Over the past few years, Delta Air Lines has gone against the grain by keeping its airplanes longer and buying up used aircraft to cut down on pricey aircraft purchases.
However, the company's desire to limit capital expenditures doesn't mean that it completely avoids buying new planes. In fact, Delta is scheduled to ramp up its purchases of new planes in the next few years. This stepped-up fleet renewal could have a big positive impact on the company's profitability.
Delta's recent new aircraft arrivalsAt present, Delta is nearing the halfway point of a six-year, 100-plane order for Boeing 737-900ER aircraft. This plane is mainly replacing older 757s in Delta's fleet. (In the 2013-2014 period, Delta added 31 737-900ERs while retiring 27 757s.) The 737-900ER offers a double-digit unit cost improvement relative to the 757 due to its fuel efficiency and low maintenance costs.
Delta has historically bought lots of used planes, like this MD-90. Photo: The Motley Fool
This order was the only source of brand new mainline planes for Delta's fleet in the past two years, which Delta has supplemented with a variety of used planes.
However, in late May of this year, Delta received the first of 10 A330-300 widebody aircraft it ordered in 2013. It will take delivery of four A330s this year, with the remainder arriving in 2016 and 2017. For now, these planes are mainly replacing some of Delta's retiring 747 jumbo-jets.
The A330s will offer a double-digit fuel efficiency improvement over the 747. In addition, they should have significantly lower maintenance costs because they have two engines, compared to four for the 747. Finally, the A330s have 22% fewer seats than the 747s, which will allow Delta to cut capacity on oversupplied routes, particularly to and from Japan.
Even more new planes coming soonIn 2016, the pace of Delta Air Lines' fleet renewal will increase. Delta will receive another 19 737-900ERs and 4 A330-300s, the same as in 2015. In addition, Delta will get its first 15 A321s. Like the 737-900ER, the 192-seat A321 will replace older 757s -- and perhaps also some older domestic 767s, which Delta currently uses on a handful of high-density routes from Atlanta.
Delta will get another 19 737-900ERs and 15 A321s in 2017, along with its last two A330-300s. It will also receive the first six of 25 A350-900s it ordered from Airbus. The A350 is a brand new model that is fairly similar in capacity to the A330-300, but with a much longer range.
The A350 will replace Delta's last few 747 jumbo-jets on long-haul routes. Photo: Airbus
The arrival of this first batch of A350s in 2017 will allow Delta to retire the last few 747s remaining in its fleet. The A350s are expected to have a 20% lower cost per seat than Delta's 747s. And like the A330s, their smaller seating capacity compared to the 747 should bolster Delta's unit revenue.
Profiting from more efficient planesIn total, Delta will purchase 80 new planes between 2016 and 2017, enough to replace 10% of its fleet. This will allow it to remove a number of planes that are ripe for retirement. Delta's domestic 767s were 23.7 years old on average at the beginning of 2015; its 747s were not far behind at 22.4 years of age. The 757s were "only" 19.8 years old on average, but almost 50 of them were built in the 1980s and early 1990s and are ready to be replaced.
Substituting the 737-900ER and A321 for the old 757s and domestic 767s will allow Delta to significantly reduce its fuel and maintenance costs. It should also help the company improve on its industry-leading reliability.
Meanwhile, swapping out the fuel-guzzling Boeing 747 for A330s and A350s will have an outsized impact on profitability because the new Airbus widebodies will reduce unit costs while simultaneously boosting unit revenue due to their smaller size.
Big batches of new aircraft are a rare sight at Delta. However, the company will receive enough new planes over the next two years to move the needle in terms of profitability. Add to this Delta's ongoing initiatives to add more seats to certain aircraft, fine-tune its pricing with new "branded fares", and grow its ancillary revenue, and the company is well-positioned for solid profit growth in the next few years.
The article How Aircraft Replacements Will Lift Delta Air Lines, Inc.'s Earnings originally appeared on Fool.com.
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.
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