Virgin Australia to ditch twin-aisle fleet, focus on domestic and regional service

As part of its recapitalization plan Virgin Australia intends to retire its long-haul aircraft. The carrier’s five 777s and six A330s will be removed from service as it invests “in the core Virgin Australia domestic and short-haul international operation.” The Tigerair A320s and ATR aircraft will also be removed from service. The new plan, mooted by Bain Capital, will be voted on by creditors in early September.

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.

– Virgin Australia Group CEO and Managing Director Paul Scurrah

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A new, smaller focus for Virgin Australia

The revised plan sees the company “simplifying its fleet to realise cost efficiencies and remove operational complexity” as it consolidates to just the 737s. The carrier does not know when long-haul markets will recover and chose to focus on domestic and short-haul international markets, areas that are easier to serve with its single type fleet.

The company states an “intention to recommence and grow long-haul flights when sufficient demand returns” but that will require Virgin Australia to acquire new aircraft, and potentially to secure airport slots or route authorities, depending on the markets it resumes.

Additionally, the Tigerair arm is to be shuttered, though its operating license will be retained. Bain is hedging its position with this move, allowing for an “option for ultra-low-cost operations when market recovers.”

The move also affects roughly 3,000 of the carrier’s employees, roughly a third of the total headcount, who are expected to lose their jobs as a result.

The revised operation “aims to be the best value carrier in the market, not a low-cost carrier.” Bain intends to continue the two-cabin offering on the 737 fleet, and target business travelers with a broad network of domestic and short-haul international destinations including frequent capital city connections. It will also serve key leisure and regional markets.

Retiring the long-haul fleet also means another 11 Gogo 2Ku planes permanently removed from service.

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Points & Credits are safe

As part of the recapitalization Bain Capital committed to honoring all travel credits and Velocity Frequent Flyer points as it takes over. The company also indicated that the credits will extend to 31 July 2022 for travel until 30 June 2023. The company promises further details on credit usage at a future point in time.

Digital first

The proposed restructuring also calls attention to the company’s IT infrastructure. Bain intends to invest in a “comprehensive digital re-platforming of both the airline and Velocity Frequent Flyer program.” The goal is “to not only improve Virgin Australia’s commercial capability and guest experience, but significantly enhance the employee experience and increase the pace of profitable revenue growth, enabling faster and bigger job growth opportunities.”

What that translates to in the real world is unclear, but assume better data management of customers and the ability to cross-sell and target offers better as part of the plan. And while more modern airline sales platforms often also mean greater opportunities to unbundle the produce the company is not pursuing a low cost carrier path. Hopefully  efforts in increase the sale ancillary services are not too egregious.

Alternate outcome

In addition to the proposal from Bain Capital, unsecured bondholders, most likely to lose out on their investment if the plan moves forward, indicated they will offer an alternative debt-to-equity swap at the meeting. It, too, will be voted upon. Butt the smart money right now is on the Bain funding to win and that plan to be implemented.