capitalize on these falling prices. Conversely, if the price of oil were to heavily
increase, airlines would be very negatively affected. Fuel prices can be
influenced by external factors such as politics, the economy, foreign imports,
war zones, supply surplus or shortage, demand, transportation, or tax. It is up to
airlines to take precautionary measures to limit the effect that volatile oil prices
may have on their profits. In order to protect against this, Virgin America
hedges a portion of its fuel on a yearly basis.
Disposable Income/ Consumer Sentiment
The airline industry is heavily dependent on consumer demand. Consumer
demand for travel revolves around the ability to travel and the consumer’s
discretionary income. Traveling comes at a high price point and thus disposable
income plays a large part in the demand for air travel. When consumer
disposable income increases, demand for air travel increases and vice versa. In
order to avoid volatility in demand, Virgin America prices itself between LCCs
and legacy carriers, hoping to be the quality pick for air travel at a bargain price
point. As disposable income is projected to increase steadily over the next few
years, there may be an increased demand for leisure travel.
Figure 8: Per Capita Disposable Income
$50,000.00
$40,000.00
$30,000.00
$20,000.00
2015
2016
2017
2108
2019
2020
2021
Source: IBISWorld
Labor Relations
Having strong working relationships with staff is vital to maintaining a cohesive
and successful work environment. Many airline employees are represented by
labor unions. These labor unions often take action against companies in order to
improve working conditions for those in the union. This exposes airlines to risk
of their wage expenses increasing in relation to these events.
Virgin America has 595 pilots, 825 inflight teammates, 632 guest services
teammates, 120 maintenance technicians and 568 management and other
personnel. Currently, the only employees who are represented by a union are the
inflight crew members who voted for representation by the Transport Workers
Union in 2014. Virgin America recently saw a wage increase take place after
negotiations took place with the labor union.
Figure 9: Other Revenue Growth Historical
Competition
$200.00
40.00%
$150.00
30.00%
$100.00
20.00%
$50.00
10.00%
$0.00
0.00%
2010
2011
2012
Other Revenue
2013
2014
% Growth
2015
The airline industry is extremely competitive and with significant consolidation
over the past 10 years, even greater competition has emerged among the
remaining airlines. Market share is concentrated among a few large players and
as a result, airlines must focus on making individual routes as profitable as
possible in order to maintain market position.
Airlines compete on a variety of factors including routes, pricing, cost structure,
frequent flyer programs, customer service, and amenities. Virgin America
currently competes with LCCs as well as legacy carriers because they consider
themselves to be somewhere in between. They compete on routes, however,
primarily with legacy carriers. Legacy carriers typically fly business routes and
UOIG 4
Figure 10: Revenue and Operating Expenses
for 2015
1,563.0
1,177.8
routes that are flown out of concentrated markets where they know the flights
will be full. LCCs draw in customers with the opposite strategy. LCCs fly very
inexpensive routes from regional places or small cities that are relatively
untouched by legacies. Virgin America adapts itself to fit a special mold, pricing
closer to that of an LCC and planning routes consistent with legacy carrier
strategies.
Strategic Positioning
124.0
Revenue
Operating
Expenses
Sales and
Marketing
21.6
9.8
3.4
1.4
227.7
D&A
Interest
Expense
Capitalized
Interest
Taxes
Net Income
Figure 11: Historical Operating Income and
Margin
$300.00
20%
$200.00
10%
$100.00
0%
$0.00
2012
2013
2014
Virgin America offers the quality of legacy carriers while maintaining the cost
structure of LCC’s. This allows them to compete on price and remain
competitive within the industry. Virgin America traditionally enters new
markets with very low prices in an effort to try and capture market share. For
example, they are launching flights from Los Angeles to Hawaii and starting at
pricing at $169 one-way, forcing competitors like Hawaiian Airlines and United
Airlines to lower prices in order to match Virgin America.
Route Structure
Virgin America’s success can largely be attributed to their strategic route
placement and market entrance strategies. Unlike LCCs and ULCCs who target
small cities in order to dominate small markets and unlike legacies who fly hub
and spoke models, Virgin America differentiates itself by identifying the most
popular and profitable routes to fly. Understanding that business travelers are
reimbursed by their companies, Virgin America positions itself in major
business markets where legacies operate but offer a better price. This way, they
can maximize their ancillary revenue and ensure high yields and load factors for
their flights.
2015
-$100.00
-10%
Series1
Pricing
Series2
Virgin America also caters to markets with high profitability and targets popular
destinations. Realizing that Hawaii is a highly traveled to vacation destination,
especially from the Bay Area, Virgin America decided to penetrate that market.
In this way, Virgin America does not have a routine way of selecting new
routes, rather they evaluate market opportunities frequently and position
themselves where they will be able to capitalize on market demand.
Cost Structure
Figure 12: Domestic Trips by US Residents
$800.00
6.00%
5.00%
$750.00
4.00%
$700.00
3.00%
Virgin America’s business model is differs greatly from the rest of the industry.
They streamline low production cost models similar to LCCs. They operate a
modern, fuel efficient fleet, enabling them to capitalize on lower maintenance
costs and common flight crew training. Virgin America also employs high
aircraft utilization, averaging 10.8 hours per aircraft day and point-to-point
operations. Oursourcing their non-core activities such as ground handling,
maintenance, call center, catering, fuel operations, and parts, Virgin America is
able to reduce costs and build relationships with their suppliers.
$650.00
$600.00
$550.00
2.00%
In Flight Experience
1.00%
Virgin America prides itself in offering flyers a unique, pleasant, and consistent
flying experience every time. By streamlining their fleet of aircrafts, they
guarantee that passengers will be experiencing the same in-flight amenities each
and every time they board a Virgin America flight. This consistency provides
great value to passengers, as they will never have to question whether there will
be an outlet or Internet access on their flight.
0.00%
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Series1
Series2
Source: IBISWorld
UOIG 5
As mentioned in the business overview, Virgin America also employs special
mood lighting within their cabins to create a calming, low-stress environment
for their guests. They installed custom-designed leather seats in their cabins to
provide comfort. Finally, their state of the art Red system allows each guest to
customize his or her inflight experience through its entertainment options, chat
capability, and menu options.
Figure 13: 2015 Route Map
Business Growth Strategies
Expanding to New Markets
Virgin America plans to grow their business by way of route expansion into new markets.
Currently, Virgin America operates in 24 cities and with a strong presence in California,
Virgin America plans to leverage that strength to expand into additional major business
and high-end leisure markets.
Source: Virgin America Website
Figure 14: Value Offerings
Legacy Carriers Low Cost Carriers
First Class Service
Leading In-Flight Experience
Brand Premium
Top Destinations
Corporate Selling Focus
Ancillary Revenue Strategy
Loyalty Program
Single fleet type
Young and fuel efficient fleet
Point-to-point network
Outsourcing
High Labor Productivity
Virgin America
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Frequent Flyer Program
Like most other airlines, Virgin America maintains a guest loyalty program. Loyalty
programs are designed to increase revenues by increasing business from current
customers, strengthen partnerships, increasing customer loyalty, and bringing in new
customers. Elevate frequent flyer program allows guests to earn points for flying with
Virgin America and redeem them for travel rewards through Virgin America’s network
and network partners.
Unlike many other airlines, Virgin America bases their loyalty program points on the
value of ticket purchases rather than miles traveled. Frequent flyers can also redeem
points for any flight, without any blackout dates.
Being an elevate member, flyers can access purchase upgrade options, complimentary
upgrades to Main Cabin Select, free checked bags and priority check-in boarding and
security access. At this time, Virgin America has 3.5 million flyers enrolled in their
Elevate frequent flyer program.
Source: Virgin America Investor
Presentation
Figure 15: 2015 EBIDTA v. Executive
Compensation
$10.00
Using market research, Virgin America has identified the top SFO and LAX domestic
markets and destinations and with that information, they plan on gradually expanding to
these new areas as well. Hawaii is one example of an attractive opportunity that Virgin
America is leveraging currently. With high-demand leisure routes and a fast growing
market, Hawaii is a very attractive market for Virgin America. Not to mention flights to
Hawaii have high average fares.
