Virgin Atlantic has seen huge improvements in profitability in the last few years, thanks to lower fuel prices and an increased focus on serving lucrative routes between the U.S. and the U.K. However, another key factor in the turnaround of Richard Branson's trendy airline is its shift away from fuel-guzzling planes with four engines in favor of modern twin-engine widebodies.
The next stage of this project involves replacing Virgin Atlantic's aging Boeing (NYSE:BA) 747 jumbo-jets. Virgin Atlantic has chosen Airbus (NASDAQOTH:EADSY) for its next aircraft order, according to Bloomberg, and will soon order 12 A350-1000 jets.
Saying goodbye to jumbo-jets
Virgin Atlantic currently operates 10 Boeing 747s -- having retired two in late 2015 -- that were built between 1994 and 2003. These planes are a little over 16 years old, on average. Normally, the useful life of a large jet is about 25 years, but Virgin Atlantic is one of many carriers opting for a quicker retirement schedule for its aging 747s.
Virgin Atlantic has leases scheduled to expire in 2019 for many of its remaining 747s, so it is looking to replace the entire fleet around that time. Last June, Virgin Atlantic CEO Craig Kreeger stated that the company was seriously considering Airbus' A350 as well as Boeing's 777-300ER and 787-10 and that it planned to order enough planes to replace all of its 747s and provide some growth capacity.
While Virgin Atlantic has not confirmed anything, it appears that Airbus has won the order with the largest version of its A350. Boeing may have been unable to deliver 787-10s during the desired 2018-2019 period, and Virgin Atlantic probably also wanted a plane closer in size to the 747.
Boeing's 777-300ER would have fit both criteria. However, it is an older design that will be superseded in 2020 by the more fuel-efficient 777X. Virgin Atlantic probably didn't want to buy a plane that could soon become obsolete. The A350-1000 appears to offer the right combination of availability and fuel efficiency.
So long, A380
Airbus' victory in this order competition may not be 100% good news. If Virgin Atlantic goes ahead with this order, it likely represents the final nail in the coffin for its outstanding order for six A380 jumbo-jets. (Indeed, it's possible that ordering the A350 is allowing Virgin Atlantic to get out of its A380 commitment.)
Virgin Atlantic ordered the A380 more than a decade ago, with grandiose plans to outfit the jumbo-jets with gyms, beauty salons, and casinos. However, it has never taken delivery of the plane -- and in recent years, it has become increasingly clear that it never would.
Indeed, Airbus has had a hard time getting any airline other than Emirates interested in the A380. Airbus ended 2015 with 140 unfilled orders for the A380. Emirates represents nearly half of that backlog, with 68 outstanding orders.
Among the remaining 72 A380 orders, Virgin Atlantic's six-plane deal is not the only one hanging by a thread. For example, Qantas doesn't seem interested in taking the remaining eight A380s it has on order. Aircraft lessor Amedeo has 20 orders on the books, but has had to delay its deliveries because it can't find any airlines interested in adding A380s.
Good news and bad news
Emirates' seemingly insatiable demand for A380s is the only thing keeping the production line busy right now. It can't singlehandedly support the A380 forever, though. Virgin Atlantic's recent decision to order twin-engine planes to replace its Boeing 747 jumbo-jets represents the clearest proof yet that A380 orders will continue to disappear.
This means that Airbus will never come close to recouping the tens of billions of dollars in losses that the A380 program has racked up so far.
However, on the bright side, Airbus' other product families continue to sell well: particularly the A320neo and A350. Production increases for these solidly profitable models will be the backbone of Airbus' profit growth over the next five years.