Virgin Australia defers Boeing 737 MAX deliveries to 2019

Virgin Australia has ordered 40 Boeing 737 MAX. (Boeing)

Virgin Australia plans to delay the arrival of the Boeing 737 MAX in its fleet until the end of 2019 and extend leases on its its current 737-800NGs amid subdued market conditions.

The decision to postpone first delivery of Boeing’s next generation narrowbody, announced on Friday, means some $350 million of planned capital expenditure related to its order of 40 737 MAX aircraft has been deferred to beyond the 2018/19 financial year.

Virgin has 40 737 MAX aircraft on order. The airline group had said previously it expected to start receiving MAX aircraft in 2018. However, Virgin’s first 737 MAX is now scheduled to arrive in the “final quarter of the 2019 calendar year”.

“Existing leases on some Boeing 737NG aircraft may be extended in order to support the group’s capacity requirements,” Virgin said in its 2016/17 first half results release on Friday.

Virgin’s initial order for 23 737 MAXs made in July 2012 had the aircraft being delivered from 2019 to 2021. Then in August 2014, Virgin brought forward first delivery to 2018. The airline group then converted orders it held for 17 737-800s into 737 MAX 8 orders, lifting its total order book for the type to 40 frames in August 2015.

Currently, the Virgin Australia group of airlines has 79 737-700/800 aircraft – 75 are flying in Virgin colours while four are in the Tigerair Australia fleet. The Boeing website shows Virgin also has four unfilled 737-800 orders.

In other fleet news, Virgin said the last of its 18 Embraer E190s will leave the fleet by the end of calendar 2017, which was part of cost reduction and fleet simplification efforts.

Separately, Virgin has put a “mid-2017” start date for nonstop flights to Hong Kong as part of a commercial partnership with shareholder HNA.

Virgin announced plans to start services from Australia to Hong Kong and Beijing in May 2016. In its application to Australia’s International Air Services Commission (IASC) seeking the necessary traffic rights to mount flights to North Asia, Virgin had set a June 1 2017 start date for both services.

While nonstop flights from Australia to mainland China were still on the cards, Virgin said it now planned to start those flights “in further stages of the agreement” with HNA.

The proposed alliance between Virgin and HNA, which covers codesharing on Virgin and HNA airlines’ flights between Australia and Hong Kong, Australia and China and the carriers’ domestic networks, reciprocal frequent flyer benefits and cooperation on route planning, sales, distribution and marketing, will require Australian Competition and Consumer Commission approval.

In terms of the first half results, Virgin reported a statutory net profit after tax loss of $36.1 million, slumping back into the red from net profit of $45.7 million in the prior corresponding period.

Underlying profit before tax, which removes one-off items and was regarded as the best indication of financial performance, was $42.3 million, a decline of 48 per cent from $81.5 million in 2015/16 first half.

Revenue dipped 0.9 per cent to $2.63 billion, Virgin said in a regulatory filing to the Australian Securities Exchange.

A slide presentation accompanying the financial results showed Virgin booked $69.8 million in restructuring changes in the 2016/17 first half as part of its “Better Business” program, which aims to reduce costs through fleet simplification and operational efficiencies in catering, maintenance and fuel consumption. Virgin said the program was on track to achieve net free cash flow savings of $300 million by the end of 2018/19.

Virgin chief executive John Borghetti said there was “continued subdued trading conditions in the domestic market”.

“Going forward, the group will stay focused on strengthening our financial position by further optimising the balance sheet and building a lower cost base,” Borghetti said in a statement.

“Due to uncertainty in external market conditions, we are unable to provide further guidance at this time.”

