Delta’s capacity: Current size and future purchase commitments

Market Realist

Investing in Delta Airlines: A must-know company overview (Part 11 of 14)

(Continued from Part 10)

Delta’s fleet

A comparison of the fleet sizes of Delta Airlines with its competitors reveals that American Airlines Group (AAL) has overtaken Delta (DAL) and United (UAL), as its total fleet reaches 1,511 after its merger compared to Delta’s 1,275 aircraft and United’s 1,265 aircraft in 2013. Southwest (LUV) operates 680 Boeing aircraft and Jet Blue (JBLU) operates 194 aircraft. Out of the 743 mainline carriers that Delta operates, 592 aircraft are owned and 151 are leased. As of December 2013, Delta has purchase commitments of 174 aircraft and options to purchase 93 additional aircraft. In 2013, Delta incurred capex of $2.6 billion and expects capex of $2.3 billion in 2014, as it plans to buy an additional 47 aircraft.

 

1.1. fleet restructuring: A cost-benefit analysis

The need for fleet restructuring arises with the dual objective of improving revenue and reducing the cost of operating the aircraft. Delta can benefit from the following advantages of restructuring.

  • Reduced repair and maintenance cost
  • Reduced fuel consumption
  • Use of advanced technology aircraft
  • Staying ahead of competition
  • Improved reliability and customer satisfaction
  • Compliance with environmental regulations for noise and emissions

However, the cost of restructuring is an important consideration, and the decision of the type and model of aircraft or the aircraft size should match with the company’s operations after a careful cost-benefit analysis in order to avoid undesired results.

A trade-off between fixed costs and variable costs

Restructuring strategies vary among airlines. While most airlines, such as United Continental, replace older aircraft with brand-new aircraft, Delta prefers to buy a combination of new and used or previously owned aircraft. Two types of costs are involved in selecting each of these strategies—fixed costs and variable costs.

Fixed costs

  • United Continental’s strategy to buy new aircraft comes with higher fixed costs, as aircraft purchase prices are far higher than the prices Delta would buy a used aircraft at. So Delta enjoys capacity expansion with a lower capital base, increasing the potential for higher returns on invested capital.
  • Fixed costs will remain constant. Unit costs can, however, reduce by increasing the frequency of flights and spreading the cost across the increased number of seats flown. The cost of idle capacity when demand decreases is higher for United Continental than for Delta.

Variable or operating costs

  • New aircraft generally run on lower maintenance costs compared to used aircraft. So Delta’s variable costs would be higher than United’s.
  • Variable costs vary according to the usage of the aircraft. Even though Delta may incur higher variable costs during high usage, when demand lowers, Delta will be in a better position to lower capacity at a lower cost than its peers.

Delta, with an aging fleet at an average age of 17 years, compared to 13.5 years for American Airlines group and United Continental, recorded restructuring charges of $402 million in 2013 (growth of 37%) as it considered the following restructuring initiatives to improve operational efficiency and reduce costs.

  • Delta has signed agreements with SkyWest Airlines and Bombardier Aerospace to replace more than 200 50-seat CRJ aircraft (which are the least fuel-efficient and rank lowest in customer satisfaction) and older B-757-200 aircraft with new, fuel-efficient CRJ-900, B-717-200, and B-737-900ER aircraft.
  • In 2012, Delta shut down its operations of Comair, a wholly owned regional airline subsidiary, in order to reduce its number of regional jets.

Continue to Part 12

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