On Tuesday, Virgin America (NASDAQ:VA) announced the latest addition to its all-Airbus fleet: the A321neo. The company has agreed to lease 10 A321neos, with deliveries running from Q1 2017 through Q3 2018.
The superefficient A321neo will allow Virgin America to boost its fuel efficiency and reduce emissions while also driving steady improvements in its nonfuel-unit costs. It may also allow Virgin America to grow its service to Hawaii, delivering a challenge to local market leader Hawaiian Holdings (NASDAQ:HA).
The A321neos are coming early
By opting to lease A321neos rather than buying them directly from Airbus, Virgin America was able to become the U.S. launch customer for this new plane. Even Hawaiian Holdings subsidiary Hawaiian Airlines -- which ordered the A321neo nearly three years ago -- won't get its first one until the second half of 2017.
Virgin America currently plans to configure the A321neos with 185 seats each, although it doesn't have to finalize the seating plan for a few months.
Based on this tentative plan, Virgin America will retain its exclusive eight-seat, first-class cabin for the A321neo. It will also use the same seats as for its A319s and A320s, with the same legroom of at least 32 inches. Virgin America evaluated using slim-line seats, which have become all the rage in the U.S. airline industry, but it determined that its standard seats were more comfortable, especially for long flights.
Each of the A321neos will come on a 12-year lease. The first five will arrive in 2017, with the last five arriving in 2018. These deliveries will allow Virgin America to grow capacity by about 10% annually in 2017 and 2018, according to CEO David Cush, on top of the 13%-15% growth the company has projected for 2016.
Big improvements over the current fleet
The A321neo's fuel efficiency makes it a game changer from a financial perspective. Virgin America expects a roughly 20% reduction in fuel consumption per seat for the A321neo relative to its current fleet of A320s and A319s.
Virgin America CEO David Cush also told me that the A321neo will have lower nonfuel-unit costs than the A320, because it spreads expenses like pilot labor, maintenance, and airport fees over more seats. This should help the company maintain its downward unit-cost trajectory for the next few years.
The A321neo will also have more range than current-generation planes, due to its more efficient engines. That will bring some routes at the edge of the A320's range -- such as Los Angeles-Honolulu -- more comfortably into reach.
Becoming a more formidable competitor
Virgin America plans to deploy the A321neos on routes to slot-constrained airports. This will allow it to add seating capacity on popular routes to JFK Airport and Newark Airport in the New York City area, where slot availability has been an impediment to growth. This will directly challenge all three legacy carriers, as well as JetBlue Airways.
Virgin America also intends to use A321neos on Hawaii routes. In the past two months, it began flying from San Francisco to Honolulu and Kahului. It has previously expressed interest in flying from Los Angeles -- its other main focus city -- to Hawaii. The arrival of the A321neos will probably be the catalyst for starting those flights.
Virgin America's growth in the Hawaii travel market will impact Hawaiian Airlines, which has the most market share for flights between the U.S. West Coast and Hawaii. Hawaiian Airlines has been expecting to gain a competitive advantage from its own A321neos, which will open up new opportunities beginning in late 2017 on routes that can't support larger widebody planes.
Instead, Virgin America is now likely to beat it to the punch. Given the massive size of the Los Angeles-Hawaii travel market, Virgin America may be able to fly not only to Honolulu and Kahului but also to the other islands that get less tourist traffic.
There are certainly plenty of West Coast markets outside of San Francisco and Los Angeles that Hawaiian Airlines can target for growth. But its future growth in those two big metropolises may be constrained by rising competition from Virgin America's own A321neo-fueled expansion.
Adam Levine-Weinberg owns shares of Hawaiian Holdings, and Virgin America and is long January 2017 $17 calls on JetBlue Airways and short April 2016 $38 calls on Hawaiian Holdings, The Motley Fool recommends Virgin America. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.