Early in the COVID-19 pandemic, Delta Air Lines (NYSE: DAL) decided to accelerate its fleet simplification plans while demand was depressed. On April 30, Delta announced that it would permanently retire its MD-88 and MD-90 fleets in early June. Two weeks later, it said it would phase out its Boeing 777s by year-end.
In late June, I suggested that Delta Air Lines might not be done with fleet restructuring. Sure enough, the company recently announced that it will retire three additional aircraft models earlier than previously planned.
Where Delta was — and where it’s going
Under prior CEO Richard Anderson, Delta Air Lines embraced (and mastered) the complexity of operating numerous aircraft types in its fleet. By opportunistically snapping up used jets that other airlines didn’t want, Delta was able to minimize capital expenditures following the Great Recession, helping it rapidly pay down debt.
Delta’s current CEO Ed Bastian and Chief Financial Officer Paul Jacobson were both involved in the leadership team that adopted this used-jet strategy a decade ago. However, over time, the costs of this strategy — ranging from lower pilot productivity to increased maintenance expenses — have become clearer. Additionally, a new generation of jets that are cheaper to operate has entered service over the past five years or so, increasing the attractiveness of buying new aircraft.
At its investor day last December, Delta touted the efficiency benefits of shifting from a “legacy” fleet to an “optimal fleet” over time. The full-service airline said it expected to have 13 fleet families in 2020, but had the potential to reduce that to just eight fleet families over time.
Image source: Delta Air Lines.
In terms of individual models, Delta operated 20 distinct mainline aircraft models and five regional aircraft models at the beginning of 2020. The carrier has already retired its MD-88s, MD-90s, and 737-700s, and will retire all of its 777-200ERs and 777-200LRs next month. Those retirements — offset by the introduction of the Airbus A220-300 and A321neo in Delta’s fleet — will whittle down the number of active mainline aircraft models to 17 by early 2021.
The next steps in fleet simplification
In a Securities and Exchange Commission document filed on Friday, Delta Air Lines revealed that it has decided to retire three additional aircraft models ahead of schedule. It will retire the Boeing 717 and 767-300ER by the end of 2025, while its regional affiliates will phase out the CRJ-200 50-seat jet by the end of 2023.
None of these moves was wholly unexpected. Back in the spring, Delta told its pilots that it would close two of the four 717 pilot bases and operate just 30 to 45 of its 91 717s over the next two years. It appears that fully retiring the 717 fleet by mid-2022 — the deadline by which Delta must replace the seats on its 717s under a 2017 Federal Aviation Administration order — is not feasible. Still, it’s likely that most, if not all, of the 717s that are temporarily grounded right now will be permanently retired, with a smaller 717 fleet remaining in service until 2025.
Delta has also been looking to move away from the cramped CRJ-200s for years. It ended the second quarter with 97 CRJ-200s remaining at its regional affiliates, and the 36 operated by SkyWest will be removed from the fleet by the end of the year. The 61 operated by Delta subsidiary Endeavor Air will stick around a little longer, but that flying will eventually be shifted to larger, more cost-effective jets.
Lastly, the 767-300ER fleet has an average age of 25 years. Delta retired seven earlier this year, and the remaining 49 have reached an age where it makes more sense to retire them than invest in them.
Delta expects to incur a $2 billion to $2.5 billion pre-tax impairment charge related to its decision to retire the 717, 767-300ER, and CRJ-200 fleets early. On the flip side, these moves will enable the airline to simplify its fleet to 15 mainline and four regional aircraft models within five years. The 717 retirement will also reduce the number of mainline pilot groups to seven, down from 10 at the beginning of 2020.
This won’t be the end of Delta’s fleet simplification efforts, either. Delta’s A320, 757, and 767-400ER models all have average ages of roughly 20 years or older. All are likely to be retired within a few years after the 717 and 767-300ER take their final bows in 2025. That would leave the mainline fleet with only 11 individual models and five pilot groups: a huge improvement over the current state of affairs.
As Delta Air Lines moves through the next phases of its fleet restructuring, the airline will benefit from higher pilot productivity, lower training costs, lower maintenance expenses, and better fuel efficiency. To carry out this plan, Delta will need to invest tens of billions of dollars for new aircraft over the next decade. However, those investments will pay off in a big way through long-term cost savings.
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Adam Levine-Weinberg owns shares of Delta Air Lines. The Motley Fool recommends Delta Air Lines. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.