Premium #184 – Does Delta’s old aircraft strategy make sense?

In the US, Delta is famous for its decision to keep old aircraft flying, and has purchased second hand aircraft into its fleet. The most prominent of recent purchases include the 717 and the MD-90. We, like others, have thought that this strategy may have economic limitations. After all, older aircraft are less fuel-efficient and incur higher maintenance costs. The key is where those trade-offs break even, and how rapidly costs grow. IndiGo just confirmed an order for 250 new Airbus aircraft, which they keep for only six years using sale and leaseback programs to always have a young fleet. This is the opposite of Delta, which saves substantially on capital expenditures by keeping older aircraft but incurs higher fuel and MRO costs. The recent massive decline in fuel prices has made Delta look very smart, as the savings in capital expenditures can compensate for a large amount of fuel at lower prices. But how have older aircraft impacted maintenance costs? The chart below indicates how the airline has been spending on its fleet maintenance according to DoT Form 41 data. From 2010-2014, we note that overall total maintenance costs have in fact risen by 36% while the fleet air hours rose less than 5%. Another view of Delta’s maintenance costs, on a per air hour basis, is shown below. This represents a 29.5% increase in maintenance cost per air hour over the period 2010-2014. With higher maintenance costs as well as higher fuel costs than newer aircraft, but lower capital costs, Delta’s strategy has proved economically effective in recent years. But what about operational impacts? We’ve examined another data source to see how the airline compares to its US peers in terms of flight cancellations. Using the DoT Part 234 source on on-time flights, compiled by masFlight, which was recently acquired by Global Eagle Entertainment, we compared Delta against the rest of the US industry regarding carrier controllable flight cancellations. So, for example, a mechanical failure would fall under this restriction. So would a mis-connecting flight crew. But one would expect that in today’s day and age, mechanical issues would be far and away the largest cause of airline induced cancellations. The following chart illustrates data on Delta versus the rest of the US industry. While the Form 41 data includes only domestic flights (hence wide-bodies excluded), it does provide an indication of relative performance. In this case, Delta did not cover itself with glory at the start of the period, but recently has performed in line with, or even better than its competition. So despite a rocky start, perhaps from the Northwest merger integration, the old aircraft have more cancellations theory doesn’t seem to apply. To look further, we segregated the fleets by manufacturer, with Airbus, Boeing, and breaking out the former Douglas models from Boeing. The following chart shows Delta’s Airbus fleet against that of the rest of the industry. Delta’s performance, shown in red lines, was worse than the industry at the start of the period, but is now slightly better than its competition. Cancellations on Boeing aircraft were a bit lower than Airbus throughout the period, and Delta has been performing in line with the industry over the last five years. The ex-Douglas types – 717s, MD80s and MD-90s, as well as the last of the DC-9s, are shown on the following chart.In this case, Delta again improved its performance to at or below industry averages during the period, with the exception of a spike in January 2014, which entailed a number of cancellations before several massive east-coast snowstorms that explains the spike in that month. The Bottom Line Can older aircraft perform as well as newer aircraft if well maintained? The answer is yes, as Delta has shown in its flight completions. While maintenance costs for these older aircraft have risen over the last five years at a faster rate than hours flown, the low capital costs and current fuel prices have kept older aircraft competitive. Delta’s strategy appears to be working, and working well. For now.

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