$280.00
$8.00
$270.00
$6.00
$4.00
$260.00
$2.00
Management and Employee Relations
David Cush, President and CEO
David Cush was appointed President and CEO of Virgin America on December
10, 2007. Prior to joining Virgin America, Cush spent 20 years at American
Airlines serving as SVP of Global Sale. He also served as VP of American’s St.
Louis hub and VP of International Planning and Global Alliances. Since joining
Virgin America, Cush has led the company to experience record-setting growth
and earn a multitude of industry best-in-class awards.
2014 Compensation: $4.63M
$-
$250.00
2013
EBITDA
2014
Executive Compensation
Peter Hunt, Senior Vice President and CFO
Peter Hunt was appointed SVP and CFO of Virgin America in July 2011. Prior
to that, he served as VP and CFO of Pinnacle Airlines Corp. form 2004-2011.
There, he oversaw the finances of a public airline with over $1B in annual
UOIG 6
revenue. At Virgin America, Hunt oversees all financial operations including
treasury, tax, financial planning and analysis, accounting, external financial
reporting, budgets, procurement, and fleet planning.
Figure 16: 2015 Executive Compensation
$5,000,000
$4,500,000
Steve Forte, COO
$4,000,000
Steve Forte joined Virgin America in 2013 as the company’s first COO and
Director of Operations. Prior to joining Virgin America, Forte worked at United
Airlines where he served as a pilot, SVP of Flight Operations and Director of
Operations. He has historically held positions in various airline associations and
has worked closely with global airlines, manufacturers and regulators to solve
various industry issues.
$3,500,000
$3,000,000
$2,500,000
$2,000,000
$1,500,000
$1,000,000
$500,000
$0
Cush
Hunt
Forte
Frances Fiorillo, Senior Vice President | People & In-Flight
Services
Fiorillo
Frances Fiorillo started her career as a flight attendant for Canadian Pacific
Airlines and rose through the company to take on various roles until she became
VP of Human Resources. With years of human resource and customer service
experience under her belt, Fiorillo is an expert at developing a culture that
respects and supports the airline’s employees and guests.
Figure 17: 2015 GDS Industry Revenue
Growth
3.90%
The airline industry is extremely volatile and for that reason, management only
forecasts the near future. Historically, management guidance has been very on
par with their performance. Their guidance usually includes the general focus
and direction of the company, route expansion opportunities, ASMs, PRASMs,
and fuel hedges.
1.60%
0.10%
-1.50%
Domestic
California
Management Guidance
LAX Basin
Bay Area
Presentation
Virgin America gives very little guidance for full year performance and only
gives general statements regarding future plans. That being said, they do
forecast for the next quarter and their results are usually on par with that
guidance. Guidance has been accurate in the past and therefore I have used the
available guidance in my projections.
Portfolio Strategy
Figure 18: Average Fleet Age of Airlines
Virgin America is not currently held in any of the three portfolios. Due to the
fact that it is a small cap company and part of the Russell 2000, it is a strong
candidate for the Alumni Portfolio. Virgin America would also be a good fit for
the Tall Firs Portfolio being that Tall Firs is underweight IME. Finally, it would
be a good fit for DADCO because it is a strong investment and it is likely to
return significant value to shareholders.
23
17
13
13
11
10
9
8
6
ALGT
DAL
UAL
AAL
LUV
ALK
HA
JBLU
VA
5
SAVE
Recent News
Competition from Virgin America is driving down CaliforniaHawaii flight fares
Presentation
UOIG 7
Pacific Business News-February 4, 2016
Figure 19: Teammates by Work Group
Virgin America announced this week that it would be launching flights from Los
Angeles to Honolulu. The flights are scheduled to begin in May following its
San Francisco-Honolulu launch in November and San Francisco-Maui launch in
December. With promotional prices starting at just $169, competitive prices
have not gone unnoticed. In reaction to this low price, Hawaiian Airlines has
decided to match fares between San Francisco and Honolulu ad San Francisco to
Maui at hundreds of dollars less than their typical rates.
21%
Maintenance
Technicians
30%
Inlfight
4% Management
Catalysts
23%
Pilots
Guest Services
22%
Upside

Greater expansion into international and national markets will bolster
revenues and increase Virgin America’s customer base.

New software made to monitor ancillary product sales and demand will
continue to boost revenue and create higher margins
Maintenance Technicians
Management and Other
Guest Services
Pilots
Figure 20: Comparable 1 Year Stock Chart
Inflight

Declining fuel costs will result in lower operating costs

Operating a newer fleet allows Virgin America to consistently provide
modern technology onboard, which will increase demand from business
travelers

Continuing to win travelers awards will increase brand awareness and
entice leisure travelers to fly with Virgin America
$250.00
$200.00
$150.00
Downside
$100.00

Increases in oil prices could have an adverse effect on the company’s
operating margin

Failing to capture significant market share in new regions could result
in Virgin America losing future potential revenue growth and brand
equity

Negative publicity can spread quickly, diminishing brand equity
$50.00
$0.00
VA
HA
ALK
ALGT
SAVE
JBLU
LUV
SKYW
Source: Yahoo Finance
Figure 21: Comparables Revenue Growth
2016
Comparable Analysis
Overview
10.0%
5.0%
0.0%
VA
HA
ALK
ALGT
SAVE
JBLU
LUV
SKYW
-5.0%
-10.0%
Source: UOIG Projections and FactSet
Virgin America Inc. is one of thousands of airlines and operates domestically
and internationally. While there are a myriad of other airlines, it was difficult to
identify airlines that are comparable qualitatively and quantitatively based on
business operations, structure and strategy. Therefore, the comparable analyses
uses 6 companies that have each have qualities that are comparable on some
metric to Virgin America. The primary criteria used to screen for comparable
companies were size, growth expectations, margins, and industry. Although
maybe more quantitatively similar with respect to route structure and expansion
strategy, I did not choose to include legacy carriers due to their enormous sizes
and varying growth expectations.
UOIG 8
For my weightings, I weighted the P/E multiple 80% due to the fact that this is
the metric that analysts primarily use when valuing airlines. I had initially
thought to include an EV/EBITDAR multiple, however it is very difficult to
accurately represent this multiple for a few reasons. Because EBITDAR is a
non-GAAP measure, it is impossible to fully understand what analysts are
including in the rent expense and therefore, any ratio rendered this way would
have a high chance of inaccuracy.
Figure 22: HA vs. VA Multiples
10.00x
8.00x
6.00x
4.00x
2.00x
.00x
EV/Revenue
EV/EBIT
HA
EV/EBITDA
P/E
Source: FactSet
Figure 23: Comparable EBITDA Margins
45%
35%
25%
15%
5%
VA
HA
ALK
ALGT
SAVE
JBLU
LUV
SKYW
-5%
Comparables
HA: Hawaiian Holdings, Inc.: (25%)
VA
Weighted Average
Source: Company 10-Ks
“Hawaiian Holdings, Inc., through its subsidiary, Hawaiian Airlines, Inc.,
engages in the scheduled air transportation of passengers and cargo. It offers
daily services on North America routes between the state of Hawai'i and Los
Angeles, Oakland, Sacramento, San Diego, San Francisco, and San Jose,
California; Las Vegas, Nevada; Phoenix, Arizona; Portland, Oregon; and
Seattle, Washington. The company also provides daily services on its Neighbor
Island routes among the six major islands of the State of Hawai'i; and daily
services on its international routes between the state of Hawai'i and Sydney,
Australia; and Tokyo and Osaka, Japan. In addition, it offers scheduled services
between the state of Hawai'i, and New York City, New York; and scheduled
services between the State of Hawai'i and Pago Pago, American Samoa;
Papeete, Tahiti; Brisbane, Australia; Auckland, New Zealand; Sapporo, Japan;
Seoul, South Korea; and Beijing, China, as well as other ad hoc charter services.
