For years, Delta Air Lines (NYSE:DAL) and its fellow network carriers have signed contracts with numerous regional airlines to operate smaller jets on lower-traffic routes, mainly connecting their hubs to small and midsize cities. For example, United Airlines currently has eight airline partners in its United Express network. That level of complexity has been pretty common in recent years.
However, Delta plans to change things up over the next 12 months. By this time next year, it will have just three regional airline partners operating Delta Connection flights, down from five today. This is a prelude to further shrinking its regional fleet -- already the smallest among the three big legacy carriers -- in favor of increased mainline service.
Two regional airlines will exit the Delta Connection network
Historically, Delta and its peers preferred to divide their regional flights among many regional airlines to minimize the potential disruption from labor disputes or other problems at any single regional affiliate. That model creates a lot of inefficiencies, though. Each regional affiliate needs its own reserve crews, its own aircraft spares, and its own maintenance department. This can lead to bloated costs.
There's also a greater risk of flight cancellations when regional flights at a particular hub are operated by many different regional airlines, especially during periods of severe weather. There could be a spare aircraft and a reserve crew available to operate a flight, but if the aircraft and crew are associated with different regional airlines, the flight will be cancelled anyway.
To simplify its Delta Connection network, Delta will end its relationship with Compass Airlines and GoJet by mid-2020. The two regional airlines, both of which are subsidiaries of Trans States Holdings, together operate 63 large regional jets under the Delta Connection brand.
Most of those planes will be transferred to one of the three remaining Delta Connection carriers: SkyWest, Republic Airline, or Delta subsidiary Endeavor Air. A handful will be replaced with an equivalent number of newly built regional jets. The three remaining Delta Connection carriers will take on more of a focus on distinct geographical regions. SkyWest's operations will be centered in the western U.S., Republic will maintain its focus on the East Coast, and Endeavor will be responsible for much of the rest of the country.
This is just the first step
Delta customers probably won't notice much of a change from the company's decision to dump two of its regional affiliates. After all, Delta tries to ensure that all regional airlines operating under the Delta Connection brand offer a consistent customer experience.
That said, the simplification of Delta's regional fleet could also pave the way for a reduction in its overall size over the next couple of years. Under the terms of its pilot contract, Delta can only have 325 planes in the 69- to 76-seat range operated by its regional airline partners. Otherwise, its regional carriers are restricted to 50-seat jets that are cramped, lack first-class cabins and other amenities, and have high unit costs. There are currently 119 such 50-seat jets in the Delta Connection network, operated by SkyWest and Endeavor Air.
Management has made it clear that many of these 50-seat jets will exit the Delta Connection fleet in the next few years. Delta is replacing them with the ultra-efficient, 109-seat Airbus A220-100. The A220 will replace large regional jets on a variety of routes, freeing up the large regional jets to cover lower-demand routes currently served by 50-seat jets.
Delta Air Lines will add nearly 80 narrowbody jets to its fleet this year, followed by more than 60 in 2020. So far, it has been using all of those new jets to replace aging MD-88s and MD-90s -- it entered 2019 with 84 of the former, all of which will be retired by the end of 2020, and 43 of the latter, which will exit the fleet by 2022. By next year, Delta is likely to turn its attention to the downsizing of its 50-seat jet fleet. Pilots flying these 50-seat jets at SkyWest and Endeavor Air will be able to transition to the larger Delta Connection jets those carriers are receiving.
These impending fleet changes are great news for investors, as A220s have dramatically lower unit costs than the 50-seat jets that will be retired. They will also be great news for customers, as some of the most uncomfortable aircraft still flying in the U.S. will be replaced by one of the most passenger-friendly jets being produced today.