Faced with a mature market that has little room for growth, Australia’s Virgin Blue is looking for other ways to capitalise on a big asset – nearly 40 options to buy Boeing 737NGs at bargain prices.
“We can’t sell the options,” says Brett Godfrey, Virgin Blue’s chief executive, which means that it can realise their value only if it buys the aircraft and finds some profitable way to use them. After the 11 September terror attacks, Virgin Blue and Brazil’s GOL were two low-cost start-ups that had the foresight to negotiate long-term purchase options for new Boeing 737s at rock bottom prices. GOL’s market is still growing, but Virgin Blue’s has flattened out, leaving it in a quandary about how to exploit this opportunity.
Last year Virgin Blue flooded Australia with extra capacity when it added 16 new 737s. It hoped to inhibit the launch of JetStar, the Qantas low-cost subsidiary, and may have partly succeeded. But the extra seats also gave Virgin Blue indigestion with too much capacity for the routes it serves.
Since then Virgin Blue has scaled back. This year, it is taking four new jets with two going off lease for a net gain of only two aircraft. Next year, with six new deliveries and up to four jets returning to lessors, Godfrey says “we have the flexibility to stay at nearly the same size or to grow our fleet”.
Growth is something Virgin Blue knows all about. It started five years ago with only two aircraft and 200 staff. Today it has 50 jets and almost 3,800 staff. With a nationwide network it is Australia’s number two airline. But in the past six months it has pulled back from at least one planned route and dropped several that it already served. The Australian market has reached its limits. From now on, says Godfrey, it will be “more of a market share game as opposed to a growth grab”.
Before talks broke off in May, Virgin Blue thought it might use more jets in a joint venture with Macau. Now Godfrey sees no obvious opportunities in SouthEast Asia. Virgin’s new agreement with Samoa to launch “Polynesian Blue” could be a template for ventures with other Pacific island nations, but it only needs one 737 to serve all the routes Virgin Blue is taking over from Polynesian Airlines.
That leaves Virgin Blue with only two obvious ways to exploit its Boeing options – to exercise them itself and then resell or lease the aircraft to someone else, or to replace leased aircraft with owned jets in its own fleet. It is pondering the choice.
DAVID KNIBB/SEATTLE
Source: Airline Business
