Is It Better to Buy Old Airplanes or New Ones? (Ask Cranky)

Why don’t we start the week with a reader question. This one actually came in awhile back, but the question is most definitely still relevant.

I was wondering if you had ever done a column comparing the business strategy of United vs Delta, specifically United’s approach to buying new more efficient airplanes vs Delta’s keeping older paid for airplanes which are less fuel efficient and repairs more often. Seems Delta is actually making a good profit, but at some point will have to buy newer airplanes. Plus the oil refinery must be bringing in some relief from fuel prices.

Does one approach out way [sic] the other in terms of life time cost of paying for new airplanes vs having planes already paid for. Just curious, since as you know United’s planes are the newest.
Mike
Chicago, IL

It is true that Continental has long loved to crow about how new its airplanes were, and that pride has carried over to United after the merger. (Just don’t fly on a pre-merger United 757.) Meanwhile, Delta takes great pride in operating a motley fleet of older airplanes. So which strategy is better?

There are really two things to consider here. One is acquisition costs. It’s a lot cheaper for Delta to buy a used MD-90 from a foreign carrier that no longer wants it than it is for United to buy a new A320 from Airbus. And of course, if you buy a new A320, that’s going to cost less than buying a new next generation A320neo aircraft. It’s like that with pretty much any good you’d purchase. Think about a car. New cars are going to cost more than used ones, and a new car of last year’s model will cost less than this year’s. But that’s only one side of the equation. The other side involves operating costs once you actually have the airplane in your fleet. Here is a very rough sketch of what that looks like.

Airplane Operating Costs

Of course newer airplanes are cheaper to operate. Some of that is by design. Newer technology generates more efficiency. That is particularly important when it comes to fuel consumption. An old JT8D sitting on an MD-80 is going to burn a lot more fuel than a brand new IAE engine on an A320. And the next generation of airplanes will burn even less fuel. The more efficient the airplane, the more expensive it’s likely to cost.

The other part of it is simply a factor of age. When an airplane comes to you brand new, you end up having very little maintenance expense early on. But after a few years, you need to spend a lot more on keeping that airplane flying. There are expensive overhauls on the airframe and the engines. And of course, things just break more often so reliability drops.

What you find is that it’s cheaper to buy an old airplane but more expensive to operate it. Which is best?

I don’t have a decisive answer to that, because each airline will find that different strategies are better based on that airline’s business plan. To see a very stark comparison of strategies, let’s look at Spirit and Allegiant. Allegiant has only been active on the used aircraft market, and that gives it tremendous flexibility.

With such low costs of owning the airplane, it can afford to sit the plane on the ground when demand isn’t strong enough. Take a look at daily utilization during the peak and trough for Allegiant.

Allegiant Utilization

When your ownership costs are that low, you really can fly when you can make money on your variable costs. That’s a lot easier in March than in September (when Florida traffic tanks) so Allegiant has the flexibility it wants.

Delta may not vary its flying nearly as much as Allegiant does, but having cheaper airplanes means that Delta has a kind of insurance policy. If the economy tanks or demand drops, it can park airplanes without feeling the pain as much as United might. But its variable costs are higher.

Then there’s Spirit. Spirit loves new airplanes because it can run them much more reliably. New airplanes require less maintenance and burn less fuel so Spirit can run them hard… and it does. I showed you Allegiant’s utilization but now compare that to Spirit.

Spirit Allegiant Utilization Comparison

Spirit flies its airplanes more than twice as often, and it doesn’t vary by month. Those airplanes are expensive so Spirit has to fly them a lot to spread the ownership costs out over a ton of flights. That doesn’t mean Spirit’s schedule is static. It may move airplanes out of Florida during September but instead of sitting them, it has to find other places that can support more flying.

United has that same issue. With all these new airplanes, it has to fly them a lot or its unit costs will creep up too much. But of course, it uses less fuel when those airplanes are in the air.

In the end, I like the flexibility that having used aircraft provides. Heck, even the idea of buying last year’s model makes a lot of sense as a middle ground. It just gives you more ability to vary your capacity. But that doesn’t mean buying new airplanes is a bad idea. It’s just a different approach. If you manage it right, then it can work as well.

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26 Comments on "Is It Better to Buy Old Airplanes or New Ones? (Ask Cranky)"

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Guest

Allegiant has started to replace the older MD80’s with used A320’s, slightly larger planes and 25% more efficient on fuel costs.

Danko
Guest

That’s not true. The A320s are supplementing the MD-80’s; not replacing them.

Brad
Guest
It is important to note that Delta’s strategy involves buying large fleets of “slightly” used aircraft that are basically in the same generation as the existing competition. In the case of the MD-90’s, for example, the planes use the same IAE engines that powers much of today’s A320 fleet. 717’s are also relatively fuel efficient (i.e. not DC-9’s). So while a brand new 737-800 or A320 might provide a a maintenance holiday for an airline, they don’t offer much advantage in terms of fuel efficiency. Delta can buy roughly five $8M MD-90’s for the price of one new $40M A320… Read more »
matt weber
Member
The choice works out a numbers game. While it is certainly true that newer aircraft usually burn less fuel than older aircraft, the differences are often not as dramatic as some people might like to think. For example the difference in Specific Fuel Consumption (SFC,pounds of fuel burned per pound of thrust per hous) between a GE90-115B (777-300ER engine)and an RB211-524g/h (767/747-400 engine) is only about 10% per cent. Of course when you are talking about the largest single expense for an airline, 10% of a very large number is still a pretty hefty number. The difference between a GE90-115B… Read more »
Mark
Guest
I think it comes down to how the airlines finance airplanes, and how they account for costs. If an airplane is leased, replacing the older airplane with a newer one may makes sense when the current airplane’s lease ends. If an airplane is purchased, its cost is amortized over a period of years. In either case, there is a capital expense each year for the airplane. However, if an airplane is owned outright, the only costs are operating and maintenance costs, so it may be cheaper to keep an older, less efficient airplane, at least until its next scheduled D-Check,… Read more »
sjc user
Guest

Will Boeing still sell you a 767-300?

