The second-largest U.S. airline
Delta Air Lines Inc
) will introduce 88
The Boeing Company
) 717-200 aircraft to its fleet starting next year.
Southwest Airlines Co.
) will lease the Boeing 717 aircrafts.
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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
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
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.