Delta Air Lines took a page out of its own playbook with dual deals for gently-used Airbus A350 and Boeing 737 aircraft as it looks to accelerate its recovery from the coronavirus pandemic.
The deal is a throwback to the Atlanta-based carrier’s active participation on the used aircraft market during the first half of the 2010s, when it bolstered its fleet with used Boeing 717s and MD-90s. A strategy actively pursued by then-CEO Richard Anderson, who managed to single-handedly reset used Boeing 777 values when he remarked that the airline could buy one for less than $10 million in late 2015. Since Ed Bastian took over as CEO in 2016, Delta has shifted to the more common practice of ordering new aircraft, including Airbus A220s, A321s, A330neos and A350s.
Hence, it is striking that, as competitors like Alaska Airlines and United Airlines eagerly nab empty production slots, Delta has opted for a dual approach acquiring both new and used planes to fuel its recovery. The airline will lease the seven used A350-900s from AerCap and purchase the 29 used 737-900ERs from Castlelake, it said on Tuesday. It did not disclose the former operators of the jets, however, The Air Current has reported that the A350s are from Latam Airlines Group and the 737s from Lion Air.
“These transactions accelerate our recovery plans,” said Bastian during Delta’s second quarter earnings call on Wednesday. He added that they aircraft fit with carrier’s existing fleet of 15 A350s — plus orders for another 20 — and 130 737-900ERs at the end of March.
That accelerated plan will see the airline recover to pre-pandemic capacity levels by next summer — a full year earlier than Bastian’s own forecasts early in the crisis. The new aircraft will partially replace the 18 777s, 77 MD-88s and MD-90s, and some of its A320, 737 and Boeing 767 fleets that it retired in 2020. All of the used aircraft are due to arrive by the first quarter of 2022 with most entering service after retrofit work by that summer.
“Delta is taking the opportunity to grow their fleet through the acquisition of used (but nearly new) aircraft at a time when there is a significant surplus of availability in the market exerting negative pressure on used aircraft prices and lease rates,” said Rob Morris, global head of consultancy at Cirium, on the deals. Market lease rates for used A350s have fallen significantly since before the pandemic to between $580,000 and $700,000 a month, he said but added that Delta could be paying even less than that.
Delta undeniably got a deal for the aircraft. Based on its updated 2021 capital expenditure guidance, the combined costs of adding the A350s and 737s is just $700 million in incremental investment in 2021 and 2022. For comparison, the list price of a new A350 is roughly $320 million and a 737-900ER nearly $113 million — or some $5.5 billion for all 36 aircraft. The additional capital expenditures do not include the 25 incremental A321neos that the airline ordered in April.
United’s recent blockbuster orders for 270 Airbus and Boeing aircraft added $12.5 billion in new capital expenditures to its obligations — nearly 18 times what Delta added with its used aircraft deals.
In addition to the savings acquiring the aircraft, Delta anticipates further operational savings from a more streamlined fleet than compared to 2019, as well as benefits from larger gauge. For example, the 737-900ERs seat 180 passengers compared to up to 158 people on either the MD-88 or MD-90. And as any airline executive knows, adding seats per departure at a lower operating cost amounts to very margin accretive growth.
“They’re plug and play,” Bastian said of the aircraft. “We’ll continue to be able to grow the business accordingly.”