Delta Continues Its Fleet Modernization With Airbus Order

by Trefis Team
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Delta Air Lines
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Delta (NYSE:DAL) has ordered 40 new Airbus aircraft with their deliveries starting from 2015 through 2017. [1] The order consisted of 10 twin-aisle A330 aircraft that Delta will deploy on its Atlantic and Pacific international routes, and 30 single-aisle A321 aircraft that it will use on domestic routes.

This order is the latest in a series of steps taken by Delta over the last few years to modernize its relatively old aircraft fleet. At the end of the second quarter, the average age of Delta’s 727 mainline aircraft was over 17 years. [2] In comparison, the average age of United‘s (NYSE:UAL) – Delta’s closest competitor – 702 mainline aircraft was a little over 13 years, at the beginning of this year. [3] Even American Airlines, which is going through bankruptcy, operated an aircraft fleet which had an average age of 13.5 years at the start of 2013. [4] Other carriers which include US Airways (NYSE:LCC), Southwest (NYSE:LUV), Alaska (NYSE:ALK) and JetBlue (NASDAQ:JBLU) operate an even younger aircraft fleet.

The higher average age of Delta’s aircraft is impacting its top line as well as bottom line performance. Older aircraft incur higher operating and maintenance costs to impact bottom line, and operate for fewer days in a year due to higher maintenance and repair needs to impact top line. Thus, this latest Airbus order and new aircraft deliveries against previous orders that Delta will start to take from the current month will help it modernize its aircraft fleet. We figure this replacement of Delta’s older aircraft with new, more efficient ones will enable it to steadily lower its non-fuel operating costs as a percentage of its passenger revenues over the coming years. Thus, boosting its profits.

We currently have a stock price estimate of $20.30 for Delta, approximately in line with its current market price.

See our complete analysis of Delta here

Delta’s Initiatives To Modernize Its Fleet

Delta is restructuring its fleet by reducing the number of 50-seat regional jets and older Boeing 757-200s in its fleet with CRJ-900s, Boeing 737-900ERs and Boeing 717-200s, which it is leasing from Southwest.

At the end of the second quarter, Delta operated 146 Boeing 757-200s with an average age of nearly 20 years. [2] Beginning this month, the carrier will start to receive the B717s it has leased from Southwest with 16 deliveries scheduled over the remainder of this year and 36 each, for 2014 and 2015. In all, Delta will lease 88 B717s from Southwest. In addition, this month onward, Delta will begin to receive new Boeing 737-900ERs against its 2011 order for these planes. Through 2018 Delta will take delivery of 100 new -900ERs. Overall, delivery of these 717-200s and new 737-900ERs will allow Delta to comfortably retire all its older 757-200s over the coming years.

Separately, Delta has planned these deliveries in such a way that its investment in these aircraft is spread equally over the next few years. Accordingly, the carrier anticipates its capital expenditures not to spike in one particular year and range between $2 billion and $2.5 billion over the next five years. [5]

Apart from operating cost gains that will boost profits, these new aircraft will significantly improve in-flight comfort for Delta flyers. The new Airbus A330 twin-aisle aircraft ordered on September 5 will feature 34 full flat-bed seats with direct aisle access, 32 extra-legroom seats and 227 economy seats. In-flight WiFi, several other on-demand entertainment options, extra-spacious overhead bins and modern interiors with LED lighting will also enhance customer experience. Even the 717-200s being leased from Southwest will feature upgraded interiors with 12 first-class seats, 15 economy-comfort seats and 83 economy seats with in-flight WiFi.

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Notes:
  1. Delta announces order for 40 Airbus aircraft, September 4 2013, www.delta.com []
  2. Delta’s 2013 second quarter 10-Q, August 1 2013, www.delta.com [] []
  3. United’s 2012 10-K, February 25 2013, www.unitedcontinentalholdings.com []
  4. Alaska’s investor presentation slide 28, May 15 2013, www.alaskaworld.com []
  5. Delta’s capital return plan, May 8 2013, www.delta.com []
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