Prior to the COVID-19 pandemic, Delta Air Lines (DAL -2.62%) planned to install premium economy seats on its entire international wide-body fleet by the end of this year. However, the pandemic forced it to halt all non-essential capital spending for a while.
Delta has since resumed its retrofit program to install what it calls "premium select" sections on its remaining wide-body fleet types. This looks like a smart move for the full-service airline.
Rollout in progress
In 2017, Delta Air Lines began installing premium select cabins on some of the wide-body jets it used for long-haul flights. Initially, it planned to offer premium economy seating on a relatively small proportion of its wide-body fleet: specifically, the Airbus A350 and Boeing 777 jets that operated its longest international routes.
Management quickly changed its tune due to the massive success of its initial rollout of premium select. With fares for the new product averaging more than double the average coach fare, Delta promised in mid-2018 to bring premium select to all of its wide-bodies by 2021.
Image source: Delta Air Lines.
The A330-900neos that entered Delta's fleet beginning in 2019 have all come with premium select cabins included. Delta also began retrofitting its 767-400ER fleet in 2019. While Delta paused that work for part of 2020, it has now finished the retrofits on all but two of its 767-400ERs.
On the flip side, Delta retired all of its 777s last year to simplify its fleet. As a result, barely more than a third of the airline's wide-body fleet features premium select seating today, leaving the airline well short of its goal of a fleetwide rollout by year-end.
Getting back on track
On Tuesday, Delta Air Lines announced that it is beginning to install premium select cabins on its 767-300ERs and A330s: the last two wide-body fleet types without this key product. The first 767-300ER with premium select seating will be ready this month, while reconfigured A330s will join the fleet beginning in July.
Delta currently has 36 767-300ERs and 42 current-generation A330s in its fleet. Since long-haul demand remains extremely weak for now due to international travel restrictions, the airline can afford to have a significant number of 767-300ERs and A330s out of service simultaneously for modifications. That will allow it to complete all of the retrofits by the summer of 2022.
Image source: Delta Air Lines.
The right product for the post-pandemic period
A number of pundits criticized Delta's recent announcement, noting that the carrier isn't upgrading the somewhat dated Delta One first-class cabins on its 767-300ERs and A330s.
This decision isn't surprising, though. Airlines rely on high-spending business travelers to fill the pricey lie-flat seats they deploy in first class and business class on long-haul routes. However, it could take another two or three years for business travel demand to recover -- and it may never reach pre-pandemic levels again. Moreover, Delta plans to retire all of its 767-300ERs by the end of 2025.
By contrast, international premium economy is an affordable luxury. U.S. consumers are sitting on an estimated $2.6 trillion of excess savings, thanks to lower spending on travel, restaurants, and entertainment during the pandemic, as well as generous government stimulus payments. That could unleash huge demand for Delta's premium select seats as international leisure travel demand recovers over the next year or two.
Delta's willingness to invest in premium select retrofits for its 767-300ERs despite their planned retirement in 2025 suggests that it expects a very quick payback period for this investment. That's great news for investors. There will be plenty of time to move forward with upgrading the Delta One cabin on the A330 fleet in a year or two, depending on the strength of the business travel demand recovery.
