A New(er) Plane Takes to the Skies for Delta

For Delta Air Lines (NYSE: DAL  ) , a recent theme has been "out with the old, in with the not-quite-so-old." Delta has been willing to buy new airplanes when it needs them and the price is right; indeed, Boeing (NYSE: BA  ) recently delivered the first of 100 737-900ERs to Delta. However, Delta has been equally enthusiastic about finding great deals on used planes that have plenty of life left.


Image courtesy of Delta Air Lines

Late last month, Delta's newest "reclamation project" -- the Boeing 717 -- finally took flight for the company. By the end of 2015, Southwest Airlines (NYSE: LUV  ) will have turned over its entire fleet of 88 Boeing 717s to Delta. The 717 is likely to become a workhorse of the Delta fleet for the next 10-15 years, particularly for shorter flights.

A great airplane that didn't fit in
While the 717 carries the Boeing name, it was originally designed by McDonnell Douglas and marketed as the MD-95. (McDonnell Douglas merged with Boeing before the plane went into service, leading to the name change.) The 717 was meant as a replacement option for the popular DC-9, a small narrowbody plane that typically had 100-130 seats, depending on the variant. The 717 is a stunning 24% more fuel efficient than the DC-9.

However, over time, the evolution of the airline business has led airline executives to prefer larger aircraft. Furthermore, Boeing and Airbus both offer aircraft families that cover the whole range of narrowbody sizes (roughly 100 seats to 200 seats). By flying planes from the same aircraft family, an airline can save on crew training and maintenance costs while still enjoying the benefits of using different-sized aircraft for different markets.

These factors conspired to undermine sales of the Boeing 717: only 156 were ever delivered. (For comparison, that would represent just four months of Boeing 737 production!) However, the few customers that did order the 717, including Southwest subsidiary AirTran and Hawaiian Holdings (NASDAQ: HA  ) subsidiary Hawaiian Airlines, have praised its performance. AirTran, which was the 717's launch customer, found that the fuel savings and reliability exceeded its initial expectations.

A natural fit
Delta and the Boeing 717 are a natural fit for each other. First, Delta still has a small fleet of 16 DC-9s that are roughly 35 years old. The rapid arrival of 717s will allow Delta to retire all of these dated aircraft by early January, taking advantage of the 717's 24% better fuel efficiency. While Delta's 717s may not be "new", on average they are more than 20 years younger than the DC-9s they are replacing.

Delta has finally started flying the Boeing 717. Photo: Delta Air Lines.

Second, Delta has been anxious to reduce its reliance on 50-seat regional jets, which are very costly to operate in terms of fuel and maintenance. Its wholly owned regional subsidiary, Endeavor Air, had 140 50-seat jets earlier this year, but plans to retire all of them by the end of 2014. Some of these will be replaced by larger 76-seat regional jets, but much of the flying will be picked up by the 717s that are arriving from Southwest.

Another wave of small regional jets operated by Delta's partners are likely to be retired in 2014 and 2015 as well. The Boeing 717 is much cheaper to operate on a per-seat basis, and Delta is betting that travelers will appreciate amenities such as large overhead bins, first-class cabins, and higher ceilings. This should more than make up for the reduction in flight options that results from using larger planes.

Ready for takeoff?
Delta wisely jumped on the opportunity to acquire AirTran's fleet of Boeing 717s. While Southwest did not want to integrate the 717s into its own fleet of 737s, Delta is well equipped to handle the complexity of operating many different aircraft types. Delta is leasing the 717s at a very good price, and they will be much cheaper to operate than the aircraft they are replacing.

This fleet could be a competitive advantage for Delta for years to come. Any other carrier that wanted to replicate Delta's strategy of replacing 50-seat jets with small narrowbodies would have to invest billions of dollars to acquire planes in that size range from Embraer or Bombardier. The 717s should therefore increase Delta's margin advantage vis-a-vis rivals, leading to market-beating gains for investors.

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Read/Post Comments (11) | Recommend This Article (2)

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  • Report this Comment On November 05, 2013, at 1:11 PM, USNBubblehead wrote:

    No matter how you slice it or dice it, the plane is still an MD-80 and still sucks.

    Retire those planes already and purchase new, more comfortable planes.

    BTW, I fly on average 150K miles domestic each and every year...with me edging close to 4M lifetime miles on a single airlines.

  • Report this Comment On November 05, 2013, at 1:22 PM, AcuraT wrote:

    "By flying planes from the same aircraft family, an airline can save on crew training and maintenance costs while still enjoying the benefits of using different-sized aircraft for different markets."

    This statement is quite true and why Southwest is getting rid of the planes. Why? Convientently overlooked by this article, the biggest (and most costly) negative about these plans is that the training will be unique at Delta. They are not the same cockpit as the MD-80 or DC-9 (which are also different from each other). Unlike Boeing and Airbus which strives for the same cockpit and fly-by-wire cabins for their fleet of offeriings, McDonnell Douglas was more of a "one-off" offering with each generation. The only plane that is somewhat close (and still not the same) is the MD-90 which Delta has only a few of (and are trying to get more of those used as well).

