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Delta Chooses Airbus, Saves Cost - Analyst Blog

Posted
9/6/2013 3:40:00 PM
By: Zacks.com
Referenced Stocks:BA;DAL;GE;LUV

After a gap of almost 21 years, Delta Airline Inc. ( DAL ) has favoured European aircraft manufacturer Airbus over its arch rival The Boeing Co. ( BA ). The premier U.S. passenger carrier has announced plans to purchase 40 new jets from Airbus in a deal worth $5.6 billion.

Delta has ordered 10 A330-300 wide body jets and 30 narrow body A321 aircraft to be delivered between 2015 and 2017. Although the A330 line of planes has already been replaced by the advanced A350 series by Airbus, Delta's choice of the former and cheaper models indicate its intent to save capital costs.

Atlanta-based Delta will be the first airline to operate the enhanced version of the A330, which contains General Electric Co. 's ( GE ) CF6-80E1 engines. The 293 capacity A330 will include latest in-flight entertainment features along with Wi-Fi connections and a modern interior to enhance customer experience.

Four A330 will be delivered in 2015, with another four scheduled for the coming years and the remaining two for 2017. These white bodied jets, which include 34 lie-flat seats, will be used for Delta's international routes.

Narrow-bodied A321s, which features similar in-flight entertainment, will have a capacity of 190. The first three A321s will be delivered in the first quarter of 2016. Another 12 aircraft will be delivered in 2016 with the remaining slated for 2017. These will serve the company's domestic routes.

Notably, Delta has the most diversified fleet among all the other U.S. carriers, which include more than 500 Boeing and close to 160 Airbus aircraft. In Jul 2012, Delta entered into an agreement with Southwest Airline Co. ( LUV ), whereby the latter will lease 88 used 717s to Delta. Though carriers generally go to a single aircraft manufacturer to enhance operational efficiencies, a mixed portfolio generally allows greater negotiating power.

Carriers usually have to incur high capital costs for buying aircraft. By opting for older versions we believe Delta has to forego some of the operating cost efficiencies of newer versions. However, the airline will get an opportunity to upgrade its fleet at a much lower price, which in turn will enhance the returns for its shareholders.

Delta currently carries a Zacks Rank #3 (Hold).



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