Sydney, Jan. 16 (Bloomberg) -- Virgin Blue Airlines Pty may buy as many as 50 aircraft from Boeing Co. for A$5.4 billion ($3.1 billion), indicating Richard Branson's resolve to challenge Qantas Airways Ltd. in Australia and Southeast Asia.
Virgin Blue will take delivery of 10 737-800 aircraft by August 2004 and has an option to buy 40 more planes in the next 10 years. Chief Executive Officer Brett Godfrey said the airline is targeting a 30 percent share of the Australian market this year, from 25 percent now, and wants to fly to Singapore and other Asian cities.
Boeing beat Airbus SAS for the order after 10 months of negotiations, Godfrey said. Virgin Blue, founded with two leased Boeing planes by Branson in August 2000 and half-owned by Sydney- based Patrick Corp., is buying aircraft for the first time as it prepares for a share sale to the public.
"It's significantly greater than I thought (and is) confirmation Virgin Blue's doing well,'' George Clapham, who helps manage A$200 million at ABN Amro Asset Management Ltd., said. "It's probably getting a good deal.''
Taking delivery of 50 planes will almost triple the number of planes flown by Virgin Blue, which already flies 737s. The discount airline will exceed its A$100 million pretax profit for the year ending March 31, 2003, Godfrey told reporters in Sydney.
The planes can fly non-stop to destinations such as Singapore and Samoa, adding international routes to Virgin's business. The airline last month gained access to a larger, newer terminal at Sydney airport, the nation's busiest.
Virgin Blue, which currently has 29 aircraft on lease, will take delivery of six of the 10 new planes between August and the end of the year. It will need about 800 more employees to operate those, Godfrey said.
Virgin Blue is planning to sell part of the discount airline in an initial public offering this year. Patrick shares rose as much as 0.8 percent and were unchanged at A$13 at 2:05 p.m. in Sydney. Qantas shares fell as much as 1.3 percent to A$3.86 and were quoted at A$3.87.
Virgin Blue has said it wants to work with only one aircraft supplier to help cut costs.
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Thurs "The Australian" 17/1/03
Virgin Blue's $5.4bn market share grab
By Steve Creedy, Aviation writer
January 17, 2003
VIRGIN Blue is aiming to claim a third of the domestic market and start its first international route by Christmas after signing a $5.4 billion deal to buy up to 50 Boeing aircraft.
The airline has a firm order for 10 Boeing 737-800s and purchase rights to another 40 over the next eight years – at a discount price.
The deal will boost Virgin's fleet to 40 aircraft within the next two years and is seen as an attempt to build an asset base as it steps up the fight against rival Qantas.
"My goal is in the not too distant future to get a third of the market," Virgin Blue chief executive Brett Godfrey said yesterday.
He put Virgin's current market share at about 26 per cent.
The Boeing deal puts Virgin among the world's six biggest low-cost carriers and will boost staff by about 800.
The first 10 planes will be delivered over 12 months starting in August, with seven arriving before Christmas.
The new 177-seat aircraft feature state-of-the-art cockpits and range-enhancing 2m winglets that allow them to fly as far as Singapore or Samoa. "That will allow us to move to the next phase of our expansion, which we've talked about for some time, which is international routes," Mr Godfrey said.
"These aeroplanes are being configured a little differently for longer-haul regional Pacific and perhaps southeast Asian destinations."
Virgin received positive responses from 16 of 18 international destinations it approached last year and possibilities for the first route include Vanuatu, Fiji, Samoa and Singapore.
By exercising the right to buy a further 40 aircraft, Virgin will be able to quickly capitalise on growth opportunities or to replace older, leased planes.
They will be a mixture of Boeing 737-700s and 800s, although the airline is also looking at the bigger 900s.
Mr Godfrey said the newer aircraft would save money by reducing operating costs and cutting out the middlemen in leasing deals.
The deal is the first time Virgin has bought planes – its current fleet is all leased – and is backed by WestLB and Hamburgische Landesbank.
"This is our first foray into the debt markets and I'm happy to say they've seen enough of our past and are confident enough in our future that they've been prepared to step up and underwrite what is essentially up to a $5.5 billion deal should we exercise all the options on the aeroplanes," Mr Godfrey said.
Neither Virgin nor Boeing would say how big a discount the airline won in what both sides described as tough negotiations.
Boeing is desperate to sell aircraft as it weathers the biggest downturn in aviation history and is keen to maintain its dominance over rival Airbus in the low-cost airline market.
Mr Godfrey joked that the deal was so good Virgin could make money buying all 50 aircraft and selling them to other airlines.
"Let's make no mistake, this has been the best time in aviation history to buy aeroplanes and I don't believe we'll ever see this sort of deal done again," he said.
Virgin Blue was recently valued by JP Morgan at $1.67 billion and is on track to exceed its pre-tax profit target this financial year of $100 million.
But Mr Godfrey appeared to back away from the prospect of a float in the first half of this year, saying the proposal was not cast in stone.
Last edited by Wirraway; 16th Jan 2003 at 18:23.