Hawaiian Holdings, Inc. markets its tickets through various distribution
channels, including its Website www.hawaiianairlines.com primarily for North
America and Neighbor Island route customers, as well as through travel
agencies and wholesale distributors primarily for its international route
customers. As of December 31, 2015, the company’s fleet consisted of 18
Boeing 717-200 aircraft for the Neighbor Island routes; 8 Boeing 767-300
aircraft; and 22 Airbus A330-200 aircraft for the North America, international,
and charter routes, as well as 3 ATR42 turboprop aircraft. Hawaiian Holdings,
Inc. was founded in 1929 and is headquartered in Honolulu, Hawaii.” – Yahoo
Finance
Although HA is not very qualitatively similar aside from the fact that VA flies
two routes to Hawaii, HA is very quantitatively similar to Virgin America in
many ways. It is one of the most similar in size to VA being a small cap
company and it has the most similar growth expectations and margins to VA.
Though HA’s beta is a bit higher, I still consider HA to be the most qualitatively
similar company to VA and for that reason, I gave it a 30% weighting.
Figure 24: HA vs. VA Multiples
16.00x
12.00x
8.00x
SAVE: Spirit Airlines, Inc.: (10%)
4.00x
.00x
EV/Revenue
EV/EBIT
SAVE
EV/EBITDA
VA
Source: FactSet
P/E
“Spirit Airlines, Inc. provides low-fare airline services. As of June 30, 2015, it
operated approximately 360 daily flights to 57 destinations in the United States,
Caribbean, and Latin America. As of December 31, 2014, the company had a
fleet of 65 Airbus single-aisle aircraft comprising 29 A319s, 34 A320s, and 2
UOIG 9
A321s. Spirit Airlines, Inc. was founded in 1964 and is headquartered in
Miramar, Florida.” – Yahoo Finance
Like Allegiant, Spirit Airlines is qualitatively similar to Allegiant based on the
fact that they both operate using low cost structures and point-to-point networks.
Spirit Airlines also flies many of the same routes as Virgin America, though
Spirit Airlines does fly to more destinations than Virgin America does.
Quantitatively, Spirit Airlines is also relatively comparable based on their small
market capitalization; however, both Spirit Airlines and Allegiant are still much
larger than Virgin America. While it has slightly less debt than Virgin America,
I think that SAVE is a company that could provide insight into the growth
patterns that we may see with VA and for that reason as well as the other
qualitative and quantitative reasons, I gave it a 10% weighting.
Figure 25: Comparable Net Margins
20%
15%
10%
5%
ALGT: Allegiant Travel Company: (20%)
0%
VA
HA
ALK
ALGT
Comparables
SAVE
JBLU
LUV
SKYW
Weighted Average
Source: FactSet
Figure 26: ALGT vs. VA Multiples
16.00x
12.00x
8.00x
4.00x
0.00x
EV/Revenue
EV/EBIT
ALGT
EV/EBITDA
P/E
“Allegiant Travel Company, a leisure travel company, focuses on the provision
of travel services and products to residents of under-served cities in the United
States. The company offers scheduled air transportation on limited frequency
nonstop flights between under-served cities and leisure destinations. As of
February 2, 2015, it operated a fleet of 53 MD-80 aircraft, 4 Airbus A319
aircraft, 9 Airbus 320 aircraft and 6 Boeing 757-200 aircraft provided services
on 229 routes to 94 cities. The company also provides air-related services and
products in conjunction with air transportation, including use of its call center
for purchases, baggage fees, advance seat assignments, travel protection
products, change fees, priority boarding, food and beverage purchases on board,
and other air-related services. In addition, it offers third party travel products,
such as hotel rooms, ground transportation, and attractions; and air
transportation services through fixed fee agreements and charter service on a
seasonal and ad-hoc basis. The company was founded in 1997 and is
headquartered in Las Vegas, Nevada.” – Yahoo Finance
VA
Source: FactSet
Figure 27: 2015 Airline Scoreboard
Qualitatively, VA and ALGT are similar in cost structure as they both operate
using a low cost, point-to-point network. However, Allegiant caters to a
different consumer and region than Virgin America does. Allegiant provides
service primarily to under serviced small cities in order to capture most of the
market share in one area, while Virgin America’s strategy is to capture high end
leisure and business travelers. Quantitatively, VA and ALGT are comparable
because they are both small cap airlines with similar growth expectations and
operating results. However, being an Ultra-Low-Cost Carrier, Allegiant does
manage to have higher margins than Virgin America. Still, based on qualitative
and quantitative factors, Allegiant is still quite similar to Virgin America and for
those reasons it was weighted 20%.
JBLU: JetBlue Airways Corporation: (15%)
Source: Wall Street Journal
“JetBlue Airways Corporation, a passenger carrier company, provides air
transportation services. As of December 31, 2014, the company operated a fleet
of 13 Airbus A321 aircrafts, 130 Airbus A320 aircrafts, and 60 EMBRAER 190
aircrafts. It also served 87 destinations in 27 states in the United States (the
UOIG 10
U.S.), the District of Columbia, the Commonwealth of Puerto Rico, the U.S.
Virgin Islands, and 17 countries in the Caribbean and Latin America. JetBlue
Airways Corporation was founded in 1998 and is based in Long Island City,
New York.” – Yahoo Finance
JetBlue Airways Corporation (JBLU) and Virgin America have a lot in common
in the sense that they cater to the same consumer base. They both appeal to the
high-class business and leisure traveler looking for a consistent and modern
flight experience. While Virgin America offers this by way of their cabin mood
lighting and entertainment system, JetBlue offers this in other forms such as
their complimentary, quality snacks and a modern fleet. Qualitatively, JBLU and
VA have similar betas. However, JBLU is larger and has a bit different growth
rates and a bit higher margins. For those reasons, I decided to weight JBLU
15%.
Figure 28: ALK vs. VA Multiples
12.00x
8.00x
4.00x
ALK: Alaska Air Group, Inc.: (10%)
0.00x
EV/Revenue
EV/EBIT
ALK
EV/EBITDA
P/E
VA
Source: FactSet
Figure 29: EV/EBITDA Multiples
EV/EBITDA Multiples
VA
3.47x
HA
4.85x
ALK
5.28x
ALGT
6.61x
SAVE
6.24x
JBLU
4.39x
LUV
4.90x
SKYW
3.19x
Source: FactSet
“Alaska Air Group, Inc., through its subsidiaries, provides passengers and cargo
air transportation services primarily in the United States. The company operates
through three segments: Alaska Mainline, Alaska Regional, and Horizon. It
serves approximately 100 cities in Alaska, the Lower 48, Hawaii, Canada,
Mexico, and Costa Rica. As of December 31, 2015, the company’s fleet
consisted of 147 Boeing 737 jet aircraft; and 52 Bombardier Q400 turboprop
aircraft. The company was founded in 1932 and is based in Seattle,
Washington.” – Yahoo Finance
Alaska Air Group (ALK) was chosen because of its similar growth expectations,
route structure, and industry. ALK competes with Virgin America on routes but
does not necessarily maintain the same priorities when it comes to the services
that they offer. However, one priority that both companies have is that they both
strive to provide quality, consistent service on routes. Qualitatively, the
companies compete on service and satisfaction. Quantitatively, their growth
rates and beta are very similar. However, ALK has higher profit margins and is
much larger compared to VA. Taking all aspects into consideration, I decided to
give ALK a 10% weighting in my comparable analysis.
LUV: Southwest Airlines Co.: (5%)
“Southwest Airlines Co. operates passenger airlines that provide scheduled air
transportation services in the United States and near-international markets. As of
December 31, 2015, it operated 704 Boeing 737 aircraft. The company served
97 destinations in 40 states, the District of Columbia, and the Commonwealth of
Puerto Rico, as well as 7 near-international countries, including Mexico,
Jamaica, The Bahamas, Aruba, the Dominican Republic, Costa Rica, and Belize.
It also sells frequent flyer points and related services to business partners
participating in the Rapid Rewards frequent flyer program, including car rental
agencies, hotels, restaurants, and retailers. The company was founded in 1967
and is headquartered in Dallas, Texas.” – Yahoo Finance
Quantitatively, Southwest Airlines and Virgin America are comparable because
their growht expectations are pretty similar and they operate the same cost
UOIG 11
structure. However, Southwest Airlines is tremendously larger than Virgin
America and has better margins as well. Quantitatively, Southwest Airlines is
comparable because they try to offer quality service and a relatively low price.
