Nine years ago, Delta Air Lines (DAL 0.31%) and its pilots reached an historic agreement that significantly changed the U.S. airline industry's competitive dynamics. Delta agreed to add 88 small main-line jets -- Boeing (BA +0.47%) 717s -- to its fleet, providing advancement opportunities for its pilots. In exchange, it got permission to add 70 more 76-seat jets in its outsourced regional operations.
These moves enabled Delta to dramatically reduce its reliance on cramped and inefficient 50-seat regional jets. That gave it a meaningful competitive advantage over United Airlines (UAL 0.34%).
Image source: Delta Air Lines.
Last month, United revealed its own plan to become less dependent on single-class 50-seat jets. However, it's taking a much different approach than Delta, which could spark another big change in industry dynamics.
Airlines bank on upgauging
Delta's 2012 pilot deal was part of a broader strategy of "upgauging" -- shifting the fleet to larger jets (especially in domestic markets). Typically, larger aircraft are cheaper to operate on a per-seat basis.
Between 2013 and 2019, Delta slashed its fleet of 50-seat regional jets from 313 to 117. It replaced this capacity with a combination of 110-seat Boeing 717s and 76-seat regional jets.
Over that period, Delta also added 130 Boeing 737-900ERs and 96 Airbus A321s to its fleet. These models have 180 seats and 191 seats, respectively, in Delta's configuration. Many of the planes they replaced were smaller, with around 150 seats.
This boosted Delta's average number of seats per aircraft by 30% in the decade after 2009, helping the full-service airline keep its costs in check and post strong profit growth.
Delta Air Lines pre-tax income (annual), data by YCharts.
Most other U.S. airlines also upgauged their domestic fleets during this period, but less aggressively than Delta. For example, between 2012 and 2019, United Airlines quadrupled its fleet of 737-900ERs from 33 units to 136. While many of those aircraft replaced similar-sized Boeing 757s, others replaced the significantly smaller 737-500. Additionally, United squeezed extra seats onto many of its remaining domestic aircraft.
Taking upgauging to the next level
Delta and United both plan further upgauging of their fleets. Delta will phase out its remaining 50-seat jets by the end of 2023, replacing them with main-line aircraft. Additionally, its order book is heavily weighted toward the A321 and its successor, the A321neo.
That said, Delta Air Lines' pilot contract requires it to have at least 88 small narrow-bodies in order to keep the extra 70 large regional jets it added following the landmark 2012 pilot agreement. While the carrier plans to retire all of its Boeing 717s by 2025, it already has 41 109-seat A220-100s in its fleet, with four more on order.
It will likely buy more to bring the A220-100 fleet up to 88 units by the end of 2025. Delta also has 50 firm orders for 130-seat A220-300s (of which nine have been delivered), plus 50 options.
In short, Delta will have plenty of small narrow-bodies in its fleet for the foreseeable future. By contrast, United Airlines is going all-in on large narrow-bodies with its new fleet strategy. The airline ordered 270 jets last month, giving it 500 outstanding firm orders for narrow-body jets, the vast majority of which are large narrow-bodies like the 737 MAX 9, 737 MAX 10, and A321neo.
Image source: United Airlines.
Meanwhile, United expects to retire over 200 50-seat jets by 2026, although single-class regional jets will still account for 10% of its departures in North America at that time. This will increase United's average seats per departure in North America from 104 in 2019 to 134 by 2026. Essentially, United plans to upgauge even faster over the next five years than Delta did over the past decade.
Jumping off the cliff
Delta closed two of its smaller hubs (Memphis and Cincinnati) over the past decade. This helped its upgauging strategy succeed because the airline drove more traffic across its largest hubs (Atlanta, Detroit, and Minneapolis-St. Paul).
United Airlines doesn't want to close any of its hubs. Moreover, none of its hubs are nearly as large as Delta's Atlanta hub. As a result, United plans to add flights at its hubs in addition to upgauging, leading to massive capacity increases across its network. That will almost certainly drive average fares lower, despite United's plans to add more premium seats and gain market share in small cities (where fares tend to be higher).
Essentially, United's management is betting that rapid upgauging will allow it to reduce unit costs faster than unit revenue declines, bolstering its profitability. Perhaps it's right. But with more 76-seat jets at its disposal and a substantial fleet of small narrow-body jets, Delta will be better able to match capacity to demand on a market-by-market basis. That's a much more reliable strategy for generating strong earnings than United's even more aggressive upgauging plan.
