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Virgin America Looks to IPO in 2014 but JetBlue Poses a Challenge

Tickers in this article: JBLU

SAN FRANCISCO ( TheStreet) -- The trans-continental aviation market is a tough one, but it has been good to Virgin America -- good enough that the carrier is considering an initial public offering next year.

Soon, however, Virgin America will face a new challenge from JetBlue which will introduce its new approach to trans-continental routes in June 2014. That approach will include first class for the first time in JetBlue's history, as well as upgraded coach accommodations on A321 jets newly introduced to its fleet.

Virgin America, which has two-thirds of its capacity in California-East Coast markets, expects to report a third-quarter profit after saying that the quarter ended June 30 was the first profitable quarter since it began flying in August 2007. Second-quarter net income was $8.8 million on revenue of $376 million. Revenue per available seat mile grew by 7.8%, the best in the industry, despite flat capacity. For the first six months, Virgin America lost $38 million.

"Trans-con is our most profitable market, the core strength of our airline," said CEO David Cush, in an interview. The carrier flies from San Francisco and Los Angeles to Boston, New York, Philadelphia and Washington. Cush said the John F. Kennedy International Airport routes are the most profitable. Two-thirds of the airline's profit is derived from trans-con flying, to which it devotes two-thirds of its capacity.

"The brand is a good brand, (popular) in high income urban markets where product is important" on five and six hour long trans-con flights, Cush said. Virgin America is known for amenities including Wi-Fi, leather seats, mood lighting and advanced in-flight entertainment.

Cush said he isn't fazed by JetBlue's announcement last week that it will upgrade its trans-con service, even though in many respects the two airlines would seem to be close competitors. Both combine high amenity levels and low fares on narrow-body Airbus jets flown primarily out of gateway airports. JetBlue carries the most passengers at JFK, while Virgin America is the second-biggest carrier at San Francisco International Airport. (Virgin is also sixth at JFK.)

"JetBlue is a great airline with a great product, just as we are," Cush said. "But it's a question of whether you can create a first-class product and first-class service in a small percentage of your markets." JetBlue's new Mint product would be offered initially on 16 seats on trans-con flights from New York. "We have first class in all our markets," Cush said. "It's not as simple as throwing a lie-flat seat on your plane and calling it a first-class product."

Additionally, he said, "We've had Wi-Fi for years and they are still six months away."

In the first quarter of 2013, American had nine daily flights between Kennedy and Los Angeles International Airport, while Delta had seven, United , six, Virgin America had five and JetBlue had four. Virgin America has eight first-class seats on its aircraft, fewer than the majors, and 138 coach seats.