Prior to the COVID-19 pandemic, Delta Air Lines (DAL 0.43%) planned to modernize its fleet at an aggressive pace in the early 2020s. However, the pandemic forced management to dial those plans back dramatically to reduce capital expenditures (capex) while matching the fleet size to demand.
By contrast, Delta's recently released 2021 annual report highlighted how the full-service airline is ramping up its fleet upgrade plans again. Let's take a look.
Delta tightens its purse strings
As of the end of 2019, Delta planned to take delivery of 66 new mainline jets annually in 2020, 2021, and 2022. It expected to spend over $10 billion on aircraft purchases over that three-year period. Including non-aircraft spending, that would have put annual capex well above $4 billion.
The onset of the pandemic caused management to rethink those plans. Delta Air Lines ultimately deferred more than half of its planned 2020 aircraft deliveries, adding just 30 new mainline jets to its fleet that year.
Additionally, Delta cut back on its planned aircraft purchases for the following years. As of a year ago, the company expected to take delivery of 33 new mainline aircraft in 2021, followed by 39 deliveries each in 2022 and 2023. This order book restructuring reduced planned capex between 2020 and 2022 by over $5 billion, helping to safeguard Delta's balance sheet.
Ramping up deliveries again
With air travel demand recovering rapidly, Delta Air Lines took all 33 mainline jets on its delivery schedule for 2021 -- and then some. During the year, the airline agreed to buy 29 used Boeing 737-900ERs and lease nine Airbus A350-900s. About half of those aircraft arrived by year-end, although they have to be refurbished before entering service for Delta.
Image source: Delta Air Lines.
Additionally, Delta accelerated the delivery schedule for a handful of wide-bodies and exercised options for 55 additional A321neos during 2021. As a result, it expects to take delivery of 70 aircraft this year, including its first 27 A321neos. Another 100 aircraft will arrive between 2023 and 2024, including 58 A321neos.
The faster delivery schedule will enable Delta to restore capacity to pre-pandemic levels next year. (In 2022, it expects to operate roughly 10% less capacity than in 2019.) The new planes are significantly more efficient than those Delta Air Lines retired in 2020, which will help keep unit costs down. Additionally, Delta retired all of its 737-700s, Boeing 777s, MD-88s, and MD-90s during 2020, which simplified its fleet and will drive long-term cost savings.
Plenty of fleet modernization opportunities remain
Most of Delta's aircraft deliveries over the next three years will be used to replace aircraft that were designated for retirement during the pandemic. However, that will still leave a lot of aircraft nearing retirement age in the active fleet.
Indeed, Delta has 100 757-200s in its fleet, with an average age of 24.4 years as of the end of 2021. It also had 56 A320s with an average age of 26 years. Delta's current fleet plan calls for most (if not all) of those planes to remain in the fleet at the end of 2024. It will have to start retiring these planes soon thereafter, though.
Thus, the second half of the 2020s could be busy on the fleet renewal front for Delta Air Lines. If the company's cash flow and balance sheet recover from the pandemic as quickly as management expects, Delta could move to retire all of its 757s, 767s, and A320s by 2030 (as well as the 717s that it already plans to phase out by the end of 2025).
Aside from the fuel and maintenance benefits of modern jets, Delta's fleet renewal program will simplify its fleet even further. That should significantly reduce overhead costs and boost productivity. This will be a powerful lever to offset inflationary pressures over the next decade, helping Delta Air Lines expand its profit margin and grow its earnings to record levels.
