Airlines: Rightsizing to Lower Cost - Analyst Blog

Over the past several years, the airline industry has been struggling with either mounting costs or economic uncertainties. The trend, it appears, will continue into the next year. While air carries are contemplating a more effective and enduring way to counter the crisis, passing on the increased cost to customers in the form of fare hikes seems an easy way out. Airlines have already imposed about 10 broad fare increases this year that have helped the stocks to remain profitable.

Air carriers are also focusing on cutting capacities and streamlining their costs by reducing non-fuel expenses. In this regard, fleet rightsizing, though initially expensive, seems the correct strategy to lower non-fuel costs. Air carriers are replacing their older fleet with new fuel-efficient aircraft, to optimize cost efficiency of their aircraft.

The second largest U.S. airline Delta Air Lines Inc. ( DAL ) is removing 70 less fuel-efficient planes from its fleet by the end of this year and another 70 planes by the end of next year. Instead, Delta will add 100 fuel-efficient Boeing Co. ( BA ) 737-900 ER jets from year-end 2012 through 2018. This will lower the company's maintenance cost by $600-$750 million, including $250 million by the end of this year.

The largest U.S. airline United Continental Holdings Inc. ( UAL ) is also progressing well on network optimization to make its fleet more efficient. The company is reducing its domestic fleet count, retiring the older and less-efficient aircraft and reconfiguring domestic aircraft for international service. United is expected to purchase new Boeing aircraft between 2016 and 2019. Continental expects to take delivery of new aircraft from January 2012 to 2016.

The largest U.S. low-cost carrier Southwest Airlines ( LUV ) is upgrading its fleet with the new Boeing Sky Interior and will introduce the larger Boeing 737-800 in March 2012. New aircraft in the company's portfolio will help in adding new destinations, as it is efficient for longer haul, high demand markets than the 737-700.

The discounted U.S. airline JetBlue Airways Corporation ( JBLU ) will buy 86 Pratt & Whitney engines from United Technologies ( UTX ) to power its A320neo jetliners in 2018. This would lead to efficient use of fuel and lower operating cost.

The proper utilization of fleet would aid these companies to generate more profits even in an uncertain economy in which fuel prices are rising. Additionally, these carriers are also cutting, scrapping or reducing flights in unprofitable areas.

We are currently maintaining our long-term Neutral rating on Delta Air Lines, United Continental, Southwest Airlines and JetBlue. For the short term (1-3 months), the carriers retain the Zacks #3 (Hold) Rank.

BOEING CO ( BA ): Free Stock Analysis Report

DELTA AIR LINES ( DAL ): Free Stock Analysis Report

JETBLUE AIRWAYS ( JBLU ): Free Stock Analysis Report

SOUTHWEST AIR ( LUV ): Free Stock Analysis Report

UNITED CONT HLD ( UAL ): Free Stock Analysis Report

UTD TECHS CORP (UTX): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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