Case Study: Virgin America

If you’ve flown Virgin America before, you know they are legitimately differentiated from the soul-sucking national leviathans. New planes that pulse like a night club, high tech seatback concierge systems, flight attendants who don’t totally hate their jobs, surprisingly competitive prices, etc. They’ve been gobbling up market share ever since their inception in 2007 and went public in November of 2014.

The airline industry has been consolidating aggressively for several years now. Historically an industry that is in the hall of fame of value destruction, M&A (and collapsing crude oil prices) have helped the players settle into an uneasy but profitable oligopoly. Meanwhile, Virgin America’s success has not gone unnoticed, although you’d never be able to tell if you just looked at the stock price. Here’s a chart of VA’s performance since their IPO until late March:

For a year and four months, the stock went exactly nowhere. Chart technicians call this “range bound”, with “resistance” above $40 and “a floor” around $30. But underneath, business was booming. Gross profits grew 24% year over year while operating profits nearly doubled thanks to cheap jet fuel. Their presence at LAX and SFO grew stronger. And two of their competitors began salivating.

On March 23rd, word leaked out that VA was “in play” – Street Lingo for “for sale”. Shares popped 13%. And then, several weeks ago, on April 4th, Alaska Air announced they were acquiring Virgin America for $2.6 billion, or $57 per share after a frenzied bidding war against JetBlue. VA shares shot up another 47% that day:

If you’re following along with your calculator, that’s a cool 83% return in about two weeks. That kind of return is impossible to the proponents of efficient markets. Of course, no one could have (legally) timed it perfectly, but consider:

• If you bought VA at its closing price of $30 on the day it IPO’d, you earned a 54% CAGR.
• If you bought VA at its peak prior to the buyout (~$42.50), you earned a 21% CAGR.

(The calculated CAGR is assuming you didn’t “trim profits” or “cut your losses” at any point in between, an endeavor that, by my estimation, adds no more long-term alpha than a coin flip, but is an endeavor heavily practiced by the vast majority of market participants.)

So any way you slice or dice it, VA shareholders got paid, ranging from handsomely to a flat-out bonanza¹. And while the stock price may not reflect it, value always matters, especially private value, i.e. how much the business is worth to someone as a whole, someone who can control operations or allocate its cash flows. The timing is unpredictable, but eventually, over the long run (count ‘em in years, not months), the market is a fine arbiter of value – a right proper weighing machine.

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¹And here, buried in a footnote, I humbly beseech you to not ask the question begging to be asked, which is “why didn’t we own any VA?” to which the answer will be an averted gaze and some mumbled variant of, well, hrm, I looked at it last April but, ah, it fell off my radar… A costly error of omission resulting in beaucoup regret.