Way back in January, Bloomberg reported that Virgin Atlantic was on the verge of announcing a deal to buy 12 A350-1000 jets from Airbus (EADSY 1.79%). This report came seven months after Virgin Atlantic stated that it planned to order a replacement for its Boeing (BA 1.98%) 747 leisure fleet within six months.
Virgin Atlantic may order the larger version of Airbus' A350 aircraft. Image source: Airbus.
Midway through the year, Virgin Atlantic still hasn't announced an order for planes from Airbus or Boeing to continue its fleet renewal. (Two weeks ago, Virgin Atlantic CEO Craig Kreeger said that an aircraft deal was imminent -- again.)
It may be that Virgin Atlantic has already decided between Airbus and Boeing, and is just waiting until the upcoming Farnborough Airshow to announce its order. But if its order hasn't been finalized yet, then the recent U.K. referendum to leave the European Union could potentially alter Virgin Atlantic's plans.
Brexit could hurt U.K. air travel
Most economists believe that uncertainty related to "Brexit" will have a significant negative impact on the U.K.'s economy. This view is shared by Virgin Atlantic founder -- and face of the brand -- Richard Branson. Branson recently stated that overseas investors are already cutting investments in the U.K., which will cost the country thousands of jobs.
The International Air Transport Association released a study last week estimating that Brexit's impact on the U.K. economy will reduce U.K. air travel passenger volume by 3%-5% by 2020. The study also found that the falling value of the British pound could reduce outbound travel by another 5.6%.
This would have a significant impact on Virgin Atlantic. Leisure flights to destinations like Las Vegas, Orlando, and the Caribbean represent a significant chunk of the carrier's business, and these routes primarily carry U.K.-based travelers.
As it happens, the planes Virgin Atlantic is most eager to replace are aging 747s used for these leisure flights. If Brexit is likely to reduce outbound traffic by about 10%, as the IATA study claims, then Virgin Atlantic may need to cut capacity on these routes going forward.
Virgin Atlantic plans to replace its remaining 747s. Image source: Wikimedia Commons user Mark Harkin.
Will Virgin Atlantic go small?
In the past few years, Virgin Atlantic has shown a tendency to opt for smaller aircraft as it replaces the worst fuel guzzlers in its fleet. The carrier has bought numerous 787-9 Dreamliners from Boeing, replacing not only the A340-300, roughly similar in size, but also the larger A340-600 and Boeing 747-400 models.
For the past year, the "smart money" has been betting that Virgin Atlantic will order Airbus' A350-1000 to replace its remaining 747s. Part of the rationale is that buying planes from Airbus might enable Virgin Atlantic to cancel its unwanted A380 orders.
But while the A350-1000 is somewhat smaller than the 747-400, the difference isn't that significant. Furthermore, Virgin Atlantic also wants to replace its remaining A340-600s. The A350-1000 would be a step up in size from those planes.
Taking into account the growth of budget carriers in the transatlantic market -- most notably Norwegian Air Shuttle -- and the dislocation that Brexit will cause, it might be prudent for Virgin Atlantic to order a smaller aircraft to complete its fleet renewal plan. This would also rule out Boeing's 777-300ER, another model that Virgin Atlantic has been considering. Moving down a rung in terms of size, the main options are Boeing's 787-10 Dreamliner, and the smaller version of Airbus' A350 (the A350-900).
Between these two aircraft, the 787-10 would provide commonality benefits with the 787-9s that will make up 40% of Virgin Atlantic's fleet by the end of 2017. It's also likely to be somewhat more fuel efficient than the A350-900.
On the flip side, Airbus' A350-900 has more range. And as noted earlier, if Virgin Atlantic orders the A350, Airbus may let it cancel its A380 orders without penalty. Brexit makes the prospect of adding the massive A380 to Virgin Atlantic's fleet especially unpalatable.
We'll probably find out soon
The Farnborough Airshow begins on July 11, and Virgin Atlantic is likely to announce its final decision during that week. Its choice between the A350-900, A350-1000, Boeing 777-300ER, and 787-10 will say a lot about how much Virgin Atlantic expects Brexit to dampen outbound tourist travel from the U.K.
On the other hand, if Virgin Atlantic doesn't announce an aircraft order at Farnborough, it will send an even clearer signal that the threat of Brexit is forcing it to reevaluate its long-term fleet plan.
