Delta Air Lines (Atlanta) has issued this statement explaining its fleet strategy is driven by opportunity and flexibility:
Delta does things differently than most airlines, and that includes the way it buys airplanes.
While most big carriers replenish and expand their fleets with brand new jets, which are either leased or purchased, Delta has purchased a mix of new and used aircraft over the past several years.
Ed Lohr, Delta’s Managing Director of Fleet Strategy, explained that the airline looks at the entire cost of jet – the purchase price, the maintenance costs, fuel efficiency and other factors – before making decisions. Often, used aircraft make the most economic sense for the airline.
And thanks to Delta’s TechOps aviation maintenance team, used planes can be maintained and retrofitted with entirely new interiors, providing a superior customer experience even though the jet may be a few years old.
And Delta typically purchases planes outright rather than leasing them.
“We do have a different strategy than most of our competitors,” Lohr said. “When you have a strong balance sheet like we do, a great TechOps organization like we do, it gives you a lot more flexibility to take advantage of opportunities when they come up.”
Above Copyright Photo: Brian McDonough/AirlinersGallery.com. Ex-AirTran Airways Boeing 717-231 N925AT (msn 55079) arrives at Baltimore/Washington (BWI). N925AT was formerly painted in the special “The Wizarding World of Harry Potter” (Universal) livery.
For example, Delta acquired 88 used Boeing 717 (above) after Southwest inherited them in its merger with AirTran Airways. Those jets fill a critical role in Delta’s domestic network, and were given nose-to-tail revamps before entering service.
Delta has similarly scoured the world for used MD-90 jets, reliable narrowbodies that are also dramatically upgraded and brought into the fleet at a very reasonable price.
Still, Delta will buy new when it makes sense. For example, the airline recently ordered 25 fuel-efficient Airbus A350-900s to fly primarily long-haul trans-Pacific routes starting in 2017.
The aircraft strategy is one of the reasons Delta has been able to pay off more than $10 billion in debt since 2008, and has seen its credit rating rise to just one notch below investment grade. Less money is tied up in expensive new jets, and instead can be invested in airport facilities, operational performance, new technology and on-board improvements to enhance the customer experience.
“The days of buying just one brand of aircraft, or signing huge orders all at once, those are definitely over,” Lohr said. “At least, they are for us.”
In a related story, Delta also issued this further clarification after CEO Richard Anderson’s recent comment about an “aircraft bubble” (also reported by us):
The aviation world was buzzing last week after Delta CEO Richard Anderson discussed an “aircraft bubble” that has been dramatically pushing down prices of used widebody aircraft.
“We’re seeing a huge bubble in excess wide-body airplanes around the world,” Anderson said during Delta’s third quarter earnings conference call. Anderson said he had seen mid-life Boeing 777-200 aircraft being available in the market at about $10 million.
Delta’s aircraft experts, Greg May, Senior Vice President – Supply Chain Management, and Ed Lohr, Managing Director – Fleet Strategy, told Delta News Hub that several trends have conspired over the last few years to create a “perfect storm” driving down prices.
The major factors:
A large number of leased widebody aircraft are being returned to lessors and manufacturers, causing a glut in the market.
Boeing 777While Delta generally purchases both new and used aircraft, many carriers lease new planes, turning them in when the lease ends, usually after seven to 10 years. Those aircraft often end up on the used airplane market.
One factor driving the large number of leased aircraft now being sold is the nearly four-year delay in deliveries of Boeing’s 787 jet, Lohr said. The delay caused many airlines to lease Airbus A330 and Boeing 777 aircraft (left) to bridge the gap while waiting for their orders to be fulfilled. Many of those aircraft are now nearing the end of their leases and being returned.
One aircraft in particular – the Boeing 777-200ER powered by Rolls-Royce Trent engines –will be entering the used market in significant numbers over the next couple years, May said. He also cited the new Airbus A350 (below), a twin-engine long-haul competitor to the Boeing 787, which has reduced demand for the 777.
“There was a time when the 777 had that market all to itself,” May said. “With the A350 and the 787 that’s no longer the case, so it’s not as attractive.”
Softness in the international economy has slowed capacity growth and reduced demand for wide-body aircraft, pushing down prices.
Economic softness in Asia and Latin America has caused many foreign airlines to tamp down growth plans. That has resulted in leased widebody aircraft being returned earlier than expected.
“They are paying the rent on those planes every month, so it’s very expensive to park them,” Lohr said. “That’s why they are not extending leases and in some cases are willing to pay a penalty to get out of other lease early, in each case, increasing the availability of used aircraft in the market.”
In addition, lower fuel prices have blunted a major advantage of new planes, which tend to be more fuel efficient.
Cheap financing created a demand for new aircraft, lowering the value of used jets.
Historically airlines in small and developing nations primarily leased or purchased used aircraft because they couldn’t afford new jets. But a wave of cheap financing, some from export credit agencies, has made it much easier for those airlines to buy new planes. Less demand for used aircraft means lower prices.
Airbus A350Lohr likened the widebody jet bubble to the housing bubble in the U.S. that burst in 2008 and collapsed the real estate market.
“Why did we have a real estate bubble? Because anyone and his brother could get a loan,” he said. “It’s the same story with new airplanes.”
While these factors have primarily impacted the widebody market, the narrowbody market is likely to be affected as well, Lohr said.
“The economics and the trends will eventually get to the narrowbodies,” he said.
After Anderson’s comments, Boeing’s stock value plunged. Analysts issued a flurry of reports debating the issue, and the question will likely be in the spotlight this week when Boeing announces its third quarter earnings.
Reuters reported Friday that Boeing may need to slow production of its Boeing 777 because of the weakness in the used aircraft market. Orders for the current generation 777 have fallen from 194 in 2011 to 63 in 2014 and just 34 this year, according to the report.
“Boeing is going to have to slow down the production rate,” Gueric Dechavanne of appraisal firm Collateral Verifications told Reuters.
Despite the attention that Anderson’s remarks received, Delta isn’t in negotiations to purchase used planes for the airline to fly right now, May said.
During the earnings call, Anderson said that he expects prices to decline further.
“Prices are going to get lower,” he said. “You wouldn’t strike a deal now.”