Delta Air Lines (NYSE:DAL) has the oldest fleet among the three big network carriers -- and a significantly older fleet than most other major U.S. airlines. As a result, it tends to lag the industry in terms of fuel efficiency.
Rather than spending tens of billions of dollars to revamp its whole fleet, Delta is pursuing a more modest fleet renewal plan, while also retrofitting many of its existing planes with extra seats to improve fuel efficiency. These efforts should drive significant fuel efficiency gains in the next two years. That will be particularly important if fuel prices start rising again in the coming years.
Slow fuel efficiency gains
Recently, Delta's main lever for boosting fuel efficiency has been its project to retire most of its 50-seat jet fleet. It has replaced those planes with 76-seat regional jets and 110-seat mainline aircraft, which are more fuel efficient.
In addition, Delta received the first of 100 Boeing 737-900ERs in 2013, and it has been taking delivery of 19 per year lately. These planes are replacing older fuel guzzlers.
Still, Delta is only making slow gains in fuel efficiency right now. In Q2, Delta's capacity rose 3.4% year over year, while fuel consumption rose 2.8%. That put its fuel efficiency gain at a very modest 0.6%.
Retrofits finally getting off the ground
In early 2014, Delta revealed a wide-ranging plan to retrofit 225 domestic aircraft to add passenger amenities and reduce unit costs. Most of the planes will get in-seat power, new seat-back entertainment systems, larger luggage bins, and in some cases, wider seats.
Meanwhile, by installing slim-line seats and reducing the size of galleys and lavatories, Delta will be able to add seats to more than 180 of the planes being retrofitted. On average, these moves will increase seating capacity by 7%. This will drive big fuel-efficiency improvements, because putting more passengers on each plane won't impact fuel consumption very much.
Originally, these modifications were supposed to be completed by 2016. However, it's taken longer than expected to get this program off the ground. In late July, Delta announced that it finally had completed the first Airbus A319 retrofit. The A319 and A320 modifications are now expected to wrap up in mid-2017.
Today, Delta is only about 10% of the way through its retrofit program. However, with the busy summer travel season now over, the pace of retrofits is likely to accelerate. And since Delta is adding seats to nearly one quarter of the planes in its fleet, this will provide a meaningful bump to its overall fuel efficiency.
Aircraft replacements speeding up, too
As it happens, Delta is also at the beginning of a period of faster aircraft replacements. Between 2016-2017, it is scheduled to receive 80 new airplanes: enough to replace about 10% of its mainline fleet.
Most of these new planes are large narrowbodies (the 737-900ER and A321) that can replace the biggest planes in Delta's domestic fleet (the 757 and 767-300). However, Delta is also receiving A330 and A350 widebodies from Airbus that will allow it to retire its remaining fuel-guzzling 747 jumbo jets.
The combined impact of Delta's aircraft retrofits and aircraft replacements should drive faster fuel efficiency improvements in the next few years. By 2018, fuel efficiency could be about 5% better than today's level.
Even with the cost of jet fuel having dropped precipitously since mid-2014, it is still one of Delta's biggest expenses. Reducing consumption is thus a straightforward way to save money. Most importantly, if oil prices rebound toward the end of the decade, Delta's fuel efficiency gains will offset some of the increased expense.
Adam Levine-Weinberg owns shares of The Boeing Company and is long January 2017 $40 calls on Delta Air Lines. 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.