Future fleets

And Qantas has confirmed it is evaluating next generation narrowbody aircraft as well as continuing the analytical work on the quest to find a ultra-long range aircraft for Project Sunrise.

The disclosures give some insight into the potential network implications from those fleet plans, as well as reflect the level of capital expenditures over the medium term.

Let’s consider what opportunities and challenges each represents.

Virgin Australia to operate the 737 MAX 10

Australia’s second largest carrier will be the first airline to take delivery of the 737 MAX 10, the large-capacity Boeing narrowbody.
The order for 10 737 MAX 10s was announced at Virgin Australia’s 2017/18 full year results presentation on August 29, which showed a return to a positive underlying profit before tax but also a large statutory loss due to a number of one-off charges.

The 10 aircraft are due to arrive from 2022 on what Virgin Australia chief executive John Borghetti described as important business routes, including, potentially to international destinations.

“These are an amazing aircraft and we are very pleased to be getting them,” Borghetti said of the MAX 10s.

The 737 MAX 10 is also the second MAX variant that will join the Virgin Australia fleet, with the airline due to accept the first on an unknown number of 737 MAX 8s in November 2019. It has total orders for 40 737 MAXes.

While the 737 MAX 8 looks like a direct replacement for Virgin Australia’s 737-800 fleet that serves domestic, trans-Tasman and Pacific Islands destinations alongside flights to Denpasar, the 737 MAX 10 order opens up some interesting possibilities.

‘These are an amazing aircraft and we are very pleased to be getting them.’
John Borghetti

Launched at the Paris Airshow in 2017, the 737 MAX 10 is the fifth and largest variant of the 737 MAX family of aircraft. Boeing says the 737 MAX 10 will have a range of 3,300nm (with one auxiliary tank) and can carry up to 230 passengers in a single-class layout.

Virgin Australia has not disclosed its layout of passenger accomodations (LOPA) for its 737 MAX 10s (or MAX 8s for that matter). However, the additional capacity over its 176-seat 737-800s (eight business, 168 economy) will be useful for adding extra capacity at slot-constrained airports such as Sydney Kingsford-Smith during peak hours.

The 737 MAX 10 larger cabin may also allow Virgin Australia to offer a lie-flat business class product without sacrificing too many economy class seats.

That sort of business class offering on a narrowbody is becoming more common. In North America, the likes of American Airlines and JetBlue have a sub-fleet of Airbus narrowbodies with lie-flat seats at the front of the cabin for use on premium routes such as Los Angeles-New York.

Closer to home, Philippine Airlines’ new A321neos, which is on the Brisbane-Manila route, has 12 lie-flat business class seats.

And Singapore Airlines’ (SIA) regional wing SilkAir plans to offer lie-flat seats in business class across its all-737 fleet.

In Virgin Australia’s case, having a 737 MAX 10 equipped with cabin products equivalent to what passengers have typically experienced only on widebody aircraft would be particularly useful for flights between Perth and Australia’s east coast capitals.

With no orders for widebody aircraft, Virgin Australia has had to downgauge some trans-continental Perth services to 737-800s when it started Airbus A330-200 Melbourne-Hong Kong flights in July 2017 and again when Sydney-Hong Kong commenced in July 2018.

A 737 MAX 10 equipped with similarly appointed business class cabins those “The Business” flagship seats on Virgin Australia’s six A330-200s would allow the airline to deploy those widebodies to North Asia while continuing to offer a lie-flat premium product on an important business route such as Perth.

Virgin Australia’s slide presentation accompanying its 2017/18 results noted the 737 MAX 10 would allow for “innovative cabin interiors”.

The aircraft’s 3,300nm range also opens up possibilities, such as a nonstop flight between Auckland and Perth (2,888nm).

At the moment, Virgin Australia codeshares on Air New Zealand’s Perth-Auckland nonstop service thanks to the pair’s trans-Tasman joint-venture.

However, the partnership ends in October, after Air New Zealand announced in April it was walking away from the tie-up in favour of going it alone on the Tasman.

(It should be noted Air New Zealand in June signed a codeshare agreement with Qantas for access to Australian domestic destinations it does not serve.)

