Bloomberg News

Airbus-Boeing Fleet Mix Seen Boosting Delta With Jet Discounts

September 04, 2013

Airbus Wins Delta Order for 40 Jets With $5.6 Billion List Value

Delta Air Lines Inc., the world’s second-largest carrier, had been evaluating Airbus SAS A330s against Boeing Co.’s wide-body 777 as part of a fleet upgrade, people familiar with the matter said in March. Photographer: David Paul Morris/Bloomberg

Delta Air Lines Inc. (DAL:US) Chief Executive Officer Richard Anderson bypassed the newest jets in favor of 40 older, cheaper models as he refreshes the most-diverse fleet of any U.S. carrier.

In purchasing 40 Airbus SAS (EAD) planes from aircraft families that have been in production for two decades, Anderson probably got a discount for Delta of “well over 50 percent” off the $5.6 billion list price, said Richard Aboulafia, vice president of Fairfax, Virginia-based consultant Teal Group.

“Airbus would have made it worth Delta’s while to sign on the dotted line,” John Strickland, director of JLS Consulting, a London-based consultant, said in a phone interview. Atlanta-based Delta and Airbus didn’t release terms.

Delta chose the wide-body Airbus A330-300 and single-aisle A321 over competitors from Boeing Co. (BA:US), which built the majority of planes in the airline’s fleet. By keeping a mix of jets at the world’s second-largest airline, Anderson gets leverage in negotiations with planemakers that already offer discounts.

Deliveries will start in 2015 on 10 A330-300 jets, a plane that Delta already flies. The following year, Delta will add the first of 30 A321s, a model new to its fleet, the company said today in a statement. It was only Delta’s second Airbus order ever, the last being 21 years ago.

“Certainly you would think it’s a buyer’s market for those planes,” said Fred Lowrance, an Avondale Partners LLC analyst in Nashville, Tennessee, who rates Delta market outperform. “Those aren’t the ‘hot’ planes these days.”

Airbus Revisions

The A330 is being supplanted as Airbus’s signature twin-engine wide-body by the A350, which made its first test flight this year and promises greater range and passenger capacity. Planes in the A320 family are being fitted with new engines, and the A321s being ordered by Delta will be arriving after Airbus begins offering the so-called neo variant.

While Delta may be giving up some of the operating cost efficiency of newer models, the airline is getting that money back through a lower purchase price, Lowrance said. Airbus lists the A330-300 at $239.4 million, and offers the A321 for $107.3 million, according to the company’s published prices.

“Richard knows our aircraft,” John Leahy, Airbus’s chief operating officer for customers, said through a spokeswoman. “For Delta to come back with this first order in over 20 years illustrates that despite recent history and any previous arrangements, the best aircraft wins at the end of the day.”

Executives at Delta weren’t available to elaborate on the fleet purchase, said Anthony Black, a spokesman.

Delta climbed 2.4 percent to $20.31 at the close in New York, while Boeing gained 1.3 percent to $106.37. Airbus parent European Aeronautic, Defence & Space Co. rose 0.7 percent to 44.63 euros in Paris.

Delta’s Inheritance

Delta inherited about 160 Airbus planes when it bought Northwest Airlines Corp. in 2008, and those jets now make up one-fifth of the fleet for the carrier.

Aboulafia called it one of the “least heterogeneous” aircraft lineups in the industry. Delta turned that into an advantage by seeking “bottom-feeder prices, current or end-of-production-life jets, coupled with lots of unloved but perfectly good used jets,” Aboulafia said.

While some carriers have exclusively bought planes from just one manufacturer in the belief that it’s more efficient for maintenance, spare parts, crew training and operational costs, Delta’s Anderson says a mixed fleet means better deals. Delta flies wide- and narrow-body models from both Boeing and Airbus, as well as Boeing’s 747 jumbo jet.

Lower Costs

“We’ve got all the engine types, all the airframe types, and what it gives you is the flexibility to negotiate and acquire airplanes at much lower capital costs than your competitors,” Anderson said in a May interview at Bloomberg’s headquarters in New York.

In addition to new jets, Delta has been buying used MD-90s, made by a company that Boeing acquired, from China for about one-quarter the cost of a new Airbus or Boeing narrow-body, Anderson said in the interview.

Delta is also leasing 88 used Boeing 717 narrow-bodies from Southwest Airlines Co. (LUV:US), which agreed to cover the $100 million cost of repainting the planes and refurbishing the interiors to seal the deal.

“Delta has the advantage of being in the catbird’s seat now,” said Vicki Bryan, senior bond analyst at Gimme Credit LLC. “They choose very carefully and deliberatively what deals they will and will not do and how much they will or will not pay. It has to be Delta’s way or they don’t have to do it.”

Airbus Comeback

The Delta win is a comeback for Toulouse, France-based Airbus after the airline chose Boeing in 2011 for an order of 100 737-900ER single-aisle jets. Airbus said many of the A321s for Delta will be assembled in Mobile, Alabama, a facility the company is building to gain a marketing edge with U.S. buyers.

“Buying the last of the current generation at a very good discount: This is part and parcel of their fleet philosophy,” Aboulafia said in a telephone interview.

The Delta order is a “vote of confidence” in Airbus’s A320 and A330 families from the former Northwest executives on Delta’s management team such as Anderson who knew the planes’ capabilities intimately, Strickland said.

Delta’s purchase also helps Airbus extend the life of the 20-year-old A330 program, which gained momentum in recent years in part because of Boeing’s delays on the 787 Dreamliner. Airbus has sought to enhance the performance of the A330, which will seat 293 passengers in two classes at Delta.

“We’re aware that they’ve selected a different model,” Tim Bader, a Boeing spokesman, said in a phone interview. “They’re a very important customer to us, one that’s got more than 500 Boeing airplanes in their fleet.”

Today’s order shows that “cheap is good” in the eyes of Delta management, said Robert Mann, who runs aviation consultant R.W. Mann & Co. in Port Washington, New York.

“The only greater surprise is that they didn’t buy them used somewhere,” Mann said.

To contact the reporters on this story: Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net; Julie Johnsson in Chicago at jjohnsson@bloomberg.net; Mary Schlangenstein in Dallas at maryc.s@bloomberg.net.

To contact the editors responsible for this story: Ed Dufner at edufner@bloomberg.net; Benedikt Kammel at bkammel@bloomberg.net


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Companies Mentioned

  • DAL
    (Delta Air Lines Inc)
    • $37.58 USD
    • 0.12
    • 0.32%
  • BA
    (Boeing Co/The)
    • $120.38 USD
    • -0.10
    • -0.08%
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