Comments

  1. Rocket says

    “continued subdued trading conditions in the domestic market” yeh, yeh, that’s this week’s excuse… order deferred because we are totally incapable of running a profitable business. This is what happens when a ‘saleperson’ is put in charge of a large company like this, a person who’s entire experience is selling, People can say ‘but he was in charge of operations at Qantas’ but he NEVER worked in any of those areas and judging by some of the operational and IT decisions of this company, has no knowledge of what happens at the front line. Won’t be hanging by our necks holding our collective breaths relying on the ‘cash flow savings of $300m’ to ever eventuate. What we’ll get is yet another pathetic excuse when the time comes to deliver.

  2. Jackson says

    I agree Rocket. It’s just an excuse because they can’t afford to operate and use the new aircraft.

  3. Jim says

    So what happens to the Tigerair change over to 737. Doubt virgin will have any spare frames available now. Does that mean the transition to 737 is over or delayed?

  4. Craigy says

    Last year Virgin stated that Tiger would transition from A320s to B738s as new aircraft were added to the Virgin Fleet. What does the deferred deliveries mean for Tiger? Will Virgin reduce capacity due to the ‘subdued trading conditions’ and transfer aircraft to Tiger or will the transition be delayed?

    Financials: Not mentioned above, Tiger made a pre tax profit of 6.2 million (down 50%) and Virgin International 0.8 million. These results do not include the costs of the Bali fiasco. It will be interesting to compare performance of Qantas Domestic/Qantaslink with Virgin Australia to see how the ‘subdued trading conditions’ have impacted profitability.

  5. KD says

    Its time the board remove John Borghett from the CEO chair and move forward. You’ve got to feel sorry for the guys on the front line that are doing their best with the lack of support from the higher levels of management. Time for a complete and utter clear out.

  6. Bruce says

    Maybe virgin Is struggling because it tries to be something it’s not. Virgin is not a full class carrier. The inflight is terrible you don’t get food. There service is not on par with Qantas. I like that virgin is visionary, more likely to try new things then Qantas. But it needs to go back to being Virgin Blue. Something it was better at them Tiger

  7. Rocket says

    Agree KD.

    The range of decisions that have been made is beyond belief… the use of the IT system they chose for their reservations and airport, for instance, it lacks capability that was even present in airline systems of the 70s… it’s competitor, ALTEA is generations ahead and reduces highly complex tasks such as re-accommodating passengers in disruptions (which are a complete manually driven fiasco in the system they use) to a simple point and click… the system even analyses options on the host airline and other airlines and recommends changes and when accepted, does all the technical work in the background and just spits out a new boarding pass and itinerary. The fact that an airline like VA actually didn’t choose that system speaks volumes… and I’ve heard that now they have switched to a component of ALTEA at least. How much money has been wasted in the meantime and how much stress placed on front line and customers because of these crappy decisions… crappy and uninformed decisions that anyone else wouldn’t have made. But, even if you put that aside and say OK, that’s just one aspect, we then have millions spent on lounges that are horrible even compared to the older, worn leather environs in some Qantas Clubs, the ordering of aircraft then deferring them, spending goodness knows what on E170s and E190s then getting rid of them, using terrible second hand A330s that were unreliable for years before getting rid of them, buying SkyWest then selling half their fleet but keeping aircraft like the A320 which does the same job but is incompatible with the 737-800, announcing TT will go to Bali then completely stuffing it up to the point where they pull out, announcing that TT will adopt the B737-800 then it appears, going back on that, closing down routes like MEL-LAX at great cost and inconvenience then starting it up again less than a year later… Qantas, United, American, Delta and Air Canada all seem to be able to make money on these routes but not Virgin… the list goes on, it’s a text book example of everything done wrong by as I said previously, a ‘sales person’ who is making major decisions about a highly complex and knowledge dependent industry.
    I disagree with only one thing KD, it’s LONG PAST the time that the Board should have removed this bloke… if there was any justice, he should be asked to pay back some of his salary as well. Nothing more than a smooth voice in an expensive Italian suit with no talent. There used to be a saying when I was a kid – to call someone or something ‘mud-guard’ was to infer that they were all shiny on top with a lot of crap underneath.