Virgin America, offers quality service at a relatively cost effective price as well.
For all the reasons listed above, I decided to give Southwest Airlines Co. a 5%
weighting.
Figure 30: Passenger Revenue Growth
$3,500.00
$3,000.00
$2,500.00
$2,000.00
$1,500.00
SKYW: Skywest, Inc.: (0%)
$1,000.00
$500.00
$0.00
2013
2014
2015
2016
2017
2018
2019
2020
Passenger Revenue
Source: Virgin America 10-K and UOIG
Projections
Figure 31: Aircraft Fuel Cost
$600.00
8.00%
“SkyWest, Inc., through its subsidiaries, operates a regional airline in the United
States. It provides scheduled passenger and air freight services with
approximately 3,500 total daily departures to various destinations in the United
States, Canada, Mexico, and the Caribbean. The company operates its flights as
Delta Connection, United Express, US Airways Express, American Eagle, or
Alaska under code-share arrangements. As of March 4, 2015, it operated a fleet
of 693 aircraft. It also offers regional jet and turboprop service to airports; and
ground handling services for other airlines throughout its system. SkyWest, Inc.
was founded in 1972 and is headquartered in St. George, Utah.” – Yahoo
Finance
$537.50
$507.04
7.00%
$499.10
$500.00
6.00%
$400.00
5.00%
$350.79
$344.95
$300.00
4.00%
3.00%
$200.00
2.00%
Just about the only qualities that SKYW and VA have in common are the fact
that they are both relatively small companies, and the fact that they both operate
low cost structures. Aside from those facts, they are vastly different qualitatively
and quantitatively speaking. However, because they are in the same industry and
I thought it would be useful to evaluate small, low cost airlines, I left it in my
model and gave it a 0% weighting.
$100.00
1.00%
$-
Discounted Cash Flow Analysis
0.00%
2012
2013
2014
Fuel Cost
2015
2016
% ASM
Projections
Figure 32: Top SFO Domestic Market
PDEWs
2789
2710
1718
1706
1656
1614
1581
1389
1179
LAX
JFK
LAS
BOS
ORD
EWR
SEA
SAN
DEN
1117
IAD
PDEW: Passengers Daily Each Way
Virgin America currently not present in this domestic Market
Source: Virgin America Investor Relations
Revenue Model:
Passenger Revenue
Passenger Revenue is computed by multiplying yield per passenger mile with
revenue per mile (RPM). RPM is calculated by multiplying available seat miles
(ASM) with load factor.
Available seat miles is arguably the most important measure of all operating
statistics when evaluating revenue. The way I went about projecting this was by
evaluating how many routes Virgin America had historically launched each year
and how many ASMs were added per route. I then had to forecast how many
routes I thought Virgin America would be adding each year. Although Virgin
America provides data about what markets and cities they want to target, they do
not indicate whatsoever the number of routes they plan to launch each year or
any rate at which they might launch new routes. Due to the fact that they do not
have a route growth pattern similar to that of more mature airlines, I did not feel
comfortable applying another airline’s growth structure to Virgin America’s. I
projected ASMs based on how many routes Virgin America had launched
historically and applied a reasonable assumption for how I thought Virgin
America would continue to launch routes.
Other Revenue (Ancillary Revenue):
Other revenue consists of baggage fees, change fees, seat selection fees,
passenger-related service fees and inflight meals and entertainment.
Management traditionally gives minimal guidance, however, one thing they
were very forthcoming about was Ancillary Revenue. In an earnings call, they
UOIG 12
emphasized their bullishness about ancillary revenue and expressed their
confidence that Virgin America could grow ancillary revenue by 12% into
perpetuity based on a new software they have been using, which helps them
price and monitor ancillary products. Although I am confident in management’s
abilities, I think 12% is extremely high for ancillary revenue and do not think it
is realistic that they will be able to achieve this given most airlines have
significantly lower growth in ancillary revenue in comparison. However, I am
still confident that they will be able to achieve high growth rates in ancillary
revenue based on the information provided. I am simply more bearish than VA’s
management with respect to other revenue.
Figure 33: VA Historical and Future
Depreciation
$80.00
$60.00
$40.00
Aircraft Fuel:
$20.00
$0.00
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Projections
Figure 34: VA Capital Expenditures
2024
Aircraft fuel is one of the main operating expenses in the airline industry. Fuel
prices are extremely volatile, which is why most airlines hedge their fuel in
order to avoid the negative effects that can be associated with wild fluctuations
in pricing. Virgin America is no exception and hedges their fuel on a rolling
basis throughout the year. In order to project fuel costs, I gathered data on the
historical price of fuel and used it to estimate Virgin America’s hedge rates
during each given year. Based on those rates, I projected very conservatively
fuel costs going forward under the assumption that they hedge their fuel on an
annual basis.
Aircraft Maintenance:
Because Virgin America operates a relatively young fleet, their maintenance
costs up to this point have not been excessive. They pride themselves in fleet
modernization and their single fleet structure. However, as their fleet does begin
to age as it approaches the terminal year, aircraft maintenance costs will increase
as a percentage of ground and other equipment.
Depreciation and Amortization:
Projections
Because Virgin America amortizes maintenance over the remaining lease term
rather than the next estimted maintence event, there will be higher depreciation
and amortization expense in the last few years of the leases in comparison to the
earlier periods. As mentioned above, Virgin America has a relatively young fleet
and just as aircraft maintenance costs will increase as Virgin America’s fleet
ages, depreciation and amortization will as well.
Capital Expenditures
Figure 35: VA Betas
Capital expenditures are expected to increase by $500 M in the next 2 years
related to the delivery of 10 new aircrafts to be added to Virgin America’s fleet.
Management has announced that 30 new aircrafts will be delivered by 2022 so I
included those in my projections and then trended down their Capital
Expenditures as their company matures in the future.
Beta:
Source: UOIG Projections
Beta was calculated by running regressions against the S&P 500. The estimated
beta for Virgin America is 1.15. All of the betas were weighted, however, the
airline industry beta was given the heaviest weighting of 55%. While the other
betas are important to evaluate, given Virgin America’s recent IPO, it was
difficult to come up with enough data points to estimate the most accurate beta
for Virgin America with just the Vasicek and Hamada.
UOIG 13
Recommendation
Figure 36: Virgin America Final Implied
Price
Method
Implied Price
Weight
Discounted Cash Flow
39.42
60%
Forward Comparables
58.06
40%
Implied Price
46.88
Current Price
30.33
Undervalued
54.57%
Source: UOIG Projections
As a relatively young airline that has had a strong start in the industry,
Virgin America is well positioned for great success even in a highly
competitive environment. Virgin America’s unique business model
allows it to be a price setter competing with legacy airlines while
maintaining a low cost structure consistent with LCCs. Giving a 60%
weighting on the discounted cash flow analysis and a 40% weighting on
the comparable analysis, a final price target of $46.88 is reached. Given
an undervaluation of 54.57%, I am recommending a BUY for all three
portfolios.
UOIG 14
February 26, 2016
Appendix 1 – Relative Valuation
Comparables Analysis
VA
Virgin America
Airlines
($ in millions)
Stock Characteristics
Current Price
Beta
Max
$158.36
1.29
Min
$15.78
0.25
Size
Short-Term Debt
Long-Term Debt
Cash and Cash Equivalent
Non-Controlling Interest
Preferred Stock
Diluted Basic Shares
Market Capitalization
Enterprise Value
265.00
2,434.00
1,282.00
0.00
0.00
691.55
27,115.79
28,525.79
10.43
96.26
89.61
0.00
0.00
18.62
810.75
1,089.14
156.35
2,003.28
500.72
0.00
0.00
221.44
10,279.81
10,496.00
Growth Expectations
% Revenue Growth 2016E
% Revenue Growth 2017E
% EBITDA Growth 2016E
% EBITDA Growth 2017E
% EPS Growth 2016E
% EPS Growth 2017E
15.36%
18.10%
130.70%
14.09%
565.42%
11.90%
-4.80%
-0.40%
-2.60%
-1.90%
-2.30%
-39.07%
0.00%
29.39%
37.35%
17.34%
Profitability Margins
Gross Margin
EBIT Margin
EBITDA Margin
Net Margin
Credit Metrics
Interest Expense
Debt/EV
Leverage Ratio
Interest Coverage Ratio
Operating Results
Revenue
EBIT
EBITDA
Net Income
Multiples
EV/Revenue
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Median
Weight Avg.
