Smaller is better for Virgin Blue

VIRGIN Blue believes passengers will show a strong preference for its fleet of 20 Embraer E-Jets as it deploys them to expand its network and boost its bottom line.

The airline's decision to add smaller Embraer E-Jets to its fleet is the culmination of a painstaking evaluation resulting from the realisation the airline would have to move beyond its original mantra of one aircraft type.

It has already moved away from its low-cost model to capture higher-yield customers through inducements such as lounges and a tiered frequent flyer scheme. Now the smaller Embraers will provide access to new markets as well as give it the flexibility to match capacity with demand on existing routes.

"We looked at everything - the Q300, the Q400, all the other regional jets out there," Virgin chief financial officer Keith Neate told the The Australian during a flight to Embraer's headquarters at Sao Jose dos Campos in Brazil this week.

"We took a look at all of them, we evaluated all of them using a combination of subjective factors, objective factors and financial performance and the one that kept coming out as a winner was the Embraer. It's just a fantastic aircraft. It has the latest technology for its type, it has two-plus-two seating, it has very generous seat space and the seat pitch is good. It just gives us a flexibility on our seat densities across every route that we fly. It's perfect."

The airline has firm orders for six Embraer 78-seat E-170 and 14 104-seat E-190 as well as options on three planes and purchase rights on 17 more.

It took delivery of the first E170 during a ceremony at Embraer's headquarters on Monday and is flying it back to Australia to start operations on existing routes next month. The planes will not fly new routes until February. The bigger E-190s will start arriving early next year and the airline expects to have 17 of its 20 planes in action by the end of that year.

The new aircraft type is expected to not only allow Virgin to make money on the 10 per cent of routes it runs at a loss with bigger planes but also open routes it can not currently fly.

Officials estimate this will giveit access to another 14 to 15per cent of the domestic network, including previously uncontested routes operated by Qantaslink and Regional Express.

Virgin chief executive Brett Godfrey has already indicated the airline has Qantaslink and its Q400 turboprop services firmly in its sights. He has also made no bones about the fact he believes Virgin will have a significantly superior product.

"We think we should be going head-to-head with that aeroplane with a 70-seat jet," Godfrey says.

"The quality service index stuff United invented - and everyone subscribes to, at least in the airline industry - says that there is generally about a 50 per cent greater preference for a jet over a turbo-prop."

While it has yet to confirm routes, Canberra is likely to be one of the first beneficiaries of the new jet. Other possibilities investigated by the airline include Albury, Bathurst, Dubbo, Wagga Wagga, Tamworth and Port Macquarie and Port Lincoln in the eastern and southern Australia, as well as about six ports in Western Australia and two or three in the Northern territory. It has also looked at seasonal routes such a Cooma and Mt Hotham.

Neate says the decision to move to two domestic aircraft types was prompted by the need for Virgin to keep growing while at the same time boosting returns.

"I guess as we expanded the business we saw that we filled all the prime routes - the triangle, then the trunk routes and the key leisure routes," he says. "But what we found was the demand from the market was a combination of schedule and frequency and we couldn't supply the frequency or the schedule people were looking for with an aircraft as big as an 800 or a 700.

"We needed something where we could match supply and demand on a flight-by-flight basis as well as a route-by-route basis.

"And that's exactly what the Embraer does for us, it gives us the opportunity."

"You take those 90 people and put them on an Embraer 190 at the same ticket price, you've suddenly got a reduced trip cost which gives you a better return for the same revenue."

Godfrey has told Virgin staff to expect some "surprising" new routes but says the airline effectively has four plans for deploying the new planes: one it believes will happen and three other options. How it turns out will depend on how competitive the market gets.

"We'll look at each market by market as to whether they go on the existing routes," he says, noting 10 per cent of the airline's routes lose money because the aircraft on them is too big.

Both Godfrey and Neate say the airline could expand its Embraer fleet if the aircraft works out as well as expected.

The airline still has three options as well as 17 purchase rights and, while the purchase rights are not as secure as options, management does not believe it will have any trouble securing production slots in a case of further expansion.

It has yet to make a decision on whether it will exercise any of those options or rights but Neate observes that Virgin took 50 options on its 737s and has 23 left.

It will be a case, he says, of seeing how the market develops in Australia.

"We'll just see how it goes but the expectations are that I wouldn't be too surprised if you see another 20 of these aircraft operating in Australia." Nor should financing be a problem, even though Neate admits there are some financiers reluctant to back the E-Jets because they are relatively new.

Most of the new planes are debt-financed through a $589.5 million deal led by ING. The deal, covers 17 Embraers and four 737-800s due to be delivered by the end of next year, has been syndicated to the likes of ANZ and Chinese bank CIBC at favourable rates.

"We sealed the deal about a month before the sub-prime crisis, not that I think it would have changed the deal too much," says Neate. "We're fortunate that we're in the position now where Virgin Blue is regarded as a strong credit risk so if you look at the syndicate list we're able to attract good quality lenders, major international banks."

On the operational side, the new aircraft has meant meticulous planning and long hours by the E-Jet program team.

Management pilots and cabin crew trained in the US and Europe as the airline's operations section worked on developing the manuals and procedures in place to get the aircraft added to Virgin's air operator's certificate. The airline is also commissioning a simulator and cabin crew training facilities.

"Operationally we're doing very well," says E-Jet program manager Scott Roworth.

"All our systems are in place, our systems of maintenance, our operational systems, all of regulatory approvals are all in place."

This week's delivery included an acceptance flight where the aircraft's systems were tested.

The handful of Virgin pilots who have flown the plane like it and say it is good to fly.

Roworth says there has been a steady stream of Virgin 737 first officers who have volunteered to move across to the Embraers and who will receive command upgrades to become the first-line captains.

"We will also go out and recruit externally to fill the first officer roles," he says.

Initial cabin crew groups are also now being trained and rated on the Embraers.

"Eventually, we will end up with our entire cabin crew group trained on both planes in order to give us maximum flexibility," Roworth says.

Overall, management is optimistic the aircraft's introduction will be relatively trouble-free, although Godfrey notes that software issues with the 190 were uncovered by jetBlue before Virgin's first delivery.

"JetBlue was the first carrier to operate the 190 so they went through all the proving and issues," he says. "We're still one of the early operators of the aeroplane but the 80-20 rule applies and I think jetBlue probably got most of them out."

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