Virgin Australia 737 MAX 10s provide platform for capacity growth and lower unit costs

In late Aug-2018 Virgin Australia announced the conversion of 10 737 MAX 8 orders to the larger 737 MAX 10.


Summary

  • Virgin Australia has converted 10 737 MAX 8 orders to the larger 737 MAX 10.
  • Virgin Australia could use high density two class 737 MAX 10s on domestic trunk routes within eastern Australia.
  • Virgin Australia may also opt for a low density two class configuration with lie-flat business class seats for transcontinental domestic routes and new medium haul international routes.

Virgin Australia initially placed an order for 23 737 MAX 8s in 2012. In 2015 it converted 17 737-800 orders to 737 MAX 8s, lifting its commitment for the type to 40 aircraft. At the time, the airline secured 737 MAX 8 delivery slots starting in 2018, but in early 2017 Virgin Australia postponed first delivery until 4Q2019.

Virgin Australia is now slated to become, in Nov-2019, the second 737 MAX 8 operator in the South Pacific region after Fiji Airways.

See related report: Fiji Airways to upgrade Adelaide product as 737 MAX 8s are introduced

Boeing launched the 737 MAX 10 in Jun-2017. According to the CAPA Fleet Database it has secured 528 commitments, but most of these did not represent new orders and were conversions from other 737 MAX variants.

The 737 MAX 8 entered service in May-2017 and the 737 MAX 9 in Mar-2018. The smaller 737 MAX 7 is slated to enter service in 2019 and the 737 MAX 10 in 2020, but Virgin Australia does not plan to begin taking 737 MAX 10s until 2022.

The 737 MAX 10 will seat up to 230 passengers in all-economy configuration, enabling it to compete with the A321neo, which is already in service and can seat up to 240 passengers in all-economy configuration.

Virgin Australia is not planning to operate its 737 MAX 10 fleet with the maximum 230 seats, instead operating the aircraft in a two class configuration, but the 737 MAX 10 will become by far its largest narrowbody aircraft. Virgin Australia currently operates 79 737-800s in two class 176-seat configuration (168 economy seats and eight business class).

The 737 MAX 10 could be a game changer for Virgin Australia as it will mean more capacity on domestic trunk routes, enabling the airline to maximise existing slots while reducing unit costs due to the higher gauge. A two class 737 MAX 10 with a similar configuration and product as its 737-800s would enable Virgin Australia to increase capacity by around 20% on routes between Brisbane, Melbourne and Sydney without increasing frequencies.

Upgauging services on these three routes is sensible: although widebody aircraft could also be deployed, large gauge new generation narrowbody aircraft generate a lower unit cost on short haul routes than widebody aircraft.

Melbourne-Sydney is a huge market – the third largest air route in the world – and could particularly benefit from large gauge narrowbody aircraft. Adding frequencies on this route is difficult because of the slot constraints at Sydney, and a high frequency service is already being provided. Based on OAG data for the week commencing 24-Sep-2018, Melbourne-Sydney is Virgin Australia’s largest route (356 weekly services), then Brisbane-Sydney (256 weekly services) and Brisbane-Melbourne (186 weekly services).

Virgin Australia could also operate a proportion of its 737 MAX 10 fleet with lie-flat business class seats, ideal for long haul domestic routes to Perth from eastern Australia and for medium haul international routes, but Virgin Australia would need to convert more 737 MAX 8 orders to 737 MAX 10s to justify two configurations. For a small fleet of 10 aircraft only one configuration is realistic.

Several 737 MAX 10 operators are planning, or are considering, lie-flat business class seats. A 737 MAX 10 with a similar configuration for Virgin Australia would generate only a slight increase in capacity compared to its 737-800s but significantly more revenue, given the much larger business class cabin and much better business class product.

Virgin Australia still has 30 smaller 737 MAX 8s on order but it would be difficult to outfit those smaller forward cabins with lie-flat seats. The 737 MAX 8 is also a better fit than the 737 MAX 10 for most of Virgin Australia’s domestic routes and also for most, or all, of Virgin Australia’s trans Tasman routes.

However, the 737 MAX 10 is an ideal platform for a small number of domestic routes and for potential international expansion to Southeast Asia.