Virgin Australia says its low-cost unit Tigerair Australia will become an all Boeing 737 operator within three years as part of fleet simplification efforts at the airline group.
Currently, Tigerair flies 14 A320s on domestic routes and three 737-800s on flights from Adelaide, Perth and Melbourne to Bali.
Those 14 A320s will be progressively replaced with Boeing 737s over the next three years, according to a slide presentation released to the Australian Securities Exchange on Wednesday on Virgin’s proposed A$852 million capital raising.
The move to replace Tigerair A320s with 737s comes after Virgin previously announced in June it would withdraw all E190 jets, as well as between four and six ATR turboprops, in an effort to reduce the number of aircraft types, improve fleet utilisation and reduce costs.
“Tigerair-branded A320 aircraft will be replaced with B737 aircraft,” Virgin said in the slide presentation.
“Fleet simplification through reduction in fleet types will make the business more scalable and productive.”
The airline group has also disposed of all eight Fokker 50 aircraft that were previously operated by Virgin Australia Regional Airlines (VARA).
The slide presentation did not refer to the two A320s operated by VARA that serve Christmas/Cocos (Keeling) Islands, as well as charter and fly-in/fly-out clients.
Virgin had five outstanding deliveries for 737-800s alongside an order for 40 of the updated 737 MAX, according to the Boeing website. The first MAX delivery for the airline was slated for 2018, the company has said previously.
While the withdrawal of 18 E190s and up to six ATRs suggested a significant fleet reduction, Virgin chief executive John Borghetti said in June the airline was continuing to take deliveries of 737s and had the flexibility to keep leased aircraft longer.
Further, Borghetti said the current ATRs and E190s were “not very well utilised”.
“It is all about network footprint and frequency, not about capacity,” Borghetti told reporters during a conference call on June 15.
“Fundamentally, 90 plus per cent of the footprint will remain the same, it is the tweaking around the edges which are driven really by supply and demand.”
At June 30 2016, Virgin’s fleet comprised 75 Boeing 737s (73 737-800s and two of the smaller 737-700s), five 777-300ERs, six Airbus A330-200s, 16 Embraer E190s and 14 ATR turboprops. Also, VARA operates 14 Fokker 100s.
In terms of financial performance, Virgin reaffirmed previously issued guidance in May of an underlying profit before tax of between A$30 million and A$60 million for the 12 months to June 30 2016. The compared with an underlying loss before tax of $49 million for the 12 months to June 30 2015.
The 2015/16 result would be impacted by between A$410 million and A$450 million in one-off charges, including $90-100 million in cash restructuring costs and $155-175 million of non-cash balance sheet impairments associated with its cost cutting program that were charged in the final quarter of the financial year.
When added to the A$59.4m restructuring charge recorded in the first half, as well as $105-115 million in the second half, Virgin’s total one-off charges and impairments for 2015/16 total between $410 million and $450 million, meaning the airline was expected to report a statutory loss when it hands down its full year results on August 5.
The slide presentation showed Etihad Airways was yet to commit to the $852 million capital raising. Should the Abu Dhabi-based carrier not participate, its 21.83 per cent shareholding in Virgin would potentially be halved, Virgin said. Singapore Airlines and Sir Richard Branson’s UK-based Virgin Group, as well as Virgin’s two new Chinese shareholders HNA Group and Nanshan, have agreed to take up their full entitlements.
The $1.011 billion in fresh equity raised through the $852 million capital raising and $159 million share placement to HNA would be used to repay a A$425 million shareholder loan and reduce other debt in an effort to bolster Virgin’s stretched balance sheet.
“We are seeking a reduction in leverage of around 15 to 18 per cent with the capital raised,” Virgin chief financial officer Geoff Smith said on June 15.
Under the share offer, existing shareholders can purchase one new share for every share they currently hold at a price of 21 Australian cents per share. This is a 28.8 per cent discount to the company’s closing share price of 29.5 cents on June 14, the day before the capital raising was announced. Virgin shares closed at 20 cents on Wednesday, the day before the official launch of the capital raising.
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