Among the five largest U.S. airlines, Delta Air Lines (DAL -1.71%) is the only one that has not ordered the Boeing (BA -0.19%) 737 MAX. In recent years, the airline giant has dealt primarily with Airbus (EADSY -1.21%) for new jets.
That said, Delta has periodically held talks with Boeing about a potential 737 MAX order. In a recent webinar for the company's pilots, CEO Ed Bastian stated, "There's certainly a place ..." for the 737 MAX in Delta Air Lines' fleet. Let's take a look at what this news means for Boeing and Delta.
The speculation continues
During the roughly 20-month grounding of the 737 MAX, order activity dried up. (The onset of the COVID-19 pandemic last year certainly didn't help.) A year ago, with the FAA on the verge of recertifying the 737 MAX for commercial service, Boeing started looking to line up new orders for its troubled jet. It was particularly eager to sell dozens of "white tail" aircraft that were built in 2019 and 2020 for customers that had subsequently canceled those orders.
At the time, Reuters reported that Boeing had talked to Delta about taking perhaps 40 of those white-tail 737 MAX jets. That might have opened the door for the airline giant to place additional 737 MAX orders in the future. However, Boeing and Delta never reached a deal, and Boeing has now sold virtually all of its white tails.
Delta still has regular discussions with Boeing, though, and management clearly is interested in the 737 MAX -- at the right price. In fact, Bastian (the Delta CEO) indicated in his recent remarks that he was surprised the two sides hadn't reached an agreement.
Major fleet needs at Delta
The biggest thing going in Boeing's favor is that Delta Air Lines will need a lot of narrow-body jets over the next decade. Last year, the airline retired its 737-700, MD-88, and MD-90 fleets, which totaled 87 aircraft at the beginning of 2020. It also plans to retire all 91 of its Boeing 717s by the end of 2025.
Beyond those confirmed retirements, Delta's 55 Airbus A320s are over 25 years old on average, its 116 Boeing 757s are 23 years old on average, and its 77 Boeing 737-800s and 57 Airbus A319s average nearly 20 years of age. All of these fleet types will be due for retirement within 10 to 12 years at most.
On the flip side, Delta took delivery of 25 new narrow-body jets last year and 22 more in the first half of 2021. Nevertheless, Delta could need over 400 narrow-body jets over the next decade just to replace retiring aircraft on a one-for-one basis. Normal fleet growth and the carrier's plan to continue shrinking its regional fleet in favor of more mainline flying will add to its aircraft needs.
This creates an enticing opportunity for Boeing to make a splash with a sizable 737 MAX deal. On the other hand, as of June 30, Delta already had outstanding orders for 206 narrow-bodies, along with options for 100 more A321neos and 50 more A220s. Last month, it exercised 30 of its A321neo options. In short, the carrier has already made arrangements for most of its near-term fleet needs.
Delta is serious, but not desperate
Within Boeing's 737 MAX family, the 737 MAX 8 could be a good fit in Delta Air Lines' future fleet. Among the narrow-body jets that Delta has purchased over the past decade, there's a yawning gap between the 130-seat A220-300 and the 180-seat 737-900ER. The 737 MAX 8 -- with room for about 160 to 165 seats in Delta's configuration -- would fill that need nicely.
This likely explains Delta's continuing interest in the 737 MAX. However, Boeing has been trying to shore up pricing for the 737 MAX, whereas Delta Air Lines has a reputation as a ruthless negotiator with respect to aircraft purchases. That will make it harder to reach a deal.
Delta doesn't need to replace its A320s and 737-800s (its current midsize narrow-body jets) immediately. As a result, it can afford to wait for Boeing to drop its asking price before placing any orders. Moreover, during the same webinar, Bastian said that Delta sees further opportunities to buy "gently used" aircraft like the 29 used Boeing 737-900ERs that it agreed to purchase last quarter.
Indeed, the pandemic has created a glut of used jets with at least 15 years of life left, depressing prices. Thus, unless Boeing has a radical change of heart with respect to pricing, investors shouldn't expect Delta to place a 737 MAX order soon. The airline would be better off tapping into the ample supply of cheap used jets if Boeing doesn't offer deep discounts.