$43.09
$65.74
0.96
0.74
HA
Hawaiian
Holdings Inc.
SAVE
Spirit Airlines,
Inc.
ALGT
JBLU
Allegiant Travel JetBlue Airways
Company
Corporation
ALK
Alaska Air
Group, Inc.
LUV
Southwest
Airlines Co.
SKYW
SkyWest Inc.
$30.78
1.15
25.00%
$39.77
1.29
25.00%
$46.87
0.90
20.00%
$158.36
0.92
15.00%
$21.36
1.20
10.00%
$72.34
1.06
5.00%
$39.31
1.01
0.00%
$15.78
0.25
116.81
850.63
368.09
0.00
0.00
139.03
5,582.36
6,181.72
33.80
96.26
394.64
0.00
0.00
44.08
1,353.72
1,089.14
156.35
893.29
264.09
0.00
0.00
53.59
2,131.31
2,916.86
10.43
135.82
632.78
0.00
0.00
103.61
4,599.51
4,112.97
53.82
539.28
89.61
0.00
0.00
18.62
2,886.49
3,389.98
265.00
1,968.00
341.00
0.00
0.00
321.51
6,761.09
8,653.09
117.00
686.00
107.00
0.00
0.00
132.03
9,524.07
10,220.07
258.00
2,434.00
1,282.00
0.00
0.00
691.55
27,115.79
28,525.79
211.82
1,533.99
132.28
0.00
0.00
51.96
810.75
2,424.28
5.20%
6.40%
14.70%
4.00%
18.10%
3.70%
6.19%
10.75%
14.34%
4.24%
22.07%
2.69%
15.36%
16.33%
130.70%
14.09%
565.42%
-39.07%
3.50%
5.20%
19.60%
-1.90%
50.60%
-0.10%
8.40%
18.10%
6.50%
12.60%
-2.30%
6.30%
6.50%
13.40%
6.80%
4.00%
9.50%
2.50%
8.10%
8.90%
28.10%
1.80%
34.60%
-0.70%
4.40%
6.40%
14.70%
2.60%
18.10%
3.70%
5.20%
5.40%
15.40%
4.60%
21.90%
7.50%
-4.80%
-0.40%
-2.60%
7.20%
9.50%
11.90%
0.00%
8.72%
16.54%
3.73%
0.00%
22.30%
27.51%
13.14%
0.00%
23.30%
28.93%
13.60%
0.00%
15.37%
16.54%
13.81%
0.00%
19.02%
23.44%
10.38%
0.00%
21.92%
26.66%
13.09%
0.00%
29.39%
37.35%
17.34%
0.00%
23.06%
28.82%
13.14%
0.00%
26.14%
32.38%
16.28%
0.00%
22.30%
27.51%
13.26%
0.00%
8.72%
25.56%
3.73%
$114.00
0.72
2.32
85.28
$8.83
0.04
0.24
10.86
$42.00
0.17
1.12
45.07
$47.44
0.19
1.00
33.68
$9.98
0.12
0.45
29.26
$51.73
0.36
1.87
10.86
$8.83
0.04
0.24
70.10
$26.51
0.17
1.18
18.94
$114.00
0.26
1.12
17.54
$42.00
0.08
0.42
45.07
$114.00
0.09
0.47
50.33
$8.83
0.72
2.32
85.28
$20,860.00
$4,652.00
$5,738.00
$2,767.00
$2,020.00
$1,344.00
$257.00
$291.91
$110.00
$155.00
$2,946.00
$509.00
$753.00
$304.00
$622.00
$4,117.25
$945.65
$1,171.85
$555.20
$547.95
$1,764.49
$271.26
$291.91
$243.73
$250.00
$2,398.00
$456.00
$562.00
$249.00
$197.00
$2,322.00
$509.00
$619.00
$304.00
$622.00
$1,344.00
$395.00
$502.00
$233.00
$222.00
$6,939.00
$1,600.00
$2,000.00
$912.00
$854.00
$5,846.00
$1,528.00
$1,893.00
$952.00
$697.00
$20,860.00
$4,652.00
$5,738.00
$2,767.00
$2,020.00
$2,946.00
$257.00
$753.00
$110.00
$155.00
2.52x
9.43x
6.75x
25.99x
15.13x
0.62x
4.02x
3.22x
NM
5.55x
1.37x
6.69x
5.19x
7.67x
9.80x
1.68x
7.12x
5.75x
NM
11.00x
0.62x
4.02x
3.73x
25.99x
5.55x
1.22x
6.40x
5.19x
7.99x
8.56x
1.77x
8.08x
6.64x
NM
15.13x
2.52x
8.58x
6.75x
12.11x
12.39x
1.25x
5.41x
4.33x
7.55x
7.41x
1.75x
6.69x
5.40x
8.55x
10.00x
1.37x
6.13x
4.97x
7.67x
9.80x
0.82x
9.43x
3.22x
4.05x
7.37x
Multiple
EV/Revenue
EV/EBIT
EV/EBITDA
EV/(EBITDA-Capex)
Market Cap/Net Income = P/E
Price Target
Current Price
Undervalued
Implied Price
Weight
73.32
0.00%
49.84
10.00%
44.06
10.00%
NM
0.00%
60.84
80.00%
$58.06
30.78
88.64%
UOIG 15
February 26, 2016
Appendix 2 – Discounted Cash Flows Valuation
Discounted Cash Flow Analysis
($ in millions)
Total Revenue
% YoY Growth
Operating Expense
Aircraft fuel
% ASM
% of Revenue
Aircraft Rent
% Revenue
Salaries, wages and benefits
% Revenue
Landing fees and other rents
% Revenue
Sales and Marketing
% Revenue
Aircraft Maintenance
% Flight, Ground and Other Equipemnt
% Revenue
Other Operating expenses
% Revenue
Depreciation and Amortization
Depreciation per Aircraft
Number of Aircrafts
Growth in Depreciation Per Aircraft
Operating Income
Operating Margin
Interest Expense
% Revenue
Capitalized interest
% Revenue
Net Interest (Income)
% Revenue
Earnings Before Taxes
% Revenue
Less Taxes (Benefits)
Tax Rate
Net Income
Net Margin
Add Back: Depreciation and Amortization
Add Back: Interest Expense*(1-Tax Rate)
Operating Cash Flow
% Revenue
Current Assets
% Revenue
Current Liabilities
% Revenue
Net Working Capital
% Revenue
Change in Working Capital
% Revenue
Unlevered Free Cash Flow
Discounted Free Cash Flow
EBITDA
EBITDA Margin
EBITDA Growth
2012A
1,332.83
28.51%
2017E
$2,052.61
16.33%
2018E
$2,423.62
18.07%
2019E
$2,818.87
16.31%
2020E
$3,144.92
11.57%
2021E
$3,449.86
9.70%
2022E
$3,686.50
6.86%
537.50
507.04
499.10
323.85
387.57
460.98
7.02%
5.15%
3.99%
2.55%
2.68%
2.77%
40.33%
35.59%
33.50%
21.17%
21.97%
22.46%
236.80
202.07
184.36
183.62
206.01
253.60
17.77%
14.18%
12.37%
12.00%
12.19%
12.36%
176.22
196.48
257.37
289.64
332.05
384.17
13.22%
13.79%
17.27%
18.94%
18.82%
18.72%
110.17
122.62
133.13
143.84
162.90
186.34
26.43%
8.61%
8.93%
9.40%
9.23%
9.08%
107.14
106.60
113.20
124.77
140.27
160.74
8.04%
7.48%
7.60%
8.16%
7.95%
7.83%
58.93
61.85
60.07
57.31
72.01
92.75
69.85%
48.29%
40.70%
35.71%
38.05%
40.80%
4.42%
4.34%
4.03%
3.75%
4.08%
4.52%
126.56
133.18
131.84
150.71
171.77
198.52
9.50%
9.35%
