For Delta Air Lines (NYSE:DAL), a recent theme has been "out with the old, in with the not-quite-so-old." Delta has been willing to buy new airplanes when it needs them and the price is right; indeed, Boeing (NYSE:BA) recently delivered the first of 100 737-900ERs to Delta. However, Delta has been equally enthusiastic about finding great deals on used planes that have plenty of life left.
Late last month, Delta's newest "reclamation project" -- the Boeing 717 -- finally took flight for the company. By the end of 2015, Southwest Airlines (NYSE:LUV) will have turned over its entire fleet of 88 Boeing 717s to Delta. The 717 is likely to become a workhorse of the Delta fleet for the next 10-15 years, particularly for shorter flights.
A great airplane that didn't fit in
While the 717 carries the Boeing name, it was originally designed by McDonnell Douglas and marketed as the MD-95. (McDonnell Douglas merged with Boeing before the plane went into service, leading to the name change.) The 717 was meant as a replacement option for the popular DC-9, a small narrowbody plane that typically had 100-130 seats, depending on the variant. The 717 is a stunning 24% more fuel efficient than the DC-9.
However, over time, the evolution of the airline business has led airline executives to prefer larger aircraft. Furthermore, Boeing and Airbus both offer aircraft families that cover the whole range of narrowbody sizes (roughly 100 seats to 200 seats). By flying planes from the same aircraft family, an airline can save on crew training and maintenance costs while still enjoying the benefits of using different-sized aircraft for different markets.
These factors conspired to undermine sales of the Boeing 717: only 156 were ever delivered. (For comparison, that would represent just four months of Boeing 737 production!) However, the few customers that did order the 717, including Southwest subsidiary AirTran and Hawaiian Holdings (NASDAQ: HA) subsidiary Hawaiian Airlines, have praised its performance. AirTran, which was the 717's launch customer, found that the fuel savings and reliability exceeded its initial expectations.
A natural fit
Delta and the Boeing 717 are a natural fit for each other. First, Delta still has a small fleet of 16 DC-9s that are roughly 35 years old. The rapid arrival of 717s will allow Delta to retire all of these dated aircraft by early January, taking advantage of the 717's 24% better fuel efficiency. While Delta's 717s may not be "new", on average they are more than 20 years younger than the DC-9s they are replacing.
Second, Delta has been anxious to reduce its reliance on 50-seat regional jets, which are very costly to operate in terms of fuel and maintenance. Its wholly owned regional subsidiary, Endeavor Air, had 140 50-seat jets earlier this year, but plans to retire all of them by the end of 2014. Some of these will be replaced by larger 76-seat regional jets, but much of the flying will be picked up by the 717s that are arriving from Southwest.
Another wave of small regional jets operated by Delta's partners are likely to be retired in 2014 and 2015 as well. The Boeing 717 is much cheaper to operate on a per-seat basis, and Delta is betting that travelers will appreciate amenities such as large overhead bins, first-class cabins, and higher ceilings. This should more than make up for the reduction in flight options that results from using larger planes.
Ready for takeoff?
Delta wisely jumped on the opportunity to acquire AirTran's fleet of Boeing 717s. While Southwest did not want to integrate the 717s into its own fleet of 737s, Delta is well equipped to handle the complexity of operating many different aircraft types. Delta is leasing the 717s at a very good price, and they will be much cheaper to operate than the aircraft they are replacing.
This fleet could be a competitive advantage for Delta for years to come. Any other carrier that wanted to replicate Delta's strategy of replacing 50-seat jets with small narrowbodies would have to invest billions of dollars to acquire planes in that size range from Embraer or Bombardier. The 717s should therefore increase Delta's margin advantage vis-a-vis rivals, leading to market-beating gains for investors.