Yesterday Delta Air Lines and Airbus announced a follow on order for another 15 A321s. Delta now has 45 A321s on order.
Delta targets reinvesting approximately 50% of its operating cash flow back into its business, resulting in $2 to $3 billion of capital expenditures annually through 2018, with $2.3 billion planned for 2014. The airline currently has an RFP out for widebodies.
The selection of the A321s fits with Delta’s policy of avoiding new technology aircraft. Only proven models seem to be trusted. While one understands the risk aversion, Delta is alone in following this strategy. Airbus and Boeing have booked orders that will keep them busy (absent another crisis) for nearly a decade. What does Delta know that nobody else gets?
There are three points that make sense for Delta; no waiting for delivery slots like with new models; sharp pricing on “close outs” and, of course, acquiring a well-known airplane. Delta seems to have done a similar deal with Boeing on the 737-900.
How clever is this strategy? Based on our analysis, Delta’s acquisition of out of production MD-90s has been a smart move. But the 737-900s and A321s are limited. There will be no deals like this once these “old” models are sold out. What then?
Rather than assume this strategy has no next step, we think it may be exceptionally smart. The primary reason is this – a crisis is coming. Crises always come, and when they arrive, orders go wobbly, and suddenly delivery slots become available. In the interim Delta has preserved its capital. This means that when OEMs are looking for a strong customer, Delta is flush and commands deep discounts. Which is to say, way above what constitutes regular retail. If big customers get 25% off retail now, Delta should be able to get close to double that during a crisis. Buying lots of aircraft at such a discount means big savings.
Remember the huge order Ryanair placed with Boeing after 9/11? Boeing made the deal because its customers were in big trouble, and the order book looked fragile. That deal was so good that, despite every attempt, Ryanair has never been able to replicate it. As we heard at the time, “we got change from a $22m check every time we picked one up”.
Delta may never see pricing like Ryanair is rumored to have seen. But Delta has skipped the retail mania this round and likely will be able to do so on the next round as well. That puts the airline in a very strong bargaining position for some time to come.
Well there will always be a crisis I suppose but waiting for one to happen to get early delivery positions is like playing the lottery. Besides, if a crisis is looming who is to say that Delta will fare better (remember Chapter 11 earlier) than other airlines. Risk aversion is like an addiction, a crisis happens, traffic goes down, hence no reason for Delta to buy new aircraft (the new mantra is capacity control), to duplicate what Ryanair and Emirates did post 9/11 takes guts and risk taking. This leaves the other means of getting the cheapest aircraft ever be a launch customer of new technology aircraft (Emirates, Etihad, Qatar Airways, Lufthansa and others), again not for the risk averse.
Follow-up deliveries are +/- undepletable : airlines who have a SVH (Strategic Visibilty Horizon) of 6 years or more and as a consequence order long leadtime new project aircraft, are rolling over their CEO fleets at ages of 8-12 years. Delta can source any quantities of CEO type additional capacity from those other guys, tackling conjecture variations based on their own SVH of 4 years or less, very successfully and in great style ?! The add-on capacity is good for 12-8 more years so there’s nothing to worry about (buffer = Leasing Companies) … as for fuel, when more is needed, Delta just open the tap of their Trainer refinery ?
Very interesting and informative article! Thanks for sharing!