Airlines realize that to be competitive in the future, they must do more than just fly customers where they want to go. For all three legacy carriers, the fight for market share includes making improvements to the passenger experience.
These improvements will obviously benefit the airlines' customers and investors, but they will also benefit the manufacturing companies involved in the renovation process. Therefore, in addition to the airlines, these manufacturing companies will make another good investment option.
Passenger experience to improve
Just this month, Delta announced improvements to the interiors of its Boeing (NYSE: BA ) 752 and 738, as well as its Airbus (NASDAQOTH: EADSY ) 319 and 320 aircraft. Over the next three years it will update the lavatories, galleys, lighting, seats, and overhead bins on these aircraft.
Delta's new seats will offer power and in-seat video screens with satellite TV to each passenger. With rising checked bag fees, customers certainly will enjoy the new overhead bins that allow for up to 60% more carry-on storage.
The upgrade process may leave customers temporarily confused about what amenities they can expect onboard. When Delta's capital investment is finished, however, passenger satisfaction will rise as Delta will offer a streamlined experience across its fleet.
Passengers will eventually enjoy individual entertainment screens at every seat on all long-haul flights. Flat-bed seating and direct-aisle access will be commonplace on all international wide-body aircraft in the Business Elite cabin.
Economy Comfort seating, which offers priority boarding and more leg room, will also be present on all two-class aircraft. This gives elite members another option for a free upgrade and all passengers the chance to purchase more personal space. WiFi will also be available on all Delta planes by 2015.
Passengers not the only ones to benefit
Delta's chosen seat, a slim-line model, will be both better for the passenger experience and the airlines' bottom line. Delta will benefit by being able to fit more passengers on each flight -- a key driver of its profit margin. Through just its most recently announced updates, Delta will increase passenger capacity across its fleet by 7%.
This includes an extra row of economy seating on both the Airbus 319 and 320. The 320 is also getting another row of first-class seats, which have the ability to bring in higher revenue per passenger.
Here is another way to look at this. Without purchasing one entire new plane or hiring one additional flight crew member, Delta is adding the equivalent of 14 Airbus 320 aircraft to its fleet.
According to the manufacturer, the slim-line seat is "15% lighter than any other full-featured coach seat on the market." The seat, plus other efficiencies of modern day aircraft, will allow for up to a 20% improvement in fuel consumption.
A new worthy investment option
The cost for just Delta's most recent refurbishment plan totals over $770 million. This figure includes all the updates, but a majority of that money will go to purchase seats for over 200 airplanes. That's over 28,000 seats just in economy class.
This money will go to the seat manufacturer B/E Aerospace (NASDAQ: BEAV ) , whose Pinnacle seat was chosen for the upgrade. B/E is far from just a seat manufacture however, and Delta is far from its only customer.
B/E Aerospace is everywhere
Two years ago, Boeing handed B/E an exclusive contract to manufacture lavatories for its next-generation 737 aircraft. This $800 million contract includes installation of B/E's vacuum toilet and lavatory lighting and oxygen system on every 737. It will also guarantee B/E contracts from individual airlines looking to upgrade to the new model.
Airlines will be interested in this system as B/E's lavatory is 25% more reliable than other models on the market. If necessary, its components "can be replaced in a few minutes, as compared to up to an hour for existing systems." Additionally, these systems have a smaller footprint allowing for up to six more seats per plane.
Back in 2011, Delta purchased 100 of Boeing's next-generation 737s. These planes, to be delivered through 2018, will include the B/E seats and lavatory system mentioned above, as well as B/E's LED cabin lighting, food preparation and storage equipment, and cabin oxygen systems.
United also chose B/E
United also released a statement indicating it would put 60,000 new seats on over 500 planes, beginning with its CR7 aircraft. B/E's Pinnacle seat was again chosen for this upgrade and with reasoning similar to Delta's.
A United vice president said that the airline is working to make travel "more user friendly." United highlighted two features of its new seat. One is that it will have more ergonomic and supportive cushioning. The seat is also "more environmentally friendly by reducing seat weight and volume, contributing to less fuel burn."
As Delta completes its cabin refurbishments, look for passengers to respond to the changes. Loyalty is an ever important dimension in the airline industry. Look for these passenger experience improvements to help Delta secure loyal customers.
While everyone loves new plane smell, Delta and United's changes are far from being just late Christmas gifts to its customers. The airlines are focused on increasing profitability.
Delta CEO Richard Anderson sees these investments as ways of "improving our shareholder returns." Anderson says the new planes "will be cash flow positive and earnings accretive from the first year of operation."
As for B/E, the company is well positioned to offer investors a good return on investment. Robert Stallard, an analyst with RBC Capital Markets, believes the industry should be optimistic. He foresees that between "capacity expansion plans" and "dated fleets," airlines "will be investing in their cabin product in order to better compete." This trend almost guarantees companies like B/E Aerospace profitable contracts for the foreseeable future.
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