Delta: Selecting A Smaller Jet Sends A Message

| About: Delta Air (DAL)

Summary

Selecting Bombardier is groundbreaking.

Deselecting Embraer is eye opening.

Ignoring Boeing is also eye opening.

Today, we heard the long-awaited news that Delta Air Lines (NYSE: DAL) selected Bombardier's (OTCQX:BDRAF) (OTCQX:BDRBF) CS100 for part of their fleet renewal. The focus of the order is something that warrants attention.

The order is for 75 firm orders plus another 50 options. The 125 breakdown was expected. But the fact that all orders are for the CS100 bears review.

The CS100 seats 110, making it an alternative to the Boeing (NYSE: BA) 717. Delta has 80 in service. The 75 CS100s therefore look like a reasonable replacement. Moreover, the CS100s are set to arrive in 2018, when many of the 717s might be ready for expensive heavy checks and could be conveniently sent back to Boeing from where they are leased.

Delta, therefore, appears to have focused on one area of concern. Readers are aware that the Delta fleet plan renewal was focused on the 149-seat MD-88. The CS100 is no way a replacement for this aircraft. So what is Delta up to here?

Let's discuss the 50 options. It is common in the industry to play the "PDP Game." PDP stands for pre-delivery payment. Airlines like to order the smallest model and pay the lowest deposits. When it's time to cut metal and start building the airplane, the airline switches up. Southwest (NYSE: LUV) has done this with the 737-700 to -800.

So, Delta may in fact be looking at the CS300 for the options. By locking in favorable pricing, the airline is in a good position to switch up for the CS300 when the time comes. This is exactly what Swiss (ETR:LHA) did. Delta has early generation A319s and A320s dating back to the Northwest Airlines days that are going to be over 20 years old soon, as well as those aging MD-88s. And there are 57 A319s, 69 A320s, and 116 MD-88s. So 50 options, if switched to CS300s, could mean a lot more options.

By focusing on CS100, less attention is drawn to this. Which means Delta does not draw more ire and opprobrium from Airbus (AEDSY) and Boeing. Not that anyone outside those firms will ever hear it. But we have reliably heard there were angry words over the Delta selection.

Delta wants a market with three potential vendors. In selecting CS100, it has given Bombardier a huge boost and provided the program critical momentum. It now has three potential vendors. It has almost certainly locked up delivery slots, hampering competitors.

Delta's management is the best among US airlines at present. They have been counter to the industry in almost everything. The airline's financial results demonstrate that being counter has been rewarding. Bombardier could not have asked for a better customer to launch the aircraft in the US market.

Disclosure: I/we 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.