Premium #122 – Is it smart to delay a fleet renewal?

The airline business is notoriously cyclical. It is also capital intensive. This combination provides an effective barrier to entry since capital sources typically don’t like cash flow gyrations. While those gyrations highlight industry risk, with risk comes opportunity. If an airline can lower its capital requirements and if market conditions (as is now seen in the US post consolidation) remain stable, it can generate strong profits. Delta Airlines

and American Airlines represent a contrast in philosophies, Delta choosing to continue to operate older aircraft, which it can obtain at lower capital costs, while American has massive orders to replace its narrow-body fleet with more modern aircraft. Which philosophy will deliver the better financial results?

To get an idea if a policy to delay fleet renewal has merit, we undertook a study of the MD-80 series aircraft in service among US carriers. The MD80 fleet is mainly in use at American and Delta, with a smaller fleet now operating at Allegiant. The Allegiant fleet, however, does much less flying than those of American and Delta.

American is retiring its fleet as it takes delivery of new Airbus and Boeing single aisle aircraft. Delta has publicly stated its commitment to keeping older aircraft in service, and has even started buying used MD90s from other airlines at attractive prices to add to its current fleet.