Delta Plans Fleet Upgrade Through Southwest’s Jets

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Delta Air Lines (NYSE:DAL) is aiming to replace its unprofitable regional jets with Boeing 717s to cut down fuel costs and help attain productivity gains. The carrier has entered into a tentative agreement with Southwest Airlines (NYSE:LUV) to procure these jets. This agreement is subject to approvals from the Delta Air Line Pilots Association (ALPA) to whom the carrier has promised improved compensation plans and better career growth opportunities. While Delta will benefit from this deal with productivity gains and additional aircraft flexibility, Southwest will own an all Boeing 737 fleet, thereby easing aircraft maintenance expenditure.

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As Delta receives a thumbs-up from the ALPA, it would start taking delivery of 88 B717s from second half of 2013. The carrier will still remain capacity neutral by replacing its existing 50-seat regional jets and DC-9 aircraft, but it will save on the fuel bill. By eliminating these aircraft due for retirement it will also save on maintenance expenditure. In addition, the carrier also has the option to add 70 more 76-seat jets to its existing fleet of 255 two-class regional jets. The carrier is enticing the pilots through increments of around 12.5% by the beginning of next year and 3% annual raise for the next two years. Amid turbulence in fuel prices, this deal is expected to provide cost savings for the carrier despite considerable salary hikes.

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Southwest, on the other hand, has maintained its low cost structure by operating a single aircraft type. Through the lease agreement with Delta, Southwest can get rid of B717 jets that came along with the AirTran acquisition. This will ensure simplified scheduling, maintenance, flight operations and training activities, and hence the company maintain its competitive low cost advantage.

Overall, it seems a win-win situation for all parties involved in the deal with Delta achieving operational efficiencies, the pilots getting better job opportunities, and Southwest sustaining its core competencies.