Virgin Australia 2.0 to cut fleet, routes and some lounges

Here's what you need to know about the rescued and rebooted Virgin Australia.

By David Flynn, August 5 2020

Virgin Australia 2.0 to cut fleet, routes and some lounges

Virgin Australia will shrink to become a domestic-only airline in the short term, with its fleet and network trimmed to suit the post-Covid travel landscape, under the sweeping reboot plan of new owner Bain Capital.

While some airport lounges, travel credit and frequent flyer points are safe from the cost-cutting axe, the same can’t be said for a third of the collapsed airline’s 9,000-strong workforce, with 3,000 jobs lost, primarily across the operational and supporting areas.

Virgin Australia entered voluntary administration on April 21, weighed down by debts of $6.8 billion and facing a travel market gutted by the coronavirus pandemic. The flight path out of administration will also be long and bumpy, expects Virgin Australia CEO Paul Scurrah, who will remain to steer Virgin into this new era.

"Demand for domestic and short-haul international travel is likely to take at least three years to return to pre-COVID-19 levels, with the real chance it could be longer, which means as a business we must make changes to ensure the Virgin Australia Group is successful in this new world," Scurrah said in outlining the shape of Virgin Australia 2.0 this morning.

Virgin Australia CEO Paul Scurrah: hard choices now, but better times ahead.

"Our initial focus will be on investing in the core Virgin Australia domestic and short-haul international operation alongside our 10-million-member strong Velocity Frequent Flyer program, continuing to offer an extensive network of destinations, a domestic lounge network and value for money for customers.".

Bain’s blueprint draws from Scurrah's own plans, drawn up since he took over the airline from John Borghetti in March 2019 and set about "turning a great airline into a great business", but amplifies and accelerates some aspects to better suit the uncertain times.

“We have worked closely with Virgin management since the binding agreement was signed to develop this strategy together for a stronger, more profitable and competitive Virgin Australia," noted Bain Capital's local managing director Mike Murphy.

"We reaffirm that we are backing Paul to successfully lead Virgin through the current turbulence and into the future.

Bain will continue working with administrator Deloitte to present the airline’s army of creditors with a detailed report on August 25, ahead of the vital credit’s vote – which is expected to seal the deal – on September 4. Those timelines have been pushed out by Deloitte from the previous late-August schedule.

Here’s what you need to know about the size, shape and scope of Virgin Australia 2.0

The new Virgin to be strongly ‘value-based’

Bain and Scurrah will carefully stake out Virgin Australia’s position to appeal to the largest slice of the travelling public with a dash of that on-brand Virgin flair (yes, Richard Branson’s ‘Virgin’ brand is staying put).

The challenger tried being a low-cost no-frills carrier when it launched as Virgin Blue in 2000, and it tried being a full-service Qantas competitor when it relaunched as Virgin Australia in 2011.

Now Virgin Australia will steer more of a middle course, although that trajectory will closer to the Qantas experience than a Jetstar, and indeed not too far from the pre-administration airline, but with a drastically reduced cost base and a healthier balance sheet, and 'value' will be its mantra.

"Virgin Australia aims to be the best value carrier in the market, not a low-cost carrier," this morning's statement says, and the v-word came up again and again at the media briefing.

"We will be very focussed on delivering the best value in the market for customers," asserted Danielle Keighery, Virgin Australia's Chief Experience Officer.

"We all know people are most focussed on price point, and we'll make sure that people feel our price point is as sharp as it possibly can be to to attract both leisure and corporate customers."

The new Virgin Australia will go mid-market and look to recover that 'Virgin vibe'.

While Bain's earlier pronouncements indicated it saw little sense in going after the corporate market where Qantas is dominant, it seems this has been tempered by exposure to the raw numbers.

"With the renewed focus on our cost base we will have a very, very strong high-quality value offering to corporates, a very good value but a good quality product," Scurrah promised.

Along with the relentless pursuit of value, the airline will still retain some of that Virgin vibe.

"The Virgin Australia culture is already incredibly good," Scurrah reflects. "When I first started in March 2019 I did put in place quite a few initiatives to unlock that inherent culture a little bit more, and that is absolutely what we're continuing with... you have to make sure there is a point of difference, and that is a huge part of our future strategy."

