One of the largest costs for airlines are the aircraft themselves. With new wide-body jets easily topping the $100 million mark and narrow-body and regional jets still costing in the tens of millions, it's easy to see why choosing the right planes is important. On top of that are other variables such as fuel, maintenance, and route capability. Here I'll look at the variety of fleet strategies and future plans employed by some airlines.
The Boeing (NYSE:BA) 737 is a highly popular plane and has earned the title of the best-selling commercial airliner in history. Among the buyers of the Boeing 737 are Southwest Airlines (NYSE:LUV) and WestJet Airlines (TSX:WJA), and for both airlines, the 737 makes up the vast majority of their fleets.
And Southwest and WestJet have good reason for this. Having only one type of plane reduces maintenance costs and increases pilot flexibility. In addition, these airlines have the ability to exclude wide-body jets from their fleets, since both Southwest and WestJet operate nearly entirely within North America.
But just because the first Boeing 737s have been around since the late 1960s doesn't make the plane old technology. Boeing redesigned the 737 for a next-generation series in the 1990s and is already taking orders for the next iteration of the aircraft -- the 737MAX. Both Southwest and WestJet are still interested in the 737, with Southwest becoming the launch customer for the 737MAX 7 and WestJet ordering 65 units of the 737MAX back in August.
If Southwest and WestJet are pursuing a modern unified fleet strategy, Delta Air Lines (NYSE:DAL) is going after just the opposite. The Atlanta-based carrier has some of every Boeing plane from the 717 to the 777 (except the old tri-jet 727), a selection of narrow- and wide-body Airbus jets, a couple of models of McDonnell Douglas aircraft, and even 16 DC-9s (which average over 35 years in age).
Obviously, Delta doesn't have the same fleet objectives as Southwest and WestJet. As a global airline flying many trans-Atlantic and trans-Pacific routes, Delta needs longer-range aircraft as well. But there is another component to Delta's fleet strategy. The airline is trying to save money on planes by using older aircraft longer and even acquiring and refurbishing used aircraft. With the money saved, Delta has been reducing its net debt from $17 billion in 2009 down to a projected $10 billion by the end of 2013.
Delta's not entirely ignoring a move toward fleet modernization. The remaining old DC-9s are slated to be retired in short order, and Delta placed an order for 100 Boeing 737-900ER aircraft. This move of conservative aircraft spending has so far been working out for Delta shareholders, with shares of the airline at all-time highs and Delta being the only legacy carrier to issue a dividend alongside a stock buyback program.
Dreaming of Dreamliners
Those finding themselves at odds with Delta's strategy may be right at home with United Continental's (NASDAQ:UAL) aircraft acquisition plans. The cost reduction surrounding the Boeing 787 Dreamliner has attracted the Chicago-based airline to become one of the largest operators of the aircraft.
Moving ahead with the 787 program, United Continental increased its total 787 order count to 65 aircraft back in June. Among the orders are a few for the stretched 787 known as the 787-10, which United Continental will be the North American launch customer for.
Shares of United Continental were sharply higher after the carrier announced $2 billion in cost cuts a few weeks ago. At the core of these cuts are fuel savings to be realized from operating the more efficient Dreamliners, as well as adding winglets to some existing aircraft. Considering the market already knew about United Continental's Dreamliner orders, this component of the savings shouldn't have come as much of a surprise. Still, the savings to be realized here are significant and must be weighed against the strategies of other airlines when making investment decisions.
Major costs, major decisions
Aircraft are not cheap but are critical to how airlines operate and what expenses they take on. While Delta and United Continental are already operating large numbers of long-distance international flights, look for orders of larger aircraft from Southwest and WestJet if these carriers decide to expand to operate similar flights.
I am generally a strong proponent of reinvesting in one's own company if it builds a fundamental strength, such as reducing fuel and maintenance costs. Nonetheless, I see Delta Air Lines as having struck a reasonable balance between returns of capital to shareholders and fleet reinvestment. This balance is made even more reasonable by Delta's efforts to reduce its net debt, providing a more stable future outlook.
Fleet management is not a one-size-fits-all strategy. For different airlines, the most responsible solution can mean different things. Therefore, it's important for airline investors to decide on an individual airline basis whether the strategy suits the airline implementing it.