Chief analyst at aviation thinktank CAPA – Centre for Aviation Brendan Sobie said the 737 MAX 10 would help reduce Virgin Australia’s unit costs due to its higher carrying capacity.

A sub-fleet dedicated to the Perth route could also be on the cards.

“There could be potentially two configurations – one with a standard domestic business class for routes up and down the east coast and a second configuration with lie flat for Perth and potentially some international services,” Sobie told Australian Aviation.

‘A sub-fleet dedicated to the Perth route could also be on the cards’.

All this talk of getting new aircraft may be slightly at odds with an eye-watering statutory net loss of $681 million for the 12 months to June 30 2018, compared with a loss of $220.3 million in the 2016/17 financial year.

However, it should be noted Virgin Australia reported underlying profit before tax of $109.6 million, an improvement from the underlying loss before tax of $3.7 million in the prior corresponding period. The company said it was the highest underlying profit before tax result in 10 years.

Further, the company’s financial accounts lodged with the Australian Securities Exchange (ASX) showed the statutory result was impacted by an accounting measure to “derecognise” $451.9 million of deferred tax assets, as well as a writedown on the carrying value of its international flying.

The financial accounts said the board took a “prudent approach” in choosing to derecognise the deferred tax asset, a non-cash measure.

Virgin Australia chief financial officer Geoff Smith said recent efforts to pay down debt and bolster the balance sheet as part of the three-year Better Business program meant the company was in a good position to fund acquisition of the 737 MAX 8s and 10s.

“We are very comfortable. Clearly the balance sheet improvements that we have delivered over the last couple of years affords this business with flexibility in our funding platform moving forward,” Smith said.

“I think a good proof point in that has been the maiden issuance of our $150 million Aussie dollar medium term note issuance in the second half of this financial year.

“In terms of our funding for the MAX deliveries, it is a very basic exercise that we would undertake – a combination of either operating leases or on balance sheet funding.

“There is a very strong interest in the lessor market on MAX aircraft generally, based on the operating characteristics of that aircraft, making I guess funding those aircraft relative simple in the market today.”

The improvement in Virgin Australia’s financial position was underscored by a unambiguous outlook statement that has guided the market to expect a positive underlying profit before tax and statutory net profit after tax in the first half of 2018/19, notwithstanding an expected increase in fuel prices.

Further, the company said it recorded its highest ever revenue for the month of July and there was “further positive momentum in forward bookings”.

And based on current market conditions, group revenue in the first quarter of 2018/19 was tipped to grow “by at least seven per cent on the prior corresponding quarter”.

“There is no doubt that this business is in the strongest position it’s been certainly for all the time I’ve been here and beyond on some metrics,” Borghetti said.

Air New Zealand poised to receive first Airbus A321neos

Later in 2018 – and some two years after the type first entered service in 2016 – Air New Zealand will become the first airline in Oceania to operate the Airbus A320neo family of aircraft.

The New Zealand flag carrier has an initial order of seven A321neos and six A320neos – some via lease, some to be purchased outright – to be used on trans-Tasman and Pacific Islands routes.

First delivery, slated to be an A321neo, was scheduled to occur before the end of 2018. Air New Zealand has chosen Pratt and Whitney engines for its A320neo fleet.

The A321neos have 214 seats in a single-class configuration, an increase of 46 seats from the 168-seat A320ceos currently operating on the airline’s trans-Tasman and Pacific Islands services.

Air New Zealand chief financial officer Jeff McDowall said in May the A321neo would have a “material cost advantage over any other competitor’s aircraft”.

That cost advantage will also be gained on Air New Zealand’s domestic network with the announcement alongside the 2017/18 financial results on August 23 that the airline had signed a commitment with Airbus for seven more A321neos for its domestic operations.

Currently, Air New Zealand has 17 A320ceos flying domestically within New Zealand. That will rise to 20 over the next year with the addition of three more A320ceos.

While the domestic jet fleet will remain at 20 aircraft from 2019 to 2024, seven older A320ceos will be withdrawn in favour of new A321neos over that time, resulting 25 per cent seat growth.

“We’ve been growing our domestic business very strongly over the past five years,” McDowall said during Air New Zealand’s analyst presentation on August 23.