"You won’t see us go back to the days of Virgin Blue, cracking jokes and rolling toilet paper down the aisle, but you will see a very human, more jovial culture than any other airline in the country."

A smaller fleet

The leaner Virgin Australia 2.0 will streamline its fleet and fly only the workhorse Boeing 737 "to realise cost efficiencies and remove operational complexity", with most other jets – including the Airbus A330s and Boeing 777s – dropped.

As to the number of Boeing 737s that'll be in the hangars, "how many we are taking through and how many we will need in the future is still a work in progress," Scurrah said.

However, he qualified that "at the end of this pandemic, once we get back to pre-Covid FY19 levels, we see a market that could sustain us having 60-80 Boeing 737s in our fleet," implying that the reboot fleet will be substantially lower.

Virgin 2.0 has settled on the Boeing 737 as its only aircraft type.

Virgin owns some 40 Boeing 737s, and assuming all of those remain on deck, they'd be supplemented by some leased aircraft – leaving the door open to cherry-picking the best deals from among the current roster of leasing companies who hold the keys to another 40 Boeing 737s.

"We're renegotiating aircraft lease rates with our lessors," Scurrah revealed, "and those lease rates will be different to what we had previously." He added that at least from an operational perspective, the airline's financial problems "were about onerous contracts and a complicated fleet."

Those 737s will retain their business class cabins, with the pointy end of the plane sharpened to appeal more to the self-employed and small- to medium-sized businesses rather than the very top end of town.

Business class will stay, but maybe not the fancy meals...

Virgin's regional and charter fleet will remain "while the company reviews options at Virgin Australia Regional Airlines (VARA), including different operating models to support continued regional and charter flying."

Of Virgin's outstanding order for the Boeing 737 MAX, Scurrah said "we are in discussions with Boeing right now on that and a number of other things."

All six of Virgin’s leased Airbus A330s, which plied the domestic east-west routes as well as selected destinations in Asia, will be handed back to their owners.

The loss of Virgin's Airbus A330s means an end to this superb coast-to-coast business class.

This will also hand leadership in the premium transcontinental business travel market to Qantas, which has its own much larger fleet of A330s with international-grade business class.

Boeing, Boeing, gone: Virgin has dumped its trans-Pacific Boeing 777-300ERs.

In addition, Virgin’s five longer-range Boeing 777-300ERs will be removed from the fleet.

"We do think it will be a very slow recovery in the international sector," Scurrah says – and by the time it's bounced back, he intends to have an all-new international fleet, with Boeing 787 Dreamliners previously earmarked for both Asia and the USA.

"We are having discussions with aircraft manufacturers but there's also going to be leasing opportunities for us," Scurrah added.

A smaller network

The sweeping impact of Covid-19 has also pegged Virgin’s short-term future as a domestic airline, and the reduced fleet – including a downsized Boeing 737 contingent – will mean some routes will be dropped entirely, while others will see a reduction in the number of services.

Scuppering Virgin's regional ATR72 fleet will mean "there are quite a few routes that we will not be continuing with," Scurrah admitted, as ATR services run to Canberra, Albury, Port Macquarie and Tamworth.

"We are currently reviewing options to continue serving those routes through a number of different mechanisms. As an example, on Canberra we may replace the ATR flying with a 737 or we may talk to one or several partners to fill the network gaps for us."

Bain will be keeping a close eye on the reopening of international travel, which is now expected to begin in 2021 with the prospects of an Australia-New Zealand travel bubble, but the demand for that travel – and its value to Virgin Australia – remains to be seen.

Short-range international routes will be first to bounce back, with Scurrah promising "we intend to have flying across the Tasman, we intend to have a presence at Bali, Fiji and other Pacific Islands, wherever that demand may re-emerge."

That said, he noted that "we might pull out of specific city pairs for some of those islands and hub through a major port" – for example, feeding passengers from Sydney and Melbourne to Brisbane and then onto overseas flights – "but all of those decisions are yet to be made."