8.85%
9.85%
9.73%
9.67%
11.26
13.96
14.49
17.20
20.64
24.77
0.22
0.26
0.27
0.32
0.28
0.31
52.00
53.00
53.00
63.00
73.00
79.00
21.67%
3.75%
18.76%
20.00%
20.00%
($31.74)
$80.88
$96.42
$238.64
$271.26
$290.73
(2.38%)
5.68%
6.47%
15.60%
15.37%
14.16%
116.11
71.29
37.52
9.98
20.00
22.92
8.71%
5.00%
2.52%
0.65%
1.13%
1.12%
(2.18)
(0.53)
(2.67)
3.41
0.00
0.00
-0.16%
-0.04%
-0.18%
0.22%
0.00%
0.00%
(0.29)
(0.34)
0.28
(2.33)
0.00
0.00
-0.02%
-0.02%
0.02%
-0.15%
0.00
0.00%
(145.38)
10.46
61.29
227.59
251.26
267.81
-10.91%
0.73%
4.11%
14.88%
14.24%
13.05%
0.02
0.32
1.18
(172.39)
7.54
20.28
-0.01%
3.03%
1.92%
-75.74%
3.00%
7.57%
($145.39)
$10.14
$60.11
$399.98
$243.73
$247.53
(10.91%)
.71%
4.03%
26.15%
13.81%
12.06%
11.26
13.96
14.49
17.20
20.64
24.77
116.12
69.13
36.80
17.53
19.40
21.19
($18.01)
$93.24
$111.39
$434.71
$283.77
$293.49
(1.35%)
6.54%
7.48%
28.42%
16.08%
14.30%
123.21
127.04
44.29
69.95
76.85
92.01
9.24%
8.92%
2.97%
4.57%
4.36%
4.48%
262.73
256.64
304.02
297.85
320.79
366.09
19.71%
18.01%
20.40%
19.47%
18.18%
17.84%
($139.53) ($129.60) ($259.74) ($227.90) ($243.95) ($274.08)
(10.47%)
(9.10%) (17.43%) (14.90%) (13.83%) (13.35%)
$ (139.53) $
9.92 $ (130.14) $ 31.84 $ (16.05) $ (30.13)
27.18
42.00
55.16
250.00
250.00
250.00
2.04%
2.95%
3.70%
16.34%
14.17%
12.18%
$ 94.33 $ 41.32 $ 186.37 $ 152.88 $ 49.81 $ 73.62
$ 61.32
552.45
2.86%
22.79%
303.41
12.52%
451.13
18.61%
216.29
8.92%
186.92
7.71%
116.76
43.54%
4.82%
232.87
9.61%
29.73
0.35
85.00
20.00%
$334.06
13.78%
26.66
1.10%
0.00
0.00%
0.00
0.00%
307.40
12.68%
37.33
12.14%
$270.07
11.14%
29.73
23.42
$323.22
13.34%
109.53
4.52%
422.68
17.44%
($313.15)
(12.92%)
$ (39.07)
250.00
10.32%
$ 112.29
$ 85.35
649.99
2.95%
23.06%
357.50
12.68%
521.82
18.51%
247.22
8.77%
214.05
7.59%
144.22
46.28%
5.12%
269.07
9.55%
35.67
0.39
91.00
20.00%
$379.33
13.46%
30.54
1.08%
0.00
0.00%
0.00
0.00%
348.79
12.37%
58.30
16.71%
$290.49
10.31%
35.67
25.44
$351.60
12.47%
128.43
4.56%
480.47
17.04%
($352.04)
(12.49%)
$ (38.89)
250.00
8.87%
$ 140.49
$ 97.46
737.20
3.05%
23.44%
403.99
12.85%
578.96
18.41%
270.97
8.62%
235.08
7.47%
170.27
49.03%
5.41%
298.21
9.48%
42.81
0.44
97.00
20.00%
$407.44
12.96%
33.55
1.07%
0.00
0.00%
0.00
0.00%
373.89
11.89%
79.58
21.29%
$294.30
9.36%
42.81
26.41
$363.52
11.56%
144.44
4.59%
523.61
16.65%
($379.17)
(12.06%)
$ (27.13)
250.00
7.95%
$ 140.65
$ 89.04
820.16
3.14%
23.77%
448.80
13.01%
631.57
18.31%
291.93
8.46%
253.78
7.36%
197.04
51.77%
5.71%
324.95
9.42%
51.37
0.50
103.00
20.00%
$430.26
12.47%
36.23
1.05%
0.00
0.00%
0.00
0.00%
394.04
11.42%
101.89
25.86%
$292.15
8.47%
51.37
26.86
$370.38
10.74%
159.71
4.63%
560.75
16.25%
($401.04)
(11.62%)
$ (21.86)
250.00
7.25%
$ 142.24
$ 82.18
886.36
3.23%
24.04%
485.62
13.17%
671.12
18.20%
306.28
8.31%
266.81
7.24%
221.50
54.51%
6.01%
344.92
9.36%
59.07
0.55
107.00
15.00%
$444.84
12.07%
38.10
1.03%
0.00
0.00%
0.00
0.00%
406.75
11.03%
142.36
35.00%
$264.38
7.17%
59.07
24.76
$348.22
9.45%
172.02
4.67%
584.64
15.86%
($412.62)
(11.19%)
$ (11.58)
214.96
5.83%
$ 144.84
$ 76.37
-$20.48
(1.54%)
2013A
1,424.68
37.37%
$94.84
6.66%
(563.20%)
2014A
1,489.97
11.79%
$110.90
2015A
$1,529.58
2.66%
$255.85
16.73%
130.70%
2016E
$1,764.49
15.36%
$291.91
16.54%
14.09%
$315.50
15.37%
8.08%
$363.79
15.01%
15.30%
$415.00
14.72%
14.08%
$450.24
14.32%
8.49%
$481.63
13.96%
6.97%
$503.91
13.67%
4.63%
2023E
$3,783.59
6.86%
2024E
$3,934.90
4.00%
938.89
1,020.50
3.42%
3.50%
24.81%
25.93%
504.60
531.21
13.34%
13.50%
684.92
708.28
18.10%
18.00%
308.51
314.79
8.15%
8.00%
269.34
275.44
7.12%
7.00%
232.64
259.70
57.26%
60.00%
6.15%
6.60%
351.61
363.19
9.29%
9.23%
64.98
71.48
0.59
0.64
110.00
112.00
10.00%
10.00%
$428.09
$390.30
11.31%
9.92%
38.47
39.35
1.02%
1.00%
0.00
0.00
0.00%
0.00%
0.00
0.00
0.00%
0.00%
389.62
350.95
10.30%
8.92%
136.37
122.83
35.00%
35.00%
$253.25
$228.12
6.69%
5.80%
64.98
71.48
25.00
25.58
$343.24
$325.17
9.07%
8.26%
177.94
186.50
4.70%
4.74%
585.08
592.93
15.46%
15.07%
($407.14) ($406.43)
(10.76%) (10.33%)
$
5.48 $
0.72
167.07
118.05
4.42%
3.00%
$ 170.69 $ 206.41
$ 82.14 $ 90.64
$493.07
13.03%
2.38%
$461.77
11.74%
(8.36%)
UOIG 16
February 26, 2016
Appendix 3 – Revenue Model
Revenue Model
($ in millions)
2010A
2011A
2012A
2013A
2014A
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
Passenger
655.45
950.93
1,215.18
1,289.27
1,329.21
1,362.87
1,587.59
1,864.92
2,224.51
2,607.67
2,920.94
3,212.34
3,434.67
3,531.79
% Growth
33.57%
45.08%
27.79%
6.10%
3.10%
2.53%
16.49%
17.47%
19.28%
17.22%
12.01%
9.98%
6.92%
9.94%
6.79%
% of Total Revenue
90.53%
91.69%
91.17%
90.50%
89.21%
89.10%
89.97%
90.86%
91.78%
92.51%
92.88%
93.12%
93.17%
93.34%
93.22%
ASM (in millions)
7,652.00
9,853.00
12,514.00
12,243.00
12,756.00
12,691.00
14,467.74
16,637.90
19,299.97
22,001.96
24,202.16
26,138.33
27,445.25
28,268.60
29,116.66
