Flying into administration, Virgin Australia rethinks Boeing 737 MAX

Virgin Australia says the make-up of its fleet will be a hot topic around the restructuring table.

By David Flynn, April 21 2020
Flying into administration, Virgin Australia rethinks Boeing 737 MAX

Virgin Australia will revisit its orders for the Boeing 737 MAX as the airline seeks to right-size itself out of administration and back into the air.

"Our future fleet considerations going forward will be something that's hotly discussed through the administration process," remarked CEO Paul Scurrah, who will remain at the helm of the challenger airline while a team of appointed administrators chart a new flightpath for a clutch of cashed-up suitors.

Virgin has signed up for 25 of the top-end 737 MAX 10 with deliveries from July 2021, and 23 of the entry-level 737 MAX 8s from February 2025, in a deal worth US$6.17 billion at current list prices – although airlines typically enjoy a steep discount of 40-60%.

One of Scurrah's first calls in taking over from John Borghetti in March 2019 was to push back hand-over of the first Boeing 737 MAX from November 2020 to July 2021.

Over 12 months on, the Boeing 737 MAX remains grounded by global authorities worldwide while the coronavirus has decimated demand for air travel, causing airlines around the world to park almost two-thirds of their fleets.

"My view is that you're going to see a fair lull in the world for the demand for narrow-body aircraft for some period of time, so we are watching that closely," Scurrah said in a press briefing following the airline's move into voluntary administration, which is an Australian equivalent of a US Chapter 11 bankruptcy.

"We have indicated to Boeing that we want to talk to them about that. They've got a lot on their plate at the moment as you can imagine, but our future fleet considerations going forward will be something that's hotly discussed through the administration process."

Virgin's back-and-forth on the Boeing 737 MAX

Virgin Australia has already rejigged its Boeing 737 MAX book five time since placing the initial order in July 2012.

The airline planned to use the 737 MAX 10 on "slot-constrained airports" such as the packed Sydney-Melbourne corridor, which rates as the world's second busiest domestic route, as well “important business routes” like the premium-heavy 4-5 hour transcontinental trek between Australia's east and west coasts.

The 737 MAX 10 was most recently seen as launchpad for Virgin's next-generation business class, reportedly a fully-flat bed which Borghetti promised in July 2017 would deliver a "quantum leap in domestic business class", replacing Virgin's fleet of  Airbus A330s when those jets spearheaded an ambitious but now-aborted expansion into Asia.

"I'd say everything we've done product-wise has not been half-baked, and we would not put a product on transcon that was not up to scratch," Borghetti told Executive Traveller at the time.

Incoming CEO Scurrah put Borghetti's 'Perth product' on the back-burner and by some reports sent it back to the drawing board.

“We will have very capable aircraft coming into the fleet with the MAX 10 and we will be considering what the cabins will look like, and have the balance of great seat, great service and great economics,” he told Executive Traveller in December 2019.

Leased Airbus A330s could be sent back

However, Virgin's Airbus A330s could also be for the chop. All six of the twin-aisle cruisers are leased from US firms at what's said to be overly-expensive rates, and the administrators are empowered to break those leases.

Four of Virgin’s fleet of five Boeing 777s are owned by the airline, but could be sold off or mothballed until the airline was ready to remount international flights.

However, Scurrah – like former CEO John Borghetti before him – has also voiced his belief that the airline should move towards a single model of twin-aisle jet rather than split its relatively small fleet across two types, noting in February this year "there are far better options out there which we are exploring at the moment."

The airline's report for the July-December 2019, published in February 2020, stated that a wide-body fleet review was underway, with "significant cost savings available from next-generation aircraft."

However, the shape of the new-look Virgin Australia which will be paraded to potential buyers is far from in sharp focus.

For the Virgin Mk II fleet, everything's on the table

Addressing speculation that Virgin Mk II could have a vastly reduced fleet and headcount, fly to fewer destinations, or axe international routes to become an entirely domestic airline, appointed administrator Vaughan Strawbridge of Deloitte said "all of those things will be put on the table."

"What we are focussing on during this process is to create as much optionality as possible," Strawbridge explained.

"Obviously we will look through the operating structure of the business, the asset structure, the lease structure and see what we can do to help position the business to be more profitable going forward. That's what we will do, but we want to create as much optionality for interested parties as possible."

Scurrah still sees "a role for some international flying", as done by some A330s and all six Boeing 777s

"One of the things that we did learn through the process of talking to our existing shareholders, through them doing the assessment on us and potential new shareholders, is that the plan we had going into COVID-19 was the right plan. We didn't trade our way into this problem, we had our oxygen supply completely cut off."

