Virgin America IPO Goes Ballistic as Oil Prices Crash

Virgin America IPO Goes Ballistic as Oil Prices Crash

With oil prices crashing, discount airline Virgin Atlantic’s IPO on Friday was a barn burner. Trading under the symbol “VA,” the stock opened about 25% higher than its estimated offering price at $27, then moved up to end the day at $30.

Oil prices have fallen by about 30% in the last four months, with the decline accelerating in the last month. Fuel costs have been about 25% of airline operating costs, with oil over $100 per barrel for the last two years. At the current $74 per barrel range, the airlines are picking up an extra 5% of revenue as cash profits.

The index of airline stocks was a big winner this year, until the October Ebola scare shook weak investors out. But the oil price plunge drove all airline stock prices to new highs and the index up 36% for the year.

The timing for an IPO by Virgin Atlantic was as if the sun, moon, and stars came together at just the right moment. The 7-year-old carrier’s initial public offering of 13.3 million shares priced was priced at $27, to raise about $369 million. The raise-up came in about $50 million above Bloomberg’s pre-offering estimate. The company stock hit an inter-day high of $31.19 on the NASDAQ Stock Market, before settling at $30.

In a statement of confidence in the company valued at about $1 billion, insiders at PAR Investment Partners LP agreed to privately purchase 2.3 million of restricted shares at a 4% discount to the offering, or about $50 million, from the controlling shareholders.

Backed by iconic billionaire Sir Richard Branson and his Virgin Group Ltd, the company launched in 2007 and consistently lost money until 2013. The company reported third quarter earnings through September 30th of $41.6 million, up from $33.5 million for the quarter last year, on a 5% revenue gain to $405 million.

The discount airline has won numerous passenger awards for inflight entertainment and being the preferred mode of transcontinental travel for Silicon Valley business types. With new cash, the airline will undoubtedly buy more planes and expand its routes.

Chriss suggests that if you are interested in how politics affects business, please click on “President Obama Goes around Senate on Climate Change.”