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Delta Picks the Airbus A321neo Over Boeing's 737 MAX

Adam Levine-Weinberg, The Motley Fool

In conjunction with its investor day last Thursday, Delta Air Lines (NYSE: DAL) announced its first order for next-generation single-aisle planes. The airline giant chose to order 100 Airbus (NASDAQOTH: EADSY) A321neos with an additional 100 options, spurning the competing Boeing (NYSE: BA) 737 MAX 10.

This outcome confirmed reports that had leaked out the day before but went against what many outsiders (including myself) had been expecting. The desperation of engine manufacturer Pratt & Whitney -- a unit of United Technologies (NYSE: UTX) -- appears to have been a critical factor behind Delta's decision.

A Delta Air Lines A321 on the tarmac

Delta's new A321neos will complement its growing fleet of A321s. Image source: Delta Air Lines.

Airbus wins the contest

Earlier this year, many pundits assumed that the competition between Airbus and Boeing for the next Delta narrowbody order wouldn't be all that competitive. Delta Air Lines and Boeing have had an acrimonious relationship in recent years, culminating in a trade complaint from Boeing after Delta ordered 75 CSeries jets from Bombardier last year.

Nevertheless, Delta Air Lines CEO Ed Bastian insisted repeatedly that this spat wouldn't affect the carrier's decision. In fact, United Continental executive Scott Kirby stated earlier this year that Airbus was unable to provide competitive pricing on the A321neo because of a "most-favored customer" clause it had offered American Airlines. This situation appeared to give Boeing a decisive advantage.

In any case, Airbus ended up winning the order. Delta will receive its first A321neo in early 2020, and all of the firm orders will be delivered by the end of 2023. This situation will allow Delta to continue replacing its oldest planes. The A321neo will provide a stunning 40% fuel efficiency improvement compared with Delta's MD-88s, according to the airline.

Thanks to Airbus' innovative cabin design, Delta Air Lines will be able to fit 197 seats on its A321neos -- five additional seats compared with its fleet of current-generation A321s. The Boeing 737 MAX 10 may not have been able to accommodate that many seats in Delta's preferred configuration. However, Delta's decision may have been driven far more by a sweetheart engine deal than by anything inherent in the A321neo design.

This deal was more about engines than airplanes

Delta Air Lines' A321neos will be powered by next-generation Pratt & Whitney geared turbofan (GTF) engines. The CSeries planes that Delta ordered last year use a similar GTF engine from the United Technologies subsidiary.

A rendering of a CS100 jet in the Delta livery

Delta has also ordered CSeries jets with Pratt & Whitney engines. Image source: Delta Air Lines.

While the new GTF engines are delivering huge fuel savings for airlines, Pratt & Whitney has been plagued by significant production delays and reliability issues. As a result, through the first eight months of 2017, A320neo buyers opted for the competing CFM LEAP engine over Pratt & Whitney's GTF offering by a 10-to-1 margin. As a result, Pratt & Whitney was desperate to get Delta's business.

To help seal the deal, United Technologies agreed to make Delta's in-house maintenance, repair, and overhaul unit a major repair shop for its GTF engines. While Pratt & Whitney didn't give Delta TechOps exclusivity as a maintenance provider, it guaranteed that Delta TechOps will perform more than 5,000 engine repairs and overhauls.

Engine manufacturers get the bulk of their earnings from service agreements. By agreeing to farm out work to Delta TechOps, United Technologies is probably giving up a substantial amount of future profits.

Clearly, CFM -- a joint venture between General Electric and Safran -- saw no need to offer similar terms. Since CFM is the exclusive engine provider for Boeing's 737 MAX family, Pratt & Whitney's desperation for a win gave the A321neo a crucial edge.

Boeing is still in good shape

It would be natural to see Delta's decision as a huge win for Airbus and a huge loss for Boeing. However, Boeing has had no trouble finding new customers for its 737 MAX jets this year. The 737 family has a backlog of nearly 4,500 firm orders, so the Delta Air Lines deal was hardly a "must-win" situation.

Clearly, Pratt & Whitney can't award every potential customer a huge engine services deal to beat out CFM. Thus, pundits shouldn't read too much into Delta's decision to buy the A321neo rather than the 737 MAX 10. The two planes offer very similar economics for airlines, so investors should expect to see a healthy rivalry between them in the coming years.

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Adam Levine-Weinberg owns shares of Delta Air Lines and General Electric. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.