Virgin Australia may lose deposit on Boeing 737 MAX order

Virgin Australia could write off its deposit on a $2.5 billion order for Boeing’s troubled 737 MAX jets, the first of which was due to be delivered in July 2021.

The airline placed its multi-billion dollar order for 48 of Boeing’s next-generation workhorse in 2012 under former CEO John Borghetti, who believed the MAX's lower running costs and greater fuel efficiency compared to the 737-800 series would sharpen Virgin’s competitive edge against Qantas.

However, in a signal that the MAX may find no place in Virgin Australia’s streamlined and cost-conscious future, Deloitte partner Vaughan Strawbridge – who leads the administration team for the collapsed airline – says he doesn’t believe the deposits paid by Virgin to Boeing to secure the order will be returned.

Speaking at today’s meeting of creditors owned close to $7 billion since the airline collapsed on April 21, Strawbridge remarked of the Boeing 737 MAX order that “obviously there is a contract in place, Boeing has the rights in respect to that contract”, according to a recording of the meeting supplied to Executive Traveller by a creditor.

Virgin won't get its money back on the Boeing 737 MAX deposits.

Strawbridge said that Boeing was “very keen to understand if the contract would be ongoing – would we fulfil our obligations under it – hence why the return of the deposits have not been made, they are there to protect (new owners) Bain in the event that contract is terminated or amended.”

“We have done a lot of work around this, and the position is that we did not expect anything to be returned from those deposits, given the large claim that Boeing has around the non-performance under that contract.”

A Virgin Australia spokesperson told Executive Traveller "we are continuing discussions with Boeing around our 737MAX order as well as any future fleet requirements."

The creditor's meeting formally approved the sale of Virgin Australia to US private equity firm Bain Capital, which committed $3.5 billion to rescue and relaunch the airline. Bain is expected to officially take ownership of Virgin Australia by October 31.

“Today was an important milestone and a significant step in Virgin Australia’s recovery," Mike Murphy, Managing Director of Bain Capital, said following the vote. "We can now continue the rebuilding process from the strongest possible platform and with the least disruption."

"We are working closely with Virgin management to build a stronger, more profitable and competitive Virgin Australia, and we look forward to the future with confidence.”

Also read: How Bain Capital will reshape Virgin Australia

Virgin’s mixed 737 MAX history 

Virgin’s original order was for 38 of the Boeing 737 MAX 8 and 10 of the larger 737 MAX 10, which it planned to use on “slot-constrained airports" such as the packed Sydney-Melbourne corridor, as well as “important business routes” like the premium-heavy 4-6 hour transcontinental trek between Australia's east and west coasts.

The 737 MAX 10 was also slated as a 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” to replace Virgin's fleet of  Airbus A330s when those jets spearheaded an ambitious but now-aborted expansion into Asia.

An early Virgin Australia PR image of its planned Boeing 737 MAX jet.

One of Scurrah’s first decisions as CEO was to shift 15 orders from the MAX 8 to the higher-capacity MAX 10, and push back the arrival of the first MAX 10 to July 2021.

“Coming in and getting a better commercial outcome for the group on the MAX order was one of my biggest single priorities here, which is why we jumped on it quickly," Scurrah said at the time.

The later delivery also deferred an estimated $1 billion in capital spending for an airline which was already mired in debt and had a relatively young fleet of Boeing 737-800s.

In addition, it would give Boeing time to address the issues which saw the MAX grounded in March 2019 after two fatal crashes.

“We are confident in Boeing’s commitment to returning the 737 MAX to service safely,” Scurrah said, “and as a long-term partner of Boeing, we will be working with them through that process.”

Global aviation authorities are now embarking on a rigorous series of certification flights to assess changes made by Boeing to the MAX’s software control system before the jet is allowed to return to the skies.

David Flynn

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.