  8. Tyalla says

    I travel with them every week and the cancellation rate seems to have gone through the roof. Not a lot of fun any more.

  9. Raymond says

    Oh, how times change… not long ago it used to be ‘Qantas-bashing’. Nowadays ‘Virgin-bashing’ is all the rage.

  10. Charles says

    Too many flights, too many aircraft, too many empty seats. {Both Qantas and Virgin}

    Halve the flight schedule [and crew costs] double the capacity of the aircraft,

    Minimum A330 or 787.

  11. Nick says

    Virgin would have made $$$ millions if Borgetti hadn’t spent cash on those premium lounges trying to match Qantas. Hardly anyone uses them … Utter waste. Get back to basics, one lounge one airline one type of airframe.

  12. Peter says

    I agree with Charles it makes little sense to fly so many 737/A320/A321 services on the world’s 5th busiest passenger route (MELB-SYD). Melbourne is tettering on the brink of its current capacity and best use of the Virgin and QANTAS slots will become vital – otherwise MELB will have queing stacks each week day during the AM/PM peaks. I say more A330-200’s (QANTAS & Virgin – both current operators). They are cheap and will be more efficient when the RR Trent 7000 powered A330neo enters sevice in Q1/Q2 2018. Every 2 A330’s releases 3 737-800’s for thinner routes.

  13. Toldyouso says

    Uninformed bigoted commentary by most above.

    The core of the Virgin AU problem is the flawed strategy of taking Virgin up the food chain to take-on Qantas headon and bypassing an excellent opportunity they already had in what were turbulent times.

    Even if the strategy had been correct, the people in the important complementary commercial areas (corporate sales for example) were lack lustre and never up to the task of taking on Qantas who had built a multi-faceted fortress around the corporate traveller segment. And the senior commercial people, because of their mediocrity, have recently paid the price with their jobs. However, all too late. And at the moment rudderless and up against Qantas who are never going to lose a battle played on their own terms.

    In the process Virgin adopting a not well thought through “vendetta based strategy” it increased its cost base substantially, and by so doing it eliminated the key commercial advantage it had: its much lower cost base.

    It should have played a disruptor role in the business traveller space and have leveraged its lower cost against Qantas. Used price to target and dominate the large SME segment and the more price conscious big corporates and thus starve Qantas of the extra oxygen it was getting in being able to maintain its load factors and and hence its overal RASK (Revenue per Available Seat Kilometre).

    Qantas was able to hold on to its higher yielding frequent business travellers (including most SME business) because the price differential was not substantial and thus was also able cross subsidise and sustain a subdued price war against an airline that needed higher yields to cover its increased costs.

    Cost advantage is a powerful weapon and the reason why Low Cost Carriers (LCCs) in nearly all markets of the world are sweeping all before them and causing so much heartache for the legacy carriers. Virgin had this, (maybe not at the ultra low cost level) but it threw it away.

    Commentators above talked about the CEO not having operational experience. But this is not where Virgin’s problems are based, apart from the operational executives’ decision (pilots and engineers enamoured you machines) holding sway to bring in the ERJ190 regional jet aircraft. This has had a fairly large detrimental impact in the background, adding to Virgin’s woes.

    Why did they do that? Madness, These aircraft have terrible economics. Operationally they cost almost as much to run per kilometre as a B737 or an A320 and yet they have half the number of seats to generate the revenue required to cover the operating costs. So in effect you need to get an airfare almost twice as high. But you cannot get that. Why? Because they are on marginal price sensitive routes to start with, but primarily because you are up against turbo-props (Q400 and ATR72) with half the operating cost base of the regional jet. So they can offer lower fares. Maybe not as nice to fly on, but price is a strong decision driver and it pulls the passengers from the regional jets (reduces load factor and RASK) and the regional jet ops cannot get the higher fares that they need to be sustainable. But hardly rocket science, is it?

