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.

FMI: www.virginamerica.com, www.skybus.com