More than a decade ago, Northwest Airlines ordered 18 787-8 Dreamliners from Boeing (NYSE:BA), becoming the aircraft's North American launch customer. However, this order has been on the rocks ever since Northwest merged with Delta Air Lines (NYSE:DAL).
In 2010, in a bid to slash capital spending, Delta deferred all of its 787 deliveries to 2020 and beyond. In late 2014, it ordered 50 modern widebodies from Airbus (NASDAQOTH:EADSY) -- with deliveries scheduled to begin in 2017 -- casting more doubt on its continued interest in the Dreamliner.
Last week, Delta Air Lines took the final step, officially canceling its entire order for 18 787-8 Dreamliners.
Delta pulls the trigger
Delta's decision to cancel its Dreamliner order had been anticipated by airline analysts for many years. When Delta ordered the 737-900ER narrowbody plane from Boeing several years ago, it negotiated the right to substitute those 737-900ER orders for its existing Dreamliner orders on a dollar-for-dollar basis.
This unusual agreement may explain the timing of the order cancellation announcement. Based on Boeing's current price list, 18 787-8 Dreamliners would be roughly equivalent in price to 40 737-900ERs. Given that Delta only has 51 remaining orders for 737-900ERs, it may have been running out of time to cancel its Dreamliner order penalty-free.
Delta doesn't need more widebodies -- for now
Since 2013, Delta Air Lines has ordered 60 widebodies from Airbus: 10 A330-300s, 25 A350-900s, and 25 A330-900neos. Eight of those planes have already been delivered, with the other 52 set to arrive over the next six years or so.
These planes will mainly be used to replace Delta's remaining Boeing 747s and its older 767s. Delta will retire its last seven 747s in 2017. Among its 767s configured for international service, 24 were built between 1990 and 1996 and will be ripe for retirement between now and the early 2020s.
However, the majority of Delta's internationally configured 767s -- 55 to be exact -- were built between 1997 and 2002. Given Delta's penchant for keeping older aircraft in service for as long as possible, these planes are likely to remain in its fleet until the mid-late 2020s.
Thus, Delta already has more than enough Airbus widebodies on order to meet its replacement needs over the next six years or so. Meanwhile, rampant overcapacity on international routes limits the number of attractive long-haul expansion opportunities in the near term. Furthermore, facility constraints at Delta's new transpacific hub in Seattle will likely prevent the company from adding new international routes there until at least 2019.
Indeed, Delta deferred part of its A350 order earlier this year in order to slow its growth rate over the next few years. Clearly, it has no need for additional widebody aircraft in the early 2020s, when the Dreamliners were scheduled to arrive.
Delta could still buy Boeing's Dreamliner later
Delta's existing orders with Airbus fully cover its widebody needs through at least 2022 or 2023. However, looking ahead to the mid-late 2020s, Delta will need to replace dozens of widebodies that it received in the late 1990s and early 2000s. That could create an opening for Delta to reorder Boeing's Dreamliner.
Delta Air Lines executives have been explicit in recent years that they want to operate a mix of Boeing and Airbus planes in order to keep the pressure on both manufacturers to offer rock-bottom pricing. Thus, Airbus' recent run of widebody orders from Delta may reflect an attempt to balance out the fleet rather than a permanent decision to shift from Boeing to Airbus.
Of course, it's possible that Delta will turn to the used aircraft market to fulfill some of its future widebody replacement needs. That said, the costs of refurbishing a widebody plane can be quite significant. Furthermore, by the mid-2020s, Dreamliner production costs -- particularly for the most popular variant, the 787-9 -- will have declined significantly from today's level. That will enable Boeing to offer lower prices.
Ultimately, canceling its Dreamliner order was a no-brainer for Delta. It's not a big deal for Boeing either, as the 787-8 model is barely profitable. And Delta will still have an opportunity to reevaluate the Boeing 787 a few years down the road, when its newer 767s start to approach retirement age.
Adam Levine-Weinberg owns shares of Boeing and is long January 2017 $40 calls on Delta Air Lines. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.