"So that is the plan that I've put to Vaughan, but ultimately what we do in the future will be a decision for those who buy us."

David

David Flynn is the Editor-in-Chief of Executive Traveller and a bit of a travel tragic with a weakness for good coffee, shopping and lychee martinis.

QF

11 Jul 2014

Total posts 531

It shall be interesting what comes out the other side, I'm sure Qantas would wish they had the same options on the other side of Covid.

Qantas - Qantas Frequent Flyer

21 Mar 2017

Total posts 36

This is so heart breaking. I worked for virgin 2008-2014. I now fly a lot internationally for my life post virgin, and hold platinum with Qantas. Alan Joyce's dirty tactics during this time have absolutely turned me off and I genuinely am going to give my business to Virgin.

They'll come out of this much, much stronger. Fresh beginnings.

Virgin (Borghetti) shouldn't have tried to downguage the fun culture we had with Brett Godfrey. That began the demise. Time for that virgin spirit to return

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 203

All 6 B777s hmmm

Qantas - Qantas Frequent Flyer

07 Aug 2013

Total posts 203

Agreed about Alan Joyce's comments - although I am biased towards Virgin as I prefer the underdog (I still fly a mix between QF and VA and price comes down to it) - the fact Joyce would rather see 10k Australian lose their livelihood so Qantas can take control of Australian Aviation industry for forseeable future. Qantas time will come later down year...they have great PR and media coverage, but they are doing it tough too. Their loan against their new B787 aircraft will only last so long. Parked A380s amongst A330s codt will add up and with a fraction of income coming in. I hope I never see Qantas EVER ask for government aid one way or another.

Etihad - Etihad Guest

21 Jul 2019

Total posts 52

I wait with bated breath too see the gov't response to any QF request for a bailout (if it comes to that). It held firm and instead advocated a "market solution" to VA's woes. Will the gov't be fair and equitable to the approximately 10'000 workers of VA and also advocate the same "market solution" for QF's approximately 30'000 workers, if that situation arises? Indeed, we've all noted the argument put forward against singular public aid to VA on the basis that any public aid should be fair and equitable (and dependent on airline size!).

So now that the principle of non-intervention seems to have been set, despite the official stance that Australia "...needs two airlines". It will be quite interesting to see whether the gov't takes the moral high ground and sticks to that principle. This isn't a dig at gov't or any particular airline. I am just interested to see what happens next, given the words and actions we've seen up till yesterday. But it does seem to me that careless or ill considered rhetoric has a nasty way of coming back to bite you.

23 Oct 2014

Total posts 186

The government would need to maintain a consistent approach and same process to all carriers.

QF

11 Jul 2014

Total posts 531

I can't see Virgin putting any 737 Max in the air, who would want to fly on them? Unless they got them that dirt cheap which I think all planes will be shortly for a period of time and I can't really see to many Airbus planes coming to VA so what they do will be interesting.

If it was me in Scurrah shoes I would be trying to get 100% Australian ownership linked to Star Alliance. Westframers have a good track record running businesses and getting the best out of them.

08 Feb 2018

Total posts 103

wesfarmers*

Ironic then how the former chair of Wesfarmers is now the chair of Qantas!

Qantas - Qantas Frequent Flyer

30 May 2013

Total posts 334

I can see Virgin Australia ending up with an all A320 fleet operating as a Virgin Blue-style low-cost airline. The 737-MAX order won't happen. Virgin Australia was the "Harris Scarfe" of airlines - destined to fail. Trying to take on Qantas in the premium market whilst also battling Jetstar for the leisure market. You can't successfully be everything to everyone. Tigerair was never a true competitor for Jetstar, they just didn't have enough aircraft to seriously take them on.

Qantas

02 May 2016

Total posts 56

There's no way Boeing will let them cancel MAX's to buy A320's......just no way it will happen, you might see less MAX's or MAX's replaced with new 787's or some mix like that, but no aircraft maker will give up what they already have without huge penalties. I would think if they cancel the A330's Boeing will be saying we can negotiate on MAX's but replace the 330's with 787 or some other fleet mix

Qantas - Qantas Frequent Flyer

29 May 2013

Total posts 50

I can't see Virgin going back to being a full LCC. But will they continue to be a full service airline or possibly a hybrid. I can see merit in both possibilities. Now I will use my extensive experience of 0 yrs in airline management and look into my crystal ball. I see Virgin concentrating on domestic travel for the most part until they get back on their feet. There may be some international to LA and Fiji if the profitability is there. Can't see Asia surviving as it already crowded. Regarding the fleet, a single manufacturer would be the most cost effective option for Virgin. It will be interesting to see if they continue with their mixed alliances with Delta, Etihad, Singapore etc or whether the possibility for joining Star or Skyteam become a possibility. Whilst it has been sad seeing Virgin's demise, I think it is also exciting at the possibilities that may eventuate when it re-emerges, hopefully as a much stronger and profitable business finding its niche in the Australian & world aviation.

