The second-largest U.S. airline Delta Air Lines Inc. (DAL) will introduce 88 The Boeing Company (BA) 717-200 aircraft to its fleet starting next year. Southwest Airlines Co. (LUV) will lease the Boeing 717 aircrafts.
The addition of Boeing 717 is the latest step in Delta’s domestic fleet optimization plan, which is targeting $600–$750 million of cost savings over the next year. The new aircraft will enhance the company’s operational efficiency and improve its profitability. The company will take delivery of 16 Boeing 717 in 2013, 36 Boeing 717 in 2014 and the remaining 36 in 2015.
The new jets will replace the older 50-seat inefficient aircrafts and the move would save $150-200 million in non-fuel costs. In addition, Delta Air Lines is expected to save $200-$250 million from maintenance efficiencies and $250-300 million from employee productivity (which includes voluntary early retirement of senior staff).
Further, Delta Air Lines is expanding seating facilities as well as installing winglets and WiFi connectivity in the fleet. The company is moving ahead with the introduction of full flat-bed seats in BusinessElite class, expansion of the First Class cabin on more fleets and increasing Economy Comfort or Economy Plus seats. Moreover, Delta is going wireless with in-flight entertainment system - Delta Connect. These efforts to upgrade fleet products and services are expected to generate an additional revenue of $1 billion by 2013.
Despite these developments, Delta projects non-fuel costs to increase 3–4% in the second quarter due to capacity reduction and higher salaries and wages. However, these increased costs will be partially offset by productivity improvements including the implementation of the LaGuardia slot swap and the new Atlanta international terminal.
From Southwest’s view, leasing of aircraft will be beneficial. Though the transition of Boeing 717 will increase costs by about $50 million, yet Southwest would benefit $200 million in annual pre-tax income once the transition is fully complete.
We are currently maintaining our long-term Neutral recommendation on Delta Air Lines. For the short term, the stock retains a Zacks #2 (Buy) Rank.
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