Virgin Australia may lose deposit on Boeing 737 MAX order

Virgin's new owners Bain could already have written off its first many millions.

By David Flynn , September 4 2020
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.
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.
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

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 488

The way I see it Bain holds all the cards and can deal anyway they please

26 May 2016

Total posts 14

With Virgin Australia's young fleet of 737-800's I would imagine virgin hold off orders for narrow body aircraft in anticipation of any boeings planned FSA lineup. 

Whether its on a 787 factory fresh order or future FSA order I doubt that deposit will be truly lost.

Qantas - Qantas Frequent Flyer

20 Aug 2014

Total posts 113

Adpadp, I suspect you are right there, and the deposit will turn into some goodwill from Boeing in the future. In any case, Boeing would not have been able to deliver the Max-10 by July 2021 anyway, so this there is more to it than a lost deposit.

01 Mar 2011

Total posts 4

The 737 max is Currently not fit for purpose and may take years to prove it’s reliability. More than sufficient grounds to walk away if Virgin chooses. 

No big loss, life moves on 

How is building a misengineered and lethal, not to mention indefinitely grounded, 'aeroplane' not ground s for Virgin to bail.   I don't understand, am I missing something here....?

Virgin Australia - Velocity Rewards

17 Aug 2017

Total posts 23

Virgin won’t need MAX for years anyway. Boeing will be desperate to have MAX in Australia as everything points to Qantas going towards A320neos 

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 328

Does the AUS market size really matter to Boeing when there are so many carriers in Northern hemisphere? I mean, UPS has more cargo planes than Qatar and Virginia combined.

Boeing may not 'refund' the deposit, but likely to grant 'future purchase credits' to Virgin to use by, say, 2024.

Qantas - Qantas Frequent Flyer

04 Nov 2017

Total posts 240

@Boeing-Tragic.

Another possibility is that the 737-Max deposit can possibly be used towards converting/switching part (or most of) 737MAX order to 787-9s should VA make the decision to return to Trans-Pacific long haul runs in 2-3 years time.

Qantas

19 Apr 2012

Total posts 950

DanV I agree they will see how close to delivery the 787-10 is mid next year then discount the deposit accordingly and move it to a purchase order ( indefinite time period) rather than an order with a delivery slot/year.

Virgin Australia - Velocity Rewards

24 Jan 2018

Total posts 328

PatrickK/DanV, please, can one of you 'school me' on why a 787-9 might be preferred to a 787-10?  I assume, perhaps incorrectly, it's operationally rather than just cost alone?  Would appreciate any insights you might have time to share.

Thanks in advance.

Qantas

19 Apr 2012

Total posts 950

I meant 737-10 for a 787-9  a typo 

Air New Zealand - Airpoints

21 Jan 2016

Total posts 195

Dan V - That will be the likely outcome for any future Boeing orders whether it is the B787 or the future 'B797' being the B737 MAX replacement.

22 Sep 2017

Total posts 35

Better to get some A321XLRs and fly to Bali, KL and Pacific islands.  There's a gap between AirAsiaX (9-across A330, no thankyou) and Qantas, and many people still have misgivings about Malaysian and Garuda.  The smaller plane can do thinner routes that don't work for Jetstar's widebodies.

AJW
AJW

16 Nov 2011

Total posts 578

Except KL you don’t need the A321XLR to do what you suggest. The standard LR would suffice. And KL what is there for Virgin Australia to justify flights anyway?

Qantas - Qantas Frequent Flyer

10 Mar 2014

Total posts 22

With some 800 737 Max orders cancelled this year, I think Virgin 2.0 would be crazy to bring it into their fleet.  It’s a dumb decision from Boeing that airlines & passengers should not reward - 1960’s design, 1980’s computers, 2015 engines, 2020 software patches to make up for all that doesn’t work on a rushed reaction design.  Wait for the FSA and get an aircraft for your future fleet Virgin!

Qantas

19 Apr 2012

Total posts 950

Oops Dan I meant a 737-10 to a 787-9.

11 Jun 2020

Total posts 4

You wouldn't get me on a 737 max for a million dollars!


Hi Guest, join in the discussion on Virgin Australia may lose deposit on Boeing 737 MAX order