26 May 2011

Total posts 62

A couple of points on some comments here.

Alan Joyce is doing exactly what he is paid (vastly I might add) to do. Protect QF's interests.

He is absolutely correct that the Govt should not protect badly managed businesses. VA was appallingly so under Borghetti and the Board. Any assistance should be airline wide, not specific to one carrier.

I ask this. As a business owner myself, I'd be mightily miffed if I had made tough but sound decisions and restructured, whilst my competitor went on a spending spree, then received preferential treatment as a reward. Would you appreciate this?

VA and Branson screamed from the rafters when QF wanted their foreign ownership cap lifted. And I highly doubt some of the commentators here supported QF in that endeavour, yet it's big bad QF now. The hypocrisy. I do recall Virgin Blue at the time arguing against any assistance for Ansett too, when that airline had a far more entrenched history and service ethic than any airline here today.

I'm Gold with VA and have had a mix of excellent and so so flights with them. I have no desire to see their employees at Centrelink nor the airline fail, but any genuine business owners here would surely agree that favourable treatment to one business is highly unfair to not only Qantas, but Rex, Alliance and so forth.

Singapore Airlines - KrisFlyer

14 Jan 2014

Total posts 318

The aviation armchair directors on this site have marked you down three nil!!

I guess they enjoy Qantas bashing too much (as I do myself).

26 May 2011

Total posts 62

I don't think I'll lose too much sleep over people with clearly no business acumen lol

Qantas

02 May 2016

Total posts 56

@Daniell....completely agree. Despite all the bashing of AJ, in reality he made the tough decisions that Borghetti never made, and some have short memories that 10 years ago QF was a basket case, losing money, poor performing international routes and AJ got bashed when he cut them all back. He also got smashed when he shut the airline down when the unions were screwing the airline over. Now that he has QF (prior to COVID19) in a much healthier position he's starting to add the international network back. Borghetti was VA's problem when he brought in all the foreign airline investors and couldn't manage it. No way the Govt should bail out poorly run businesses and particularly those 90% foreign owned. Tough but that's business.

QF

11 Jul 2014

Total posts 531

@Daniell , I don't look at it that way, I look at it as I am a consumer. I go with the company that will give myself the better deal and better service. To me Borghetti is a hero for giving myself the way out of bad service from Qantas. I actually get to fly Singapore Airlines First Class on points and as a Qantas P1 said to myself last week, Qantas is a below average product. Top Qantas flyers say that about their product know, what would they say if there was only one airline. Reminds myself of Panama and those Fokker 50's that you can see the old TAA logo on the planes.

26 May 2011

Total posts 62

UpUpAndAway,

As I said, I'm Gold with VA and fly then fairly regularly. Service is subjective. I can't say I've flown VA internationally. Domestically, I believe QF offers a far better experience, from check in to Business lounges, seat amenities, wifi etc.. Definitely not food, I must say! In terms of staff, had good and average experiences on both. In terms of consumer satisfaction, isn't QF considerably ahead in most independent polls, such as Morgan et al?

However all that is irrelevant if ‘heroes', like you say JB is to you, are unable to offer a sustainable business model, which VA clearly isn't. We can all spend spend spend in business, but it's a false economy when those decisions then see continual losses. It took Scurrah to actually take a knife to the business. And again I ask, if you're in business yourself, do you see it as appropriate that your badly managed competitor is rewarded? It's a no brainer to me.

I also wonder if JB would continue to be your hero had you lost all of your points in this scenario? I think not.

QF

11 Jul 2014

Total posts 531

@Daniell All you have shown is you don't understand how international business works, they don't want to pay tax here in Australia.

26 May 2011

Total posts 62

Erm, ok UpUpAndAway.

I probably shouldn't engage in business acumen with someone who describes Borghetti as a hero.

10 Apr 2016

Total posts 45

Would be interested to know if their oil hedging is unwound due to administration which would allow them to capitalize on the current lower spot price and therefore get a significant competitive advantage over Qantas due to the lower operating costs.


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