“Since 2016, we’ve grown the network almost 20 per cent driven by increased utilisation of our aircraft. To grow further though, we’ll be using a phased approach that efficiently and moderately increases the network capacity.”

Air New Zealand’s projected growth in its home market will likely widen the capacity gap between it and rival Jetstar, which has a mix of A320s and Dash-8 Q300 turboprops serving nine destinations in New Zealand.

Meanwhile, the airline has three more 787-9s due to be delivered by 2020 that will bring the total number of the type to 14.

Further ahead is the replacement of eight Boeing 777-200ERs between 2023 and 2025, with an order tipped to be announced during the first half of 2019. Boeing’s 787 and 777-X, as well as the Airbus A350, are all in the mix.

Air New Zealand chief strategy, networks and alliances officer Nick Judd said at the company’s investor day in May the airline was working on having an aircraft capable of nonstop flights from Auckland to New York and other points in the Americas.

“We want to try and get to New York, we want to get deeper into South America and so we’re very interested in the shape of these ULR ultra long range aircraft that are coming out,” Judd said.

‘We want to try and get to New York.’
Nick Judd

While the 2017/18 results presentation forecast capital expenditure on aircraft of about $1.2 billion in the 2018/19 and 2019/20 financial years before dropping away over the following two years, it noted no assumptions on capital expenditure for the 777-200ER replacement were included in those estimates.

Air New Zealand’s capacity guidance showed available seat kilometres (ASK) was expected to grow between four and six per cent in the current year.

The airline planned to increase capacity in the domestic market between three and five per cent as it added extra jet flights to Dunedin and Queenstown, and expanded in some regional ports.

Its Tasman and Pacific Islands network was forecast to expand by seven to nine per cent, which accounted for the new flying schedule to Australia and the introduction of the Airbus A321neo into those markets.

And international long haul ASKs were expected to grow between three to five per cent as it started flights to Chicago and Taipei, as well as increased flying to Singapore.

As far as the bottom line was concerned, Air New Zealand reported net profit of NZ$390 million for the 12 months to June 30 2018, up 2.1 per cent from NZ$382 million from the prior corresponding period.

Looking ahead, Air New Zealand has guided the market to expect underlying earnings before taxation in the range of NZ$425 million to NZ$525 million for 2018/19.

Qantas evaluating next generation aircraft

While Qantas is the largest of Oceania’s big three flag carriers, the Flying Kangaroo actually has the smallest order book.

At the time this edition went to print, Qantas had taken delivery of six Boeing 787-9s, with a further eight to arrive before the end of calendar 2020.

Those eight aircraft represent the only outstanding orders for firm aircraft. However, the airline group retains a host of options and purchase rights for the 787, with flexibility to opt for the 787-8, -9 or -10 and to allocate those airframes to either Qantas or its budget arm Jetstar.

Currently, Qantas’s 787-9 routes are Melbourne-Perth-London Heathrow, Melbourne-Los Angeles, Melbourne-San Francisco and Brisbane-Los Angeles-New York (JFK).

Looking further ahead, the Dreamliners, which are replacing Qantas’s Boeing 747-400/400ER fleet, will also be deployed to Hong Kong from Brisbane, Melbourne and Sydney.

The airline is also evaluating which of the Boeing 777-X and Airbus A350 was best suited to operate nonstop flights between Australia’s east coast and London and New York as part of Project Sunrise.

On that front, Qantas chief executive Alan Joyce said a request for information had been issued to Airbus and Boeing, while talks with pilots over modifications to enterprise bargaining agreements (EBA) for operating these ultra long-haul missions were underway alongside discussions with regulators.

“Our plan has always been, once we finish the request for information (RFI), which is finding out more about the aircraft, to do an RFP. We will be going through an RFP process, which we hope will complete in 2019,” Joyce told reporters during Qantas’s 2017/18 results presentation on August 23.

“If the business case works, if the regulations can be changed and if the pilot agreement is reached, we will see these aircraft a arriving by 2022 and into operations.”

