Delta Air Lines: Following The Ongoing Modernization Trend In The Airline Industry

Jan. 3.14 | About: Delta Air (DAL)

Aiming to modernize its fleets and reduce fuel expenses, Delta Air Lines (NYSE:DAL) is replacing its older fleet with newer, more-efficient, and higher seating-capacity aircraft. In early 2014, it decided to replace the last of its old DC-9 aircraft. Since 2008, the company has retired more than 350 aircraft, including 50-seat CRJ-200s, Saab 340s, and DC-9s, and added more fuel-efficient, next-generation aircraft such as the Boeing (NYSE:BA) 777-200LR, along with the regional jets which have a seating capacity of 65 and 76 seats. It has also added Boeing 737 and Boeing 717, which have higher seating capacity compared to the previous aircraft and will enhance passenger revenue per mile with lower fuel expenses.

In the fourth quarter, Delta began operating its fleet of Boeing 717-200 aircraft. It is currently operating nine of these aircraft. The company has ordered 88 in total, subleasing them from AirTran Airways, a subsidiary of Southwest Airlines (NYSE:LUV). Delta will receive the remaining aircraft in 2014 and 2015. In replacing its old 50-seat aircraft with 110-seat aircraft, Delta will increase its revenue. This will also allow the company to reduce the cost per-mile-per-passenger, which in turn will boost its bottom-line.

Further, it has ordered 100 Boeing 737-900ER, of which it has received delivery of 12 aircraft, with the 19 more per year expected through 2017 followed by 12 in 2018. The 737-900ER has a blended winglet that enhances engine life, reduces maintenance costs, and lowers fuel consumption by 6%, slashing costs for airline operators. Also, the 737 series aircraft are powered with General Electric's (NYSE:GE) CFM56-7B engine, which is fuel efficient. This along with blended winglets will help Delta lower its maintenance cost and improve fuel consumption per seat by 15% to 20% over older Boeing 757s and 767s, and Airbus A320 aircraft. These superior features will lower the per-seat cost compared to its older aircraft.

Delta has also ordered 40 Airbus aircraft worth $5.6 billion. The order includes 30 aircraft of the A321 series, with four aircraft being delivered in 2015 and the remaining to arrive in 2016 and 2017. Further, A321 aircraft are powered with CFM56-5B engines and are also featured with wingtip sharklets, improving fuel-efficiency by 4%. Adding these aircraft to its fleet will help the company reduce fuel cost.

Fuel cost, including fuel-related taxes, for the first-nine months was $7,175 million, around 28% of Delta's total operating expense. The company reported a year-over-year fuel expense decline of around 8% for the first nine months. In modernizing its fleets with new more fuel-efficient aircraft, Delta will reduce future fuel expenses. This in turn will enhance its bottom-line and help it to compete with other airlines in service and price.

Competitor also focusing on fuel-efficient aircraft

United Continental Holdings (NYSE:UAL) also expects that by replacing its old, low-efficient fleets with more fuel-efficient aircraft such as Boeing's 787 Dreamliner and modifying existing aircraft with blended winglets, it will realize higher fuel efficiency and reduce engine-maintenance cost. United estimated that in modernizing its fleet it will save around $2 billion by 2017, generating nearly 50% of its savings from a 7% reduction in fuel expenses, which are currently around $13 billion. It is also expected to reduce annual maintenance costs by $100 million. This will help United to enhance pretax earnings by around 2% to 4% in the next four years.

Meanwhile, American Airlines Group (NASDAQ:AAL), plans to replace its old 50-seat regional aircraft, which are scheduled for retirement, with 76-seat Bombardier (OTC:BOMBF) CRJ900 aircraft. It recently ordered 90 aircraft worth around $4 billion, comprising 60 Embraer's (NYSE:ERJ) E175 aircraft and 30 Bombardier CRJ900 NextGen aircraft. The company will receive the first Bombardier aircraft by the second quarter of 2014, while Embraer will deliver its aircraft in 2015. Bombardier's CRJ aircraft enhancement program has made CRJ aircraft more fuel-efficient and is expected to reduce fuel consumption by 5.5% compared to its previous versions. The aircraft will also be nearly 5% more efficient than competitor same-class aircraft. American Airlines has an option to buy an additional 40 CJR900s and 90 E175s, and if exercised would be worth $9 billion. The company, by replacing its old, less-efficient aircraft with the new aircraft, will lower repair and maintenance costs and improve economic efficiencies.


Delta Air Lines' modernization strategies will enable the company to reduce its maintenance cost and fuel expenses. This will allow the company to compete with other airlines in price and service. With its ongoing modernization program, the company is expected to report year-over-year revenue growth of 4% to 6%, with operating growth of 7% to 9% in the fourth quarter. It is also estimated that Delta will generate pretax profit of around $2.6 billion in 2013; through the third quarter, it has generated pretax profit of $2.05 billion. By operating more fuel-efficient aircraft it will continue to enhance its bottom-line, too. This in-turn will boost investor confidence in the stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.