%Growth
16.90%
28.76%
27.01%
(2.17%)
4.19%
(.51%)
14.00%
15.00%
16.00%
14.00%
10.00%
8.00%
5.00%
3.00%
3.00%
81.50%
81.50%
79.20%
80.20%
82.60%
82.24%
82.09%
81.95%
81.82%
81.68%
81.54%
81.41%
81.27%
81.14%
81.00%
LoadFactor
2024E
3,667.96
%Growth
(1.57%)
0.00%
(2.82%)
1.26%
2.99%
(.43%)
.15%
(.17%)
(.17%)
(.17%)
(.17%)
(.17%)
(.17%)
(.33%)
(.33%)
RPM (in millions)
6,236.00
8,034.00
9,912.00
9,814.00
10,550.68
10,437.53
11,955.65
13,635.11
15,790.47
17,971.21
19,735.42
21,278.70
22,305.31
22,936.02
23,584.50
%Growth
15.08%
28.83%
23.38%
22.16%
6.44%
(1.07%)
14.54%
14.05%
15.81%
13.81%
9.82%
7.82%
4.82%
2.83%
2.83%
10.50
11.82
12.26
13.14
13.27
13.05
13.28
13.68
14.09
14.51
14.80
15.10
15.40
15.40
15.55
16.15%
12.57%
3.72%
7.18%
.99%
(1.68%)
1.77%
3.00%
3.00%
3.00%
2.00%
2.00%
2.00%
2.00%
1.00%
Yield per passenger mile
%Growth
Other
68.60
86.18
117.66
135.41
160.76
166.71
176.90
187.69
199.11
211.19
223.98
237.52
251.84
251.80
266.95
20.66%
25.62%
36.53%
15.09%
18.72%
3.70%
6.11%
6.10%
6.08%
6.07%
6.06%
6.04%
6.03%
6.01%
6.00%
9.47%
8.31%
8.83%
9.50%
10.79%
10.90%
10.03%
9.14%
8.22%
7.49%
7.12%
6.88%
6.83%
6.66%
6.78%
Total Revenue
$724.05 $1,037.11
$1,332.83
$1,424.68
$1,489.97
$1,529.58
$1,764.49
$2,052.61
$2,423.62
$2,818.87
$3,144.92
$3,449.86
$3,686.50
$3,783.59
$3,934.90
% Growth
32.21%
43.24%
28.51%
37.37%
11.79%
2.66%
15.36%
16.33%
18.07%
16.31%
11.57%
9.70%
6.86%
2.63%
4.00%
% Growth
% of Total Revenue
Passenger Revenue
2010A
2011A
2012A
2013A
2014A
2015A
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
ASM
7,652.00
9,853.00
12,514.00
12,243.00
12,756.00
12,691.00
14,467.74
16,637.90
19,299.97
22,001.96
24,202.16
26,138.33
27,445.25
28,268.60
29,116.66
RPM
6,236.00
8,034.00
9,912.00
9,814.00
10,550.68
10,437.53
11,955.65
13,635.11
15,790.47
17,971.21
19,735.42
21,278.70
22,305.31
22,936.02
23,584.50
Loadfactor
81.50%
81.50%
79.20%
80.20%
82.60%
82.24%
82.09%
81.95%
81.82%
81.68%
81.54%
81.41%
81.27%
81.14%
81.00%
655.45
950.93
1,215.18
1,289.27
1,329.21
1,362.87
1,587.59
1,864.92
2,224.51
2,607.67
2,920.94
3,212.34
3,434.67
3,531.79
3,667.96
%Growth
33.57%
45.08%
27.79%
6.10%
3.10%
2.53%
16.49%
17.47%
19.28%
17.22%
12.01%
9.98%
6.92%
9.94%
6.79%
%of Total Revenue
90.53%
91.69%
91.17%
90.50%
89.21%
89.10%
89.97%
90.86%
91.78%
92.51%
92.88%
93.12%
93.17%
93.34%
93.22%
Passenger Revenue
UOIG 17
February 26, 2016
Appendix 4 – Working Capital Model
Working Capital Model
($ in millions)
Total Revenue
Current Assets
Credit card holdbacks and receivables
Days Sales Outstanding A/R
% of Revenue
Prepaid Expenses
% of Revenue
Total Current Assets
% of Revenue
Long Term Assets
Flight Equipment
% Revenue
Ground and Other Equipment
%Revenue
% Revenue
Depreciation and Amortization
Depreciation per Aircraft
Number of Aircrafts
Growth in Depreciation Per Aircraft
Net PP&E Ending
Total Current Assets & Net PP&E
% of Revenue
Current Liabilities
Accounts Payable
Days Payable Outstanding
% of Revenue
Air Traffic Liability
Days Charges Outstanding
% of Revenue
Other Current Liability
Days Charges Outstanding
% of Revenue
Total Current Liabilities
% of Revenue
2015A
2016E
2017E
2018E
$1,332.83
2012A
$1,424.68
2013A
$1,489.97
2014A
$1,529.58
$1,764.49
$2,052.61
$2,423.62
$2,818.87
2019E
$3,144.92
2020E
$3,449.86
2021E
$3,686.50
2022E
$3,783.59
2023E
$3,934.90
2024E
95.19
26.07
7.14%
28.02
103.67
26.56
7.28%
23.37
23.41
5.74
1.57%
20.87
42.55
10.13
2.78%
27.40
46.74
9.67
2.65%
30.10
56.24
10.00
2.74%
35.77
66.40
10.00
2.74%
43.13
77.23
10.00
2.74%
51.20
86.16
10.00
2.74%
58.28
94.52
10.00
2.74%
65.19
101.00
10.00
2.74%
71.02
103.66
10.00
2.74%
74.28
107.81
10.00
2.74%
78.70
2.10%
$123.21
9.24%
1.64%
$127.04
8.92%
1.40%
$44.29
2.97%
1.79%
$69.95
4.57%
1.71%
$76.85
4.36%
1.74%
$92.01
4.48%
1.78%
$109.53
4.52%
1.82%
$128.43
4.56%
1.85%
$144.44
4.59%
1.89%
$159.71
4.63%
1.93%
$172.02
4.67%
1.96%
$177.94
4.70%
2.00%
$186.50
4.74%
84.37
6.33%
0.00
0.00%
27.18
2.04%
11.26
65.56
4.60%
62.53
4.39%
42.00
2.95%
13.96
76.82
5.16%
70.75
4.75%
55.16
3.70%
14.49
93.95
6.14%
66.55
4.35%
250.00
16.34%
17.20
111.81
6.34%
77.41
4.75%
250.00
14.17%
20.64
126.64
6.17%
100.71
4.91%
250.00
12.18%
24.77
145.48
6.00%
122.70
5.06%
250.00
10.32%
29.73
164.50
5.84%
147.11
5.22%
250.00
8.87%
35.67
178.27
5.67%
169.04
5.38%
250.00
7.95%
42.81
189.79
5.50%
190.82
5.53%
250.00
7.25%
51.37
196.65
5.33%
209.67
5.69%
214.96
5.83%
59.07
195.50
5.17%
221.10
5.84%
167.07
4.42%
64.98
196.75
5.00%
236.09
6.00%
118.05
3.00%
71.48
0.22
52.00
-
0.26
53.00
21.67%
0.27
53.00
3.75%
0.32
63.00
18.76%
0.28
73.00
20.00%
0.31
79.00
20.00%
0.35
85.00
20.00%
0.39
91.00
20.00%
0.44
97.00
20.00%
0.50
103.00
20.00%
0.55
107.00
15.00%
0.59
110.00
10.00%
0.64
112.00
10.00%
68.45
$191.65
14.38%
100.06
$227.10
15.94%
106.90
$151.19
10.15%
(72.29)
-$2.34
