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.”