Issue 340: Changing Stripes

Currently, Tigerair flies 14 A320s on domestic routes plus three 737-800s recently transferred across from Virgin Australia for use on flights from Adelaide, Perth and Melbourne to Bali.

Those 14 A320s will be progressively replaced with Boeing 737s over the next three years, Virgin revealed in a slide presentation released to the Australian Securities Exchange on July 6 detailing the airline’s proposed A$852 million capital raising.

The three 737s currently in the Tigerair fleet were repainted in Tigerair livery and reconfigured with 180-seat all-economy configuration for the Bali flights. They remain on the Virgin Australia International Airlines air operator’s certificate and are flown by Virgin pilots alongside Tigerair cabin crew, whereas in replacing the A320 it is likely the 737s will be placed on the Tigerair AOC and flown by Tigerair pilots.

The move to replace Tigerair’s A320s with 737s comes after Virgin previously announced in June it would withdraw all its Embraer 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).

Virgin has confirmed to Australian Aviation the two A320s operated by VARA that serve Christmas/Cocos (Keeling) Islands, as well as charter and fly-in/fly-out clients, will remain.

Virgin has five outstanding deliveries for 737-800s alongside an order for 40 of the updated 737 MAX, according to Boeing’s orders and deliveries website. The first MAX delivery for the airline is slated for 2018, Virgin 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 plus the two A320s.

Tigerair was tight-lipped about what the fleet change would mean for the airline. In a statement, the airline would only confirm the transition to a single fleet type and its A320s would be progressively removed over the next three years and replaced with 737s.

“As each Boeing 737 joins the Tigerair fleet, the aircraft will be reconfigured and rebranded in Tigerair Australia livery before commencing service,” the Tigerair statement said.

“The decision does not affect the Tigerair Australia network or flight program. ” Currently, BAE Systems Australia delivers line maintenance up to and including A-checks for Tigerair’s 14 A320s.

And in May, Tigerair signed a two-year heavy maintenance contract with SIA Engineering Company Limited (SIAEC), with the work to be carried out by SIAEC and its joint venture company, SIA Engineering (Philippines) Corporation, at their facilities in Singapore and Clark, Philippines, respectively. Meanwhile, Virgin’s engineering facility in Brisbane conducts line maintenance on its 737 fleet, while heavy maintenance checks are performed at Air New Zealand Engineering Services in Christchurch and Auckland.

And in December 2015 Virgin signed a 13-year contract for Delta Air Lines’ maintenance division, Delta TechOps, to perform engine maintenance, repair and overhaul services for the 737’s CFM56-7B powerplants.

Neil Hansford, the chairman of aviation consultancy Strategic Aviation Solutions, said having Tigerair transition to the 737 would allow Virgin to have one engineering workforce capable of maintaining the Boeing narrowbody, rather than having that work split currently.

“You can get rid of all the Airbus engineering out of Tiger, which was being outsourced anyway, and pull all that work into Virgin,” Hansford told Australian Aviation in an interview.

“What it allows them to do is to swap fleet units seamlessly so all it means is a trip to Townsville for a paint job, a transfer between the AOCs and you’ve got common fleet units.

“Cabin reconfigurations are nickels and dimes compared to maintaining all the parts and all the engineering infrastructure, which is a significant cost.

“You’ve got one training stream and one engineering stream, you’ve got flexibility in moving fleet units. All those things are good principles. But in the end you’ve still got to try and make some money while you are learning these good principles.

“And Qantas is not going to sit back and take the pressure off while you reorganise. ” In addition to the cost savings, Hansford said the move to have an all- 737 fleet across both Tigerair and Virgin was likely to lead to the low-cost carrier taking routes off Virgin.

“You may see Virgin reduce their fleet and you may see more aircraft go over to Tiger chasing the leisure market,” Hansford said.

“I think you will see Virgin transferring more routes to Tiger simply because of the yields on those routes. ” However, Hansford said Virgin would not be able to take full advantage of having Tigerair in its stable of airlines if the budget carrier was not part of the Velocity frequent flyer scheme.

“Unless they can link the Velocity scheme into Tiger customers, it is always going to be a second-class offering to your Qantas-Jetstar combination,” Hansford said.

“That’s what’s important to people, to keep their status in the Qantas frequent flyer scheme, so they keep their silver or gold or platinum. ” That prospect seems unlikely given comments from Borghetti in 2014, when he told aviation thinktank CAPA – Centre for Aviation passengers buying a Tigerair ticket paid for a Tigerair experience, regardless if they were a Velocity frequent flyer member eligible for lounge access.

“What you will never see is a situation where you will get brand blurring as I call it between Virgin Australia and Tiger,” Borghetti said in December 2014.

“They will be a distinctly different proposition.

“I’m sorry, they don’t have a lounge and you can’t use ours. ” Tigerair Australia joins Silkair to transition from Airbus to Boeing in recent times, after Singapore Airlines’ regional wing, previously an all-Airbus operator, signed for 54 737s in November 2012, with first delivery in November 2014.

In terms of financial performance, Virgin reaffirmed previously issued guidance in May of an underlying profit before tax of between $30 million and $60 million for the 12 months to June 30 2016. This compares 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 handed down its full year results on August 5.

Virgin was hoping the fleet changes and cost reduction program, dubbed Better Business, would yield $300 million a year in savings by 2018/19.

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 $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 could purchase one new share for every share they currently hold at a price of 21 cents per share. This was 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.

In the end you’ve still got to try and make some money. NEIL HANSFORD