Shares of low-cost airline Virgin America soared 30% on the first day of trading as investors placed a bet on high-flying potential market expansion for the premium-focused brand.
The airline’s stock closed at was recently trading at $30, above the IPO price of $23 apiece. The first-day pop exceeds the average 13% gain IPOs have notched so far this year according to IPO ETF manager Renaissance Capital. Virgin America currently has a market capitalization of $1.3 billion.
“Even though we are a high-quality product, we have a lost cost model,” Virgin America Chief Executive David Cush told CNBC. “Others have deviated from it, we’ve stayed true to it.”
The Virgin America IPO is well timed on several fronts. Gasoline prices are under $3 and a new government report is forecasting the average price will remain under that level in 2015. Meanwhile, carriers have done a good job of keeping a lid on capacity, allowing the airlines to charge higher fares as the supply of seats hasn’t been added as quickly as demand has risen.
There haven’t been a ton of airline IPOs to hit the market recently, with only three others debuting in the past 12 years. So far, Virgin America’s IPO is outperforming two of those competitors, Spirit Airlines (SAVE) and Republic Airways (RJET). Shares of Spirit slid 3.8% on the first day of trading, while Republic’s stock only rose 5.9%, according to Renaissance Capital. JetBlue’s (JBLU) IPO was more well received in 2002, when the stock posted a nearly 67% first-day gain.
Virgin America is leveraging a brand founded by Sir Richard Branson, founder of conglomerate Virgin Group. The airline targets a very specific demographic interested in premium services, including power outlets at every seat, inflight wireless Internet access, and some unique on-board mood lighting.
Virgin America primarily flies from San Francisco and Los Angeles to other major business and leisure destinations in North America, so the airline has fairly limited scale. As of the end of September, it provides service to 21 airports with a fleet of 53 aircraft. Operating revenue totaled $1.12 billion for the first nine months of the year, up from $1.06 billion a year ago. The company also swung to a profit, reporting net income of $56.2 million versus a loss of $4 million last year. Virgin America also reported a full-year profit in 2013.
The company only has 1.3% of the domestic industry, and Cush said there are other opportunities, looking at new markets like Hawaii.
The airline has said in its regulatory filings that the company could be adversely hurt by the Virgin brand name, and particularly, Branson. Branson’s Virgin Group generated some press late last month when a Virgin Galactic SpaceShip crashed during a test flight, killing one and seriously injuring another. But Cush told CNBC that the crash had “no impact” on Virgin America’s business.