Beyond the more immediate requirements, Qantas’s full year results showed it was also considering how next generation aircraft such as the Embraer E2 and Airbus A220 (formerly known as the CSeries) regional jets, as well as Boeing’s proposed new mid-market airplane (NMA), might fit in the airline’s future plans.

Those fleet renewal considerations were outlined in a presentation to analysts in a slide entitled “Pathway for fleet transition to next generation aircraft technology”.

It shows various in-service and in-development aircraft programs are “under evaluation”.

While it should be stressed that no orders for these, or other, aircraft types were imminent, the slide did offer some insight into the thinking at Qantas’s Mascot headquarters regarding future aircraft needs.

Qantas chief financial officer Tino La Spina said fleet requirement considerations focused on three key objectives.

These were getting the right aircraft on the right route, maintaining the flexibility to be able to move aircraft around and the need to be competitive in all markets.

“That means we need to stay ahead of the curve and always be looking at new technology out there for the ultimate replacement of our fleet,” La Spina said.

“There’s more than tyre kicking going on and the team are always looking at what’s coming across the horizon so that we have a fleet plan out there that sees the orderly transition to new technology to meet those three objectives whenever that time is.

“And they are different for our different fleet types.”

In February, an analyst report raised some concerns that Qantas had been underspending when it came to capital expenditure in its fleet, particularly for aircraft used domestically, and raised the prospect the airline potentially faced a big funding task from 2020 onwards to replace ageing airframes.

At that time, Qantas strongly refuted the report’s conclusions and said the findings lacked substance.

Fast forward to the full year presentation and Qantas was again keen to stress the investments being made on new aircraft and new products – such as its Airbus A380 refurbishment program – while highlighting its balance sheet had the necessary firepower to undertake a fleet renewal program when the time came.

Qantas said it expected to spend $1 billion on capital expenditure, which covers the acquisition of aircraft, among other items, in 2018/19, compared with $1.97 billion in 2017/18.

And looking further ahead, La Spina said the company was in a good position to invest in its fleet for future needs.

“There’s been some reporting historically about our capex bill and that we have been under investing. That’s just patently not true,” La Spina said.

“We have said that we think that we can replace the entire fleet and remain competitive and not have to in any year exceed capex of $2 billion.

“The evaluation of those fleet types is consistent with that objective.”

The E2 and A220 would be the potential replacements for QantasLink’s 17 Fokker 100s with an average age of 25 years and 20 Boeing 717s with an average age of 16.3 years.

However, those figures compare favourably with aircraft used by its competitors in similar markets, according to the Qantas slide presentation. Further, the 717 is a type that has proven its durability over the years.

In addition to fly-in/fly-out and charter flights for resources companies in states such as Queensland and Western Australia, the 717 and Fokker 100 are also used on a number of regular public transport (RPT) services to better match capacity with demand.

Meanwhile, the NMA could replace Airbus A330s being used on east-west routes, on the golden triangle of Brisbane, Melbourne and Sydney to add more capacity during peak times and on some Asian routes.

And of course there is the upcoming consideration of a replacement for Qantas’s 75 737-800s.

“We retain the flexibility to adjust our fleet renewal plan, guided by our financial framework,” Joyce said during Qantas’s results presentation to analysts.

‘We retain the flexibility to adjust our fleet renewal plan.’
Alan Joyce

“The competitiveness of our fleet is not based on average age but on maintaining competitiveness on the technology curve. The vast majority of the group’s aircraft are similar to the aircraft in the fleets of our competitors.

“But we are not standing still and are well on our way to transitioning our fleet to the next generation technology across both Qantas and Jetstar.”

Meanwhile, over at Jetstar the renewal program for its narrowbody fleet will begin in mid-2020 when the first of 18 Airbus A321LRs arrive. The order, part of the Qantas Group’s long-standing order of 99 A320 family aircraft, was announced in February.

As far as the financials were concerned, Qantas sounded a note of caution about rising fuel prices as it reported a record underlying profit before tax of $1.6 billion for 2017/18, up 14 per cent from the prior corresponding period.

Net profit after tax rose 15 per cent to $980 million.

While no profit forecast was provided, Qantas did guide the market to expect international capacity across the airline group to increase one per cent, while domestic capacity was expected to be flat.