On Jan. 6, 2014, Flight 2014 will depart Minneapolis/St. Paul for Atlanta. But what seems like an ordinary flight will mark the end of service for a staple of airline fleets over the past few decades. After the conclusion of the flight, Delta Air Lines (NYSE:DAL) will retire its last DC-9, thereby marking the end of service for this type of aircraft with any major U.S. airline. I'll take a look at where Delta's going from here, and how the DC-9 strategy mirrors a current Delta fleet management strategy.
From Northwest to Delta
Although Delta was the DC-9 launch customer in 1965, it eliminated the aircraft from its fleet by 1993. Delta's current DC-9 aircraft came to it courtesy of the airline's 2008 merger with Northwest Airlines. In the 1990s, Northwest began acquiring DC-9s from other airlines, with the number of the aircraft in its fleet peaking at nearly 200 jets. Although the number of DC-9s began to be reduced as Northwest retired the oldest ones, the Northwest fleet still contained about 70 DC-9s around the time of the Delta merger.
As Delta and Northwest integrated operations, the DC-9s became part of the Delta fleet, and were repainted in Delta colors. As Delta has continued to reduce the number of DC-9s, the airline has selected some interesting solutions for fleet modernization.
When Northwest was acquiring DC-9s from other airlines in the 1990s, they weren't the most fuel-efficient aircraft; they were also not the cheapest to operate. Northwest developed its taste for the DC-9 because acquiring the aircraft was far cheaper than purchasing new planes.
Delta looks to be picking up where Northwest left off with its current fleet plans. The airline acquired 49 teenaged MD-90 aircraft from China Southern Airlines last year. Rather than purchasing new aircraft, which could easily top $50 million each, the MD-90s were likely acquired for $5 million to $8 million each. Even with several millions more in refurbishments per aircraft, this still represents a substantial savings over purchasing new planes.
The airline also saw an opportunity to add some Boeing 717 aircraft to its fleet, and began leasing 88 of the aircraft from Southwest Airlines (NYSE:LUV). Southwest came into ownership of the planes after it acquired AirTran Airways in a 2011 merger; however, Southwest decided to maintain its pure Boeing 737 fleet by leasing the 717s to Delta. As an extra sweetener to Delta, Southwest paid $100 million to convert the planes to Delta's standards. Although the latest types of aircraft would still edge out the 717 in lower operational costs, the 717s are still an improvement in efficiency for Delta, because they will replace less economical small jets in Delta's fleet.
Even when it comes to new aircraft, Delta is still choosing the less expensive options. Over the next few years, Delta will be taking delivery of 100 Boeing 737-900ER aircraft rather than opting for Boeing's latest 737 iteration, the 737 MAX.
Delta has been working on a new aircraft fleet strategy of keeping costs down by selectively acquiring older, less-expensive aircraft. While Delta has pursued the path of less aircraft expense, its legacy rivals have gone in the other direction.
United Continental (NYSE:UAL) has launched a major push for the Boeing 787 Dreamliner, as it became the North American launch customer and ordered 65 Dreamliners of varying types. American Airlines Group (NASDAQ:AAL) has built its new image around having a modern fleet, and went about it by placing the largest order in aircraft history in 2011. Totaling 460 planes split between Boeing and Airbus, the order was still allowed to continue despite the airline's bankruptcy filing in November of that year. Since then, the newly merged airline has started taking delivery of the first of the planes, and has placed another order for 90 regional jets split between Embraer SA, and Bombardier.
United Continental and American Airlines Group are trying to cut operational costs and build an image around flying the newest planes. But new planes aren't cheap. The large costs of the planes will make following Delta in repurchasing shares, paying a dividend, and reducing debt, more difficult. In a way, Northwest's approach to the DC-9s is being seen again at Delta, and it is literally paying dividends for shareholders.
End of an era
The DC-9 has long been a workhorse for airline fleets, and the Delta DC-9s averaged around 35 years of age at retirement. Although Delta is replacing them with more fuel-efficient aircraft, the Atlanta-based carrier is still keeping costs in check by its fleet selection. This balanced approach should help Delta to lower operational expenses while still reducing debt and paying a rare airline dividend.
The last DC-9 flight will be numbered 2014 to commemorate the aircraft's last year in service, and the preceding flight will have the number 1965 noting the DC-9's first year in service. Although the DC-9 is unlikely to ever fly again for a major U.S. airline, the strategy that Northwest Airlines used in acquiring them lives on in Delta's fleet-management strategy.
How much does Delta's dividend matter?
Alexander MacLennan owns shares of American Airlines Group and Delta Air Lines. Alexander MacLennan has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2015 $17 calls on American Airlines Group. This article is not an endorsement to buy or sell any security and does not constitute professional investment advice. Always do your own due diligence before buying or selling any security. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.