    This means Delta will need a fleet of pilots that fly this and only this kind of aircraft - with little ability to get more. This would not work at Southwest, and is a cost Delta is willing to take on. While the article is right mostly on everything else, it kind of glosses over this issue which is why NO OTHER airline wanted these aircraft.

    Delta will finally eliminate ancient 30 year old DC-9s which Delta has to cancel flights on now more often than ever due to mechanical problems (I flew four of them, connecting through Atlanta recently - three were extensively delayed due to mechanical problems - over an hour - and one was canceled). The MD-80s are better but not a lot. Delta has to do something to make their fleet more reliable, or I for one will take my business elsewhere.

  • Report this Comment On November 05, 2013, at 1:48 PM, Tyeward wrote:

    In a way, this does make sense. If Delta can pull it off and still manage to be profitable, I see nothing really wrong with it. They aren´t that bad. I personally don´t mind them not unless I am stuck in the back near the lav and people are hitting my shoulder when trying to pass my seat.

  • Report this Comment On November 05, 2013, at 2:42 PM, euclid17 wrote:

    AcuraT wrote: "Delta has to do something to make their fleet more reliable, or I for one will take my business elsewhere."

    Really? In an SEC filing this week, Delta reported a mainline completion factor of 99.9% for October and an on-time arrival rate of 91.4%. And that includes a ton of flights in the congested New York airspace.

  • Report this Comment On November 05, 2013, at 2:49 PM, TMFGemHunter wrote:

    @AcuraT: I wasn't trying to gloss over the disadvantages of flying different aircraft types: I just need to keep my word count down! You are right about some of the challenges. However, Delta is going to have 88 of these 717s. That's a large enough fleet to present meaningful ownership and fuel cost savings to offset the added complexity.

    My main point was that Delta is the best positioned of any carrier to take advantage of this airplane. Delta already operates just about every aircraft type out there, and has staffing procedures to handle that complexity. For instance, Delta has 18 Boeing 777s, even though it also has similarly-sized A330s and slightly smaller 767-400s in its fleet.

    This is all the result of a conscious decision on the part of Delta's management team that saving money on aircraft CapEx is the most important goal and everything else can be managed.

    Best,

    Adam

  • Report this Comment On November 06, 2013, at 11:07 AM, gort wrote:

    what idiot wrote this article ? southwest never had 717 aircraft.

  • Report this Comment On November 06, 2013, at 12:20 PM, LPM1223 wrote:

    @GORT

    I believe the 717's were Air Tran which is now a subsidiary of SW, so in fact, SW does own 717's along with their traditionl 737 fleet.

  • Report this Comment On November 06, 2013, at 12:34 PM, abramsmm01 wrote:

    717's are essentially DC-9-30's with more efficient and quieter engines, modern avionics, and more modern looking interiors. I recall seeing them with AirTran in the late 90's, which hardly qualifies as newer, unless compared to the DC-9's.

    Disadvantages are relatively short range, and I doubt there will be much in the way of IFE.

    Advantages are 2 seats on 1 side of the aisle (less chance of getting a middle seat), and what appears to be favorable terms for Delta.

    The DC-9 in any evolution is a solid ship, but already starting to look very dated vs. 737 NG's, Airbus 319, and the new larger regional jets on the horizon.

  • Report this Comment On November 06, 2013, at 12:58 PM, jerrynf wrote:

    The 717 was originally built by McDonnel-Douglas and therefore, yes, is a spawn of the MD-80 series. There are quite a few of the MD-80 series still reliably flying, though some, not profitable. Boeing inherited this plane when it bought McDonnel-Douglas

  • Report this Comment On November 07, 2013, at 12:44 AM, WingWise wrote:

    The 717 also has the greatest cargo/baggage capacity for it's class of aircraft. This is what it made it very popular with Hawaiian, for flying those luggage-laden tourist and cargo inter-island flights. Also, FYI... Boeing did not buy McDonnell Douglas. It was a stock-for-stock merger transaction. The new merged company decided to retain the Boeing name only (versus dealing with a Boeing-McDonnell acronym), which often leads people to think it was a buyout.

  • Report this Comment On November 07, 2013, at 9:09 AM, TMFGemHunter wrote:

    @abramsmm01: I don't think the 717 looks dated at all. (And why should it? Production began in 1998, around the same time as the 737 NG!) The planes Delta is getting will be around 12 years old on average, which is below the company's fleet-wide average.

    The 717s are primarily meant to take over routes from the DC-9 and from regional flying. Of the three initial routes, the longest is Newark-Atlanta, which is around 750 miles. I would guess that all of the 717 flying will be on stage lengths under 1000 miles, including a lot of short hops (300-600 miles). Also, the 717s all have Wi-Fi, which is all you need for in-flight entertainment... if you're willing to pay. AirTran also had satellite radio, but I assume that's going away in the conversion process.

    Adam

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