"Long-haul international operations are an important part of the Virgin Australia business," the airline maintains.

"However, given current international travel restrictions, the airline will continue to suspend flights to Los Angeles and Tokyo with the intention to recommence and grow long-haul flights when sufficient demand returns. Customers will continue to have access to international markets through the airline’s codeshare partners."

Lounges to reopen, The Club to close?

Virgin says it will "maintain a network of lounges in key domestic locations" – they've clearly proven to be a vital part of the airline's overall appeal, even as a mid-market rather than full-service operation.

Virgin's airport lounges will remain, but only at "key domestic locations".

However, that lounge network will exclude Alice Springs and Wellington – where Virgin Australia's lounges will not re-open – while the airline's regional lounge at Perth Airport's Terminal 2 won't return, either.

For Perth passengers, the airline's flagship Terminal 1 lounge will remain available, but will be far less convenient for travellers departing from T2, given the walk between terminals and the need to clear security a second time.

Separately, there's no word on the fate of The Club, Virgin's invitation-only equivalent to the Qantas Chairman's Lounge.

Closing time for The Club, a sanctuary of schmooze for high-flying corporates and captains of industry.
Source: Supplied

We'd previously tipped the elite Club lounges for closing, based on previous comments by Bain's Murphy that "we are not looking to take Qantas head on, especially in their corporate part of the market."

"We are not looking to attack the very high end of corporate Australia," Murphy doubled-down, saying the outcome of Virgin's previous battle for the suited-and-booted business travel brigade "wasn’t a happy outcome for anybody."

Executive Traveller asked Scurrah about the fate of The Club during today's media briefing, so which he replied with a laugh "People aren’t meant to know about The Club! But of course, we all do!"

"We don’t have any updates on that today," he continued. "The only thing I will say about it is that we know our customers, particularly high-tier customers, want a differentiated level of service, and we're working through exactly how that will look once the demand comes back."

Travel credits, Velocity Points honoured

If Bain’s pitch to Virgin creditors gets the green light, it will honour the full value of all outstanding travel credits and 'conditional credits' issued to customers on cancelled flights.

"All travel credits and Velocity Frequent Flyer points will be carried forward" under Bain's ownership, the airline says.

“Bain Capital recognises the importance of Virgin Australia’s loyal customers, and that’s why they will be provided the value of their travel credits post administration," Scurrah said, adding that the use-by date of those travel credits will be "significantly extended to ensure they have plenty of opportunity to book tickets to their favourite destinations."

Travel credit will be available for use on Virgin Australia flights covering travel until 30 June 2023, as long as the booking is made by 31 July 2022.

While there was initially less certainty around 'conditional credits', Deloitte confirms to Executive Traveller that "conditional credits still held ... will then be recognised as Future Flight credits by the new owner."

International airline partnerships

While international travel will be off the agenda for several years, Scurrah says that alliances with overseas airlines will be "a very important part of the future" to both Virgin Australia and Velocity.

Virgin's current bespoke roster of partners includes Singapore Airlines, Etihad Airways, ANA, Virgin Atlantic and Delta Air Lines, along many others.

"Because we intend to be very competitive in the corporate space it's very important that we have global coverage and strong partners, and it's important to our Velocity program that we have the most competitive earn and burn opportunity ," Scurrah said.

"So yes, there'll be some very strong alliances... you can speculate that some of the ones we’ve got might continue, and you could also speculate there could be some new ones."

Tigerair extinct

There should be no surprise that the low-cost Tigerair operation won't be returning.

Former Virgin Australia CEO John Borghetti acquired Tigerair over 2013-2014 for $35 million to challenge Jetstar while the more upmarket Virgin went head-to-head with Qantas.

With Virgin now charting a course into the middle of the market as a solidly value-based proposition, there’s no need for the questionable baggage of the budget Tigerair brand.

"The Tigerair brand will be discontinued in the market as there is not sufficient customer demand to support two brands at this time," the airline says, although it's keeping Tigerair Australia's Air Operator Certificate (AOC) and the resources necessary to support the AOC "to support optionality to operate an ultra-low-cost carrier in the future when the domestic market can support it."