Delta and Boeing Revive a Dead Deal

On Wednesday, Delta Air Lines announced that it had struck an agreement to buy 40 planes from Boeing . The order includes 20 new 737-900ER jets plus 20 used Embraer E190 jets that Boeing is acquiring from Air Canada.

Upgauging to larger planes has big unit cost benefits. Image source: Delta Air Lines.

The Embraer E190s will allow Delta to further reduce its usage of fuel-guzzling 50-seat regional jets. Delta executives clearly think that 50-seat jets don't have a future, due to a growing pilot shortage in the regional airline industry and poor customer satisfaction.

Meanwhile, the additional orders for Boeing 737-900ERs will enable Delta to retire some of its more than 100 MD-88s. These planes were built between 1987 and 1993 and are already about 25 years old on average. Furthermore, they have only 149 seats, compared to 180 seats on the 737-900ER. Delta will thus capture upgauging benefits from replacing MD-88s with 737-900ERs.

Finally, the incremental order for 737-900ERs will also allow Delta to grow modestly in the domestic market. For 2016, it plans to increase domestic capacity by 1%-3%. If it continues growing at this rate, it will probably need to increase its domestic fleet by an average of 5-10 planes per year.

Boeing and Delta will both benefit from finally firming up this aircraft order that has been more than six months in the making. But Delta was clearly the biggest winner in this deal.

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The article Delta and Boeing Revive a Dead Deal originally appeared on

Adam Levine-Weinberg owns shares of Embraer-Empresa Brasileira and The Boeing Company and is long January 2016 $30 calls on Embraer-Empresa Brasileira and long January 2017 $40 calls on Delta Air Lines, The Motley Fool recommends Embraer-Empresa Brasileira. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

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