Like many of the major US airlines, Delta Air Lines (NYSE: DAL) utilizes a mixed fleet of wide-body and narrow-body aircraft, allowing the airline to match the aircraft capacity to the route. The wide-body fleet has capacities of over 200 passengers and is generally used on international flights, while almost all of the narrow-body fleet has passenger capacities of less than 200.
Delta is in the process of a fleet update with a plan different than its competitors. Delta's competitors have placed orders for new narrow-body aircraft that are a mix of the current production models and the next generation of more fuel efficient planes from Airbus (EADSY 1.71%) and Boeing (BA +0.77%). Delta has also placed orders with Airbus and Boeing, but only for current generation aircraft, not the next generation aircraft with new engines. What is Delta's narrow-body fleet replacement strategy?
On June 2, 2014, Delta Air Lines and Airbus announced an order for 15 additional Airbus A321s to be delivered to Delta beginning in 2018, bringing the total Delta order to 45 airframes. The A321 will join the Airbus fleet currently operated by Delta with deliveries paced at 15 aircraft per year from 2016 to 2018.
Boeing hasn't been left out of orders for new narrow-body aircraft. Delta is currently taking delivery of Boeing 737-900ER aircraft from a 100-airframe order announced in 2011. Deliveries of these 737-900ERs started in 2013 and will continue through 2018.
Why is Delta acquiring current generation aircraft when a newer generation that promises fuel savings is only a few years away? Price, availability, and to let the design mature before taking delivery. Boeing and Airbus are slowly changing production from current generation to next generation aircraft, which leaves production slots for the current generation aircraft available, and it is widely speculated that Delta was able to acquire these aircraft at a substantial savings.
Delta's CEO Richard Anderson has said that the airline needed the planes sooner than the next generation of aircraft would become available. He also wants to give the design time to mature and show that it is reliable. Delta has watched the teething pains of the Boeing 787, and would rather let another airline go through the shake-out process a new design often goes through.
New aircraft are not the only additions to the fleet. Delta has operated a fleet of MD-88s and MD-90s for many years. Recently, Delta purchased 49 used MD-90 aircraft from several airlines around the globe and overhauled them to match the current fleet of MD-90s.A leased fleet of 88 Boeing 717s is joining Delta over the next few years.This family of aircraft are all descendants of the DC-9, an aircraft Delta introduced into commercial service in 1965.
This mixture of new and used aircraft is part of Delta's plan to keep capital expenditures in very tight rein. When discussing the Boeing 737-900ER purchase, Delta's Anderson was quoted in a 2011 press release as saying, "A key component of Delta's strategy is making prudent investments for the future while maintaining our financial and capacity discipline."
The risk with this plan is a very large spike in oil prices. Fuel represents the largest cost component for an airline. If oil prices spike, then being saddled with older, less fuel-efficient aircraft will be a detriment to Delta's bottom line. To help mitigate the risk of fuel costs rising, Delta owns and operates its own refinery that is capable of producing up to 80% of its jet fuel needs.
Looking at Delta's narrow-body fleet acquisitions, a plan starts to emerge. When new aircraft can be purchased at a good price and on a delivery schedule that meets the airline's needs, then it will purchase new craft. Even though the aircraft being purchased by Delta are not the latest, most fuel-efficient versions, they still represent a fuel savings of up to 15% per seat over the aircraft they are replacing.
The second part of this plan is to acquire used aircraft when models are available that fit into the fleet and offer a large savings on acquisition costs. The higher fuel consumption costs of these older aircraft are partially offset by the lower purchase costs. Owning a refinery provides Delta an additional protection against rising fuel costs.
Delta has charted a unique course with hits fleet acquisition plan. The current stock price indicates that investors believe that this plan will work. Though the final results will not be seen for a few more years, when we will be able to look back and see if the gamble paid off over the long term, the plan looks like a well thought out strategy to contain capital expenditures and balance the fuel risk.
