Tigerair plane swap to cut costs

Virgin Australia plans to phase out Tigerair’s fleet of Airbus A320 aircraft will help it save costs.

Melbourne Storm captain Cameron Smith with one of Tigerair’s A320 aircraft, which will be replaced with a Boeing 737. Picture: Kylie Else

Virgin Australia’s plans to phase out Tigerair’s fleet of Airbus A320 aircraft will help it save costs but analysts warn it could hamper growth at the low-cost carrier and cause capacity constraints.

Virgin announced this week that it would take a one-off $450 million hit to its full-year earnings and sell Tigerair’s 14 A320s as part of a three-year cost-cutting program to repair its balance sheet.

“The move makes sense,” said CAPA Centre for Aviation analyst Blake Moore. “Tiger is too small to justify an additional subfleet of aircraft and the costs associated with that. With 14 A320s, this could be a sign that Tiger isn’t getting any bigger any time soon — especially as previous growth ­targets have been missed and ­orders for four aircraft were disposed of in 2014.”

Virgin is betting that its cost-cutting program will help save up to $300m from the end of the 2019 financial year, in part by reducing the complexity and spread of its aircraft fleet.

Those changes will see Virgin shed as many as six of its 14 ATR turboprop aircraft, its remaining Embraer E190 fleet and all of the Airbus A320s used by Tigerair.

The 14 A320s now used by Tiger­air will be gradually replaced with Boeing 737s from Virgin’s fleet as it receives new aircraft. Virgin has about 40 Boeing 737 MAXs on order to replace the 737s that will be sent to Tigerair, but ­deliveries of the new aircraft are not expected to start until 2018.

After the fleet reductions, Virgin will be left with a mix of Boeing 737 and 777s, A330s and a handful of ATR turboprops.

The fleet simplification program will allow Virgin and Tiger­air to move to a common fleet of Boeing 737 single aisle aircraft that will help reduce operating and maintenance costs.

But as all of Tigerair’s A320s are leased, it is expected that Virgin will incur some one-off costs when terminating those deals.

One of the casualties of the sell-off will be an Airbus A320 that was only this year named after Melbourne Storm captain Cam­eron Smith in celebration of a five-year sponsorship deal with the National Rugby League club.

Both Tigerair and Virgin ­have declined to provide additional ­details on the fleet simplification plans, which has left unanswered questions about the timing of the aircraft changes and the ­impact it could have on the airline’s ­capacity.

But Mr Moore said any ­adverse effects from capacity changes would be offset by the savings of moving to a common fleet.

“It would depend on the timing; Virgin is due to receive around 13 new Boeing 737s over the next three years while Tiger have 14 A320s at present — so it could remain relatively flat,” he said. “Increased utilisation is another part of Virgin’s better business program, so that could also offset any net reduction in aircraft in the interim.”

As Tigerair takes delivery of 737s from Virgin, the carrier will have to refit the cabins to a single class in line with its status as a low-cost carrier.

“Assuming a like-for-like ­replacement, we’d probably see 737-800s fitted with about 189 seats, so that would be a 5 per cent increase in seat capacity over the existing fleet,” Mr Moore said.

“However Tiger are operating less ASKs (available seat kilometres) now than they were this time last year, despite adding two new aircraft to their fleet since then. It’s likely that the post-refleet Tiger will be smaller than it is now.”