    That is why the ERJs and similar were virtually been given away during the times of high fuel price. And even in times of reduced fuel costs they are not competitive. Not unless you can get a substantially higher airfare for each kilometre flown by each seat. So a very dumb decision. They should have looked at Ansett’s similar dumb decision many years earlier with Kendell. Ansett turned Kendell from being a profitable regional turbo-prop airline into a huge loss leader.

    No sympathy for Virgin.

    All self-inflicted with very poor strategic thinking and poor Board oversight and now in a very difficult (almost impossible position) to reverse out of where they are right now. It would require a radical restructure to take it back to where it was and that is not easily achieved.

    For example with customers: “The Lord giveth, but does not take away”

    Regrettably, I do not see a good future for Virgin Australia.

  14. Toldyouso says

    Absolute rubbish above about using A330s and B787s. Sheesh.

    Aircraft too big and these key business traveller routes are won on a frequency game. You only need a small fleet of the wide bodies for domestic Australia.

    You have to think more about how do you fill up the larger aircraft 12 or more block hours per day (that’s all you get on domestic and even that is extremely hard to sustain network wide), 7 days per week, 365 days per year. Day in, day out.

    You are only thinking about peak hour operations and not taking into account that business travel concentrates into morning and evening peaks and also on a few routes only and is there only Sunday night to Friday night.

    What about weekends? what about middle of day.? What about holiday vacation times? What about routes other than Sydney, Melbourne and to a degree Brisbane and Perth that cannot sustain these much bigger aircraft? What about the power of frequency? What about the capital/financing costs required to get these big aircraft, particularly 787 (a great aircraft but not for the domestic routes)? Why do you think second hand A330s are cheap right now and surplus? What happens to their economics if only half filled? What about the extra turn times required which cuts out peak hour flying time availability. What about the additional spare parts and more engineers and pilots required because of multiple types. What about pilot and cabin crew utilisation efficiency?

    What do you think that all of above does to the RASK when the CASK is virtually constant regardless of load factor?

  15. Not so Sharp Sharp? says

    Management have screwed the pooch on this one.

    Easy to say it’s all doom, but there is positives, and that’s for a MASSIVE restructuring for both Tigerair and virgin!!! Both need to align to more efficient systems and actually synergise rather than use buzz words instead of actually getting it done.

    In saying that fleet optimisation is relative to your size and network, Tigerair should stay on the Airbus instead of wasting millions on fitouts of old 737 unwanted airframes from VA!!! Not to mention the cost of training their pilots and hiring contractor pilots that will most likely leave the business taking experience with them……. Management have not thought this through because all points lead to them making only “bean counting” decisions without thinking of the long term effects on the people that actually make them the money, the staff!! As you can see, with shitty staff comes poor performance !!!

  16. Mick says

    Wow massive post from toldyouso.

    Completely agree. Virgin are in a very tight spot. CEO needs to go. Every single day staff come to work and find another form of cost cutting being implemented, something else that has been taken away. Flights departing with light loads, business class seats mostly always empty.
    What else can we do other than sit back and watch the place slowly self destruct?!

  17. Lechuga says

    In all honesty, for both Qantas and Virgin I personally think the A321neo would be best option for the MEL-SYD route and it would cover PER and BNE not to mention it could also cover across NZ.

    I just junk it gives that extra capacity where a few less flights can be run and free up a couple 737/A320s not to mention it could probably free up a couple A332s

