Why Delta’s 737 Order Reminds Me of Baseball

It’s now official. Delta has decided to order a hundred 737-900ER aircraft. These aren’t the new engine versions but just plain old 737s, stretched to an insane length. With so many airlines ordering Airbus A320neo aircraft and showing great interest in Boeing’s proposed re-engined 737, why would Delta go with the old 737-900ER? My mind instantly went to baseball.

Before we talk about America’s pastime, let’s talk details first. Delta ordered one hundred 737-900ER aircraft to begin replacing its 757, 767, and A320 fleets. I assume this can replace some of the A320s coming off lease as well as the older domestic 767s. Add the 757s on top of that, and this is only a start. The airline will need a lot more airplanes to completely replace these fleets. My assumption is that you’ll see these fit right in with the domestic and Caribbean route structure.

The 737-900ER holds almost as many people as a 757. Continental has it configured with 173 seats right now in a similar configuration to what I’d expect to see from Delta, so it’s maybe a 10 to 15 seat cut versus the 757. It doesn’t have the range of the 757, so it’s not going to be serving Europe anytime soon. But there is plenty of room for this airplane to take over within the US for Delta. But why bother?

Most airlines have been clamoring for the re-engined A320 and 737 families and the promises of lower fuel burn. American may have ordered current generation aircraft, but that’s to replace its MD-80s, which it sees as needing replacement sooner rather than later. So why wouldn’t Delta just wait and order airplanes with newer engines since its existing fleet still has a few good years left?

It’s because Delta seems to look at the world in a different way, and that’s where baseball comes to mind. If you’ve read Moneyball, you know the story of the Oakland A’s. Being a small market team, the A’s couldn’t compete on revenue so they had to get creative to build a competitive team. They decided to flip baseball’s knowledge on its head. The A’s believed that the traditional way of valuing players wasn’t necessarily the best judge of actual performance and there were other metrics to use that would help Oakland build a team without breaking the bank. It worked and Oakland was initially able to create low dollar, high quality playoff-bound teams.

I see a similar thing going on at Delta. Everyone is clamoring for the newly-engined aircraft to the point where Boeing was forced to announce the new 737 before it wanted, just so it could win an order from American. But Delta sees that fever for new engines as providing an opportunity for it to do something different. Take a look at this quote from CEO Richard Anderson:

A key component of Delta’s strategy is making prudent investments for the future while maintaining our financial and capacity discipline

Yes, better fuel efficiency is very important, but not if the initial cost of buying that fuel efficiency is so high. This is how Allegiant justifies buying MD-80s, and it’s how Delta seems to be looking at its current fleet decisions. (It also explains why Delta has been buying up MD-90s on the used market.) These airplanes do still provide better fuel efficiency over the existing fleet, but the initial cost is much less than going for one of those newer-engined aircraft. The math works for Delta because of the way others behave.

We don’t know anything about Boeing’s pricing of its re-engined 737 yet, so let’s look at Airbus for an example. An A321 lists for $99.7 million. The new engine option is an additional $6.2 million. That might not seem like a huge difference, but remember that we’re talking about list prices.

With the A320neo selling like hotcakes, you can bet that the discounts wouldn’t be as steep compared to the current generation models. Think of it as a year-end model clearance. Cal Worthington would be proud.

Lower acquisition costs give the airline more flexibility. When you have higher variable costs and lower fixed costs, you can think about scheduling your fleet in different ways. It gives you some flexibility that Northwest has known about for years. Why do you think those DC-9s are still flying 40 years down the road? They’ve been a great asset for the fleet, even if their time is finally coming to an end.

Now, it’s not like Delta is a small market airline and can’t afford more expensive airplanes. It’s just seeing a piece of the market that’s being undervalued and is trying to take advantage. That’s smart.

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