On Wednesday, Delta Air Lines (NYSE:DAL) announced a new fleet upgrade initiative. It will modify 225 aircraft -- 56 Boeing (NYSE:BA) 757s, 43 Boeing 737-800s, 57 Airbus A319s, and 69 Airbus A320s -- adding larger overhead bins, in-seat power, more space-efficient galleys and lavatories, in-seat satellite TV, and new slim-line seats. The upgrades are expected to improve passenger comfort, but just as importantly, they will boost Delta's cost-efficiency.
By doubling down on slim-line seats and removing unnecessary galley space, Delta will be able to add seats to its Boeing 757s, Airbus A319s, and Airbus A320s. This will widen Delta's cost advantage over top rivals United Continental and American Airlines.
Many of the upgrades Delta announced last week, such as in-seat power and personal TVs, are designed to improve the on-board experience for passengers. This may foster greater customer loyalty over time.
However from an investing perspective, Delta's ability to add rows during these retrofits (without reducing legroom) is the critical factor that will make these investments extremely lucrative. The two main factors enabling these additional rows are the move to slim-line seats and the new space-saving galley and lavatory designs.
The rise of slim-line seats
Just about every major carrier, including Delta, Southwest Airlines (NYSE:LUV), and Alaska Air (NYSE:ALK), has started to install slim-line seats on its planes. These modern seats are highly desirable because they weigh less than traditional seats, reducing fuel burn, and they are thinner, allowing airlines to add more seats without reducing legroom. Some fliers find the new seats uncomfortable, but most can't tell the difference from traditional seats.
Delta already has slim-line seats on about a third of its planes, and the new Boeing 737-900ERs and used Boeing 717s entering its fleet are also outfitted with slim-line seats. Following the completion of the recently announced retrofits, the vast majority of Delta's planes will have slim-line seats.
Smaller galleys and bathrooms
Delta is also saving space by optimizing galley and lavatory configurations. For example, Delta's new 737-900ERs utilize a space-saving lavatory designed by B/E Aerospace (NASDAQ:BEAV). The upgrades to Delta's existing fleet will provide similar space-saving benefits.
Delta is also reducing galley space. The airline's 757s and A320s are around 19 years old, on average, while the A319s and 737-800s average about 12 to 13 years of age. In other words, when most of these planes were delivered, airlines were still offering free meals in coach! Today, food service on Delta's domestic flights is limited to cookies and pretzels, and a few buy-on-board sandwiches. As a result, Delta can make do with much less galley space.
Get ready for more seats!
The end result is that while the 737-800s will keep the same 160-seat configuration, all of the other planes being modified will get extra rows of seats. The 757s will be configured with 199 seats (except for a few 757s designated for trans-Atlantic flights, which will have 197 seats). That's a significant bump from the 168- to 184-seat configurations that Delta currently uses for its 757s.
Delta's A320s will be outfitted with 160 seats, up from 150 seats in their current configuration. Lastly, the A319s will see a smaller capacity boost, with 132 seats in the new configuration, up from 126 seats today.
Adding seats to these older aircraft makes them more cost-competitive with new aircraft. That's particularly important today, because American Airlines is aggressively renewing its fleet with brand-new planes from Airbus and Boeing.
United Airlines has announced a similar retrofit of its A319s and A320s to add seating capacity. However, United's A319s will have 128 seats and its A320s will have 150 seats in the new configurations, so Delta will still have a density advantage (especially on the A320). That will help Delta maintain its cost advantage over United.
Delta's far-reaching aircraft upgrade program will add several modern passenger conveniences to some of its older aircraft. However, investors should be particularly excited about Delta's plans to add rows to most of these planes through the use of slim-line seats and space-saving lavatories and galleys.
By fitting more seats on each plane, Delta can reduce its unit costs without adding billions of dollars to its already hefty capital-expenditures tab. Savvy moves like this have propelled Delta to the top of the airline industry in the last few years, and so far, there's no sign that Delta will give up this leadership position anytime soon.