  18. Rocket says

    Toldyouso – I agree with much that you say but you are wrong about the operational side… I know something about the working of this particular company and they are bereft of any experience in that area. Billy the blind man’s dog would have signed up for Amadeus ALTEA as the CM/FM DCS front-line system but they looked at it totally from a revenue and reservations/sales perspective and it’s a complete joke – to the point where their major partner airline regularly gives passengers in disrupts to Qantas because it’s just easier… Agree about the A330s but even here, once again operationally bereft – they can barely operate them on time and competently across the country… they are facing a competitor that has well developed knowledge and skill base and operational systems of a ‘real’ airline and can chuck a A330 on a MEL-SYD, or MEL-BNE at a moment’s notice… VA can’t do that without a days notice and even then they just don’t have the operational set up to achieve consistent operational performance. For goodness sake, over the road at Qantas it doesn’t matter what aeroplane turns up at the gate, it just gets handled, regardless of the route. VA gives the appearance of a ‘competitor’ on the outside but has no depth whatsoever, another reason for stupid decisions. As some who work there have told me – it’s not competitive with Qantas because “Qantas is a REAL airline”. When you’re major partner in this region who is also a ‘real’ airline rolls their eyes and walks away from something as simple as a passenger transfer, that says something. The problem is that there are too many know-nothings that stop standard industry practices in the airport area from being implemented but they do it on false premises which have been dictated directly from the top. Those that have been poached from QF are largely useless or too weak to stand up (not all, there are some people there that command respect but they are either not in sufficiently influential positions or are not listened to). It’s a mess that can only be resurrected if there is a complete internal revolution, starting at the top.

  19. ian says

    now with real estate boom has well & truly ended, Qantas will have a very hard time making any money, as passengers switch to LCC’s.

    Get ready for the massive recession we had to have + AUD$ is about to drop significantly with U.S. about to increase interest rates.

    It’s going to be a very rough ride in 2017-2018. Wonder how many big legacy airlines around the world will fail ? Plenty am sure.

  20. Tom says

    batten down the hatches ….

    1) massive growth in unemployment about to happen, especially in the building sector

    2) major world recession/depression

    3) AUD$ to drop so oil prices set in USD$ will cost more for Australian airlines.

  21. craig says

    didn’t Qantas go from a $2 billion loss to a $1.5 billion profit in one year ?

    If so, not that special.

  22. Harry says

    virgin have a massive SALES PREVENTION TEAM, almost like the public service mentality that still exists at Qantas.

    Just last week, had an issue with a Qantas booking. Got a call from Qantas to say call this other department at Qantas, as we don’t talk to them.

  23. JoshJ says

    Lots of emotion and not a lot of knowledge from some here.

    Operating the E190 is certainly a poor decision, but these aircraft were purchased back in the Brett Godfrey era. Not one to defend JB and think he has a lot to answer for, both things are not as bad as many like to make out. The arrival of John Thomas has brought massive behind the scenes changes with major restructure already taking place internally and many jobs being slashed in the process. A shake up that needs to happen, I’m sure we can remember AJ doing something similar at QF a few years back cutting thousands (?) of jobs. If you are not familiar with the previous work of John Thomas I suggest you do some research. He will not only save JB’s backside, but potentially the airline. Many changes happening and many more to come.

    As for Tiger, people again need to do some research. Do you realise the massive cost the pay on their current A320 fleet do to legacy leasing? Many of these aircraft are coming to the end of their lease life and have been a huge financial burden since day 1. They were purchased at the begging when Ryanair started the company and was never intending to keep it for a long period of time. Build it up in Asia and flick it for profit. TGG new of these large lease costs as did VA when they purchased TGG for $1. The transition to the 737-800 will be an expense of course, but TGG have very high load factors and with the new aircraft will also come a re-fit using new slimline seating – allowing room for an extra row and thus increasing revenue. A simplified fleet between VA and TGG will make life much easier for both. VAI soon hoping to operate to Hong Kong and whispers of TGG replacing their lost DPS route with another short haul international destination using the 3 ex VA 737-800s.

    Not all doom and gloom but we know bad news brings more clicks right?

  24. franz chong says

    Just don’t go down the path of too many kinds of the same plane for the same job.Ansett made the same mistakes over the years of having 727’s,737’s and A320’s between 1989 and 1997 but stuck with the latter two till it’s demise.you only need one of the same family for the kind of work it does.If it means a mix of 737’s for the smaller sectors and A330’S/787’S FOR internationals and domestic that could do with bigger capacity so be it.