(.15%)
(40.13)
$36.71
2.08%
2.12
$94.13
4.59%
47.90
$157.43
6.50%
97.28
$225.71
8.01%
140.11
$284.55
9.05%
181.98
$341.69
9.90%
250.42
$422.45
11.46%
314.52
$492.46
13.02%
386.27
$572.77
14.56%
82.87
22.69
6.22%
116.52
31.91
8.74%
63.35
17.35
4.75%
$262.73
19.71%
44.00
11.27
3.09%
138.89
35.58
9.75%
73.75
18.90
5.18%
$256.64
18.01%
52.82
12.94
3.55%
150.48
36.86
10.10%
100.72
24.67
5.18%
$304.02
20.40%
51.06
12.15
3.34%
148.93
35.44
9.74%
97.87
23.29
6.40%
$297.85
19.47%
56.09
11.64
3.18%
168.28
34.91
9.54%
96.42
20.00
5.46%
$320.79
18.18%
63.58
11.31
3.10%
192.85
34.29
9.40%
109.66
19.50
5.34%
$366.09
17.84%
72.88
10.98
3.01%
223.63
33.68
9.23%
126.16
19.00
5.21%
$422.68
17.44%
82.23
10.65
2.92%
255.37
33.07
9.06%
142.87
18.50
5.07%
$480.47
17.04%
88.90
10.32
2.83%
279.62
32.45
8.89%
155.09
18.00
4.93%
$523.61
16.65%
94.41
9.99
2.74%
300.94
31.84
8.72%
165.40
17.50
4.79%
$560.75
16.25%
97.55
9.66
2.65%
315.39
31.23
8.56%
171.70
17.00
4.66%
$584.64
15.86%
96.71
9.33
2.56%
317.34
30.61
8.39%
171.04
16.50
4.52%
$585.08
15.46%
97.03
9.00
2.47%
323.42
30.00
8.22%
172.49
16.00
4.38%
$592.93
15.07%
UOIG 18
February 26, 2016
Appendix 5 – Discounted Cash Flows Valuation Assumptions
Discounted Free Cash Flow Assumptions
Tax Rate
Risk Free Rate
Beta
Market Risk Premium
% Equity
35.00% Terminal Growth Rate
1.80% Terminal Value
1.15 PV of Terminal Value
6.45% Sum of PV Free Cash Flows
Considerations
1.95%
2,731
912
956
Method
Implied Price
Weight
91.23% Firm Value
1,868
% Debt
8.77% Total Debt
130
Cost of Debt
4.87% Cash & Cash Equivalents
395
Implied Price
46.88
Small Cap Risk Premium
1.00% Non-Controlling Interest
0
Current Price
30.33
1,738
Undervalued
54.57%
CAPM
10.19% Market Capitalization
WACC
9.57% Fully Diluted Shares
Terminal Risk Free Rate
2.75% Implied Price
Discounted Cash Flow
39.42
60%
Forward Comparables
58.06
40%
44
39.42
Terminal CAPM
11.14% Current Price
30.33
Terminal WACC
10.44% Undervalued
29.98%
UOIG 19
February 26, 2016
Appendix 6 –Sensitivity Analysis
Implied Price
Undervalued/(Overvalued)
Terminal Growth Rate
39
0.5%
1.0%
1.5%
2.0%
2.5%
0
0.5%
1.0%
1.5%
2.0%
2.5%
0.98
41.25
42.74
44.41
46.31
48.48
0.98
36.00%
40.90%
46.43%
52.69%
59.84%
1.08
37.88
39.11
40.49
42.05
43.81
1.08
24.88%
28.96%
33.51%
38.63%
44.43%
1.18
34.92
35.96
37.11
38.39
39.83
1.18
15.13%
18.55%
22.34%
26.57%
31.32%
1.28
32.31
33.19
34.15
35.22
36.41
1.28
6.53%
9.42%
12.60%
16.13%
20.06%
1.38
29.99
30.74
31.55
32.45
33.45
1.38
(1.11%)
1.34%
4.04%
7.00%
10.29%
Adjusted Beta
Adjusted Beta
Implied Price
39
0.5%
1.0%
1.5%
2.0%
2.5%
0
0.5%
1.0%
1.5%
2.0%
2.5%
9.76%
35.30
36.38
37.58
38.92
40.43
9.76%
16.39%
19.95%
23.90%
28.32%
33.30%
8.76%
38.60
39.80
41.14
42.64
44.32
8.76%
27.27%
31.24%
35.65%
40.58%
46.14%
7.76%
42.27
43.62
45.11
46.78
48.66
7.76%
39.37%
43.80%
48.73%
54.24%
60.45%
6.76%
46.36
47.86
49.53
51.40
53.51
6.76%
52.85%
57.81%
63.32%
69.48%
76.42%
5.76%
50.92
52.60
54.48
56.57
58.92
5.76%
67.89%
73.44%
79.61%
86.51%
94.28%
WACC
WACC
Implied Price
39
0.5%
1.0%
1.5%
2.0%
2.5%
0
0.5%
1.0%
1.5%
2.0%
2.5%
213.97
35.89
36.99
38.21
39.58
41.12
213.97
18.32%
21.95%
25.99%
30.50%
35.58%
163.97
35.89
36.99
38.21
39.58
41.12
163.97
18.32%
21.95%
25.99%
30.50%
35.58%
113.97
35.89
36.99
38.21
39.58
41.12
113.97
18.32%
21.95%
25.99%
30.50%
35.58%
63.97
35.89
36.99
38.21
39.58
41.12
63.97
18.32%
21.95%
25.99%
30.50%
35.58%
13.97
35.89
36.99
38.21
39.58
41.12
13.97
18.32%
21.95%
25.99%
30.50%
35.58%
Terminal Year
Capex and
Acquisitions
Terminal Year
Capex and
Acquisitions
Implied Price
39
0.5%
1.0%
1.5%
2.0%
2.5%
0
0.5%
1.0%
1.5%
2.0%
2.5%
45.00%
36.10
37.21
38.45
39.84
41.40
45.00%
19.0%
22.7%
26.8%
31.4%
36.5%
40.00%
35.99
37.10
38.33
39.71
41.26
40.00%
18.7%
22.3%
26.4%
30.9%
36.0%
35.00%
35.89
36.99
38.21
39.58
41.12
35.00%
18.3%
22.0%
26.0%
30.5%
35.6%
30.00%
35.78
36.88
38.09
39.45
40.98
30.00%
18.0%
21.6%
25.6%
30.1%
35.1%
25.00%
35.68
36.77
37.97
39.32
40.84
25.00%
17.6%
21.2%
25.2%
29.6%
34.7%
Tax Rate
Tax Rate
Implied Price
Additional Senstivity Tables
39
0.5%
1.0%
1.5%
2.0%
2.5%
0
0.5%
1.0%
1.5%
2.0%
2.5%
423.85
35.89
36.99
38.21
39.58
41.12
423.85
18.3%
22.0%
26.0%
30.5%
35.6%
373.85
35.89
36.99
38.21
39.58
41.12
373.85
18.3%
22.0%
26.0%
30.5%
35.6%
323.85
35.89
36.99
38.21
39.58
41.12
323.85
18.3%
22.0%
26.0%
30.5%
35.6%
273.85
35.89
36.99
38.21
39.58
41.12
273.85
18.3%
22.0%
26.0%
30.5%
35.6%
223.85
35.89
36.99
38.21
39.58
41.12
223.85
18.3%
22.0%
26.0%
30.5%
35.6%
Fuel Cost
Fuel Cost
UOIG 20
Appendix 8 – Sources
Company 10-K’s
Factset
IBIS World
Mergent Online
ONEsearch
S&P Net Advantage
SEC Filings
Virgin America Investor Relations page
Virgin America presentations
Wall Street Journal

Virgin America, Inc. - University of Oregon Investment Group

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