DAB
Guest
To pick up on a point here and in the original question, it seems correct that Delta is managing its fuel “differently” by use of Trainer. However, to the original question, I still can’t believe that the investment in a refinery is worthwhile on a risk adjusted long term basis for Delta. They have essentially swapped the premium for Jet over crude in the market for net refining margin minus capital expense from a site that had been a dog… Most of their cost (looking at VLO’s latest differential posting to their IR site) is the $108/bbl of the recent… Read more »
sjc user
Guest
It’s not like DL is looking for any used plane. They targeted the MD-90, which is from the mid 1990’s and the 717, which are from the early 2000’s. Both of these plane types were not wanted by anyone else and DL got them really cheaply. DL also has bought new 737-900’s and has an order for new A321’s and A330’s. I’m pretty sure they got a great deal on that Airbus order. I think DL is just not trying to get the latest and greatest planes, but planes they know are reliable and work with their fleet. It seems… Read more »
sjc user
Guest
I forgot about the 757 and 767 purchases. The ex-TWA 757’s are newer than their current 757’s IIRC and are a nice ride from the west coast to JFK. But, the ex-ATA 757’s were kind of junky. I might have wanted to forget those. But, they are used mainly for Hawaii, so it seems like no one really cares about their fleets to Hawaii anyway. I blanked on the Gulf Air 767’s (probably because I do little int’l flying). I just had 5 flights on Delta this month. One was on a domestic 767-300, two were on A330-200, one on… Read more »
DesertGhost
Guest

I can sum it up succinctly. The answer is: “Depends.”

bhamric
Member
It’s important to remember with DL that they are using the 717 as a replacement for 50 seat RJ’s so “fuel efficiency” is measured against the cost of running 2 50 seat (100 seats total) aircraft to a market against 1 717 run (110 seats total). Running the 717 to a market and cutting out a flight offers a huge discount in operating costs. The A319 does some of this flying as well but has a big larger seating capacity at 128 (although with the new slim line seats being installed that will climb again). Look for the A319 to… Read more »
Sanjeev M
Guest
Previously the argument was that commonality in a fleet was great, but people have realized that after 20-25 frames it doesn’t really matter. The 739 is really good on high capacity trunk routes, and makes sense as the “previous generation” since the MAX is being launched. The 717 as mentioned earlier is a pretty good deal for DL. From a passenger perspective, the 717 with refurb interior is great and boarding doesn’t take more than 15 minutes. I thought DL also ordered the A333 HGW which is planned for the Seattle TPAC routes. Would that work as a 767 replacement… Read more »
robert.rolwing
Member

United’s new planes are mostly replacing older-less fuel effecient planes-APOLOGIZE,I CANNOT SPELL]
I wish though, United would order and buy the new Boeing 777x-8 and 777x-9Dash, AND NOT AIRBUS
United would then have also cost savings with FLEET COMMONALITY

jaybru
Member
I know airlines assume customers don’t pay much attention to aircraft on which they are buying a ticket, but wouldn’t it be nice to know everything about an aircraft on which one might want to buy a ticket. I know, airlines think all we care about is the price of the ticket, but how about giving us something to make a choice on additional information? On the booking website, in addition to what is there now, usually nothing more than aircraft type and model, although I know UA’s website, under “Flight Status,” lists the planned unique UA aircraft number a… Read more »
Nick Barnard
Member
Most of the time the airlines don’t know what exact airplane will be flying a specific flight when you book. I have trip with flights in 87 and 91 days from now. At the moment I know we’re flying an E175 operated by Compass and a 737-800 operated by Delta, but I’m quite sure neither Delta nor Compass have assigned an exact plane to those flights. If people had this information while booking (say they were purchasing a ticket much closer to flying) I’m not sure they’d be knowledgeable enough to use the information. We’re in a society that everyone… Read more »
jaybru
Member
Nick, of course, I’m being slightly absurd and what you said about pilots is true. Here too, I would like to believe the pilot is qualifed, but hey, when was the last time you walked into the cabin and saw the pilot’s license hanging there for you to examine. When I go to a doctor or even a beutician, I see a license hanging on the wall. Pilots? No. As you point out, we have a lot of information about everything these days, but what information is important? I think 99 of airline customers, me, too, are too often in… Read more »
ScottC
Guest
DL, like NW before it, also does a very good job maintaining its older frames. NW bought almost every available DC-9 frame as they were retired and stripped them for parts. When it was time for an engine overhaul, they would just replace it with an engine from a retired frame that still had time left on it. I believe they are doing the same thing with the MD-88. Also, an MD80 is about the same fuel consumption wise As newer planes within ~500 miles. the greater efficiency of the high bypass engines only shows itself during cruise, which is… Read more »
Will
Guest

Really interesting post, never thought much about the costs of the differing strategies. Although I’m surprised United doesn’t artificially try to bid up the prices of used airplanes by feigning interest in the used market.

Nick Barnard
Member

The problem is you might get stuck actually winning your bid and having to buy a plane you don’t want. Plus airlines have fun ways to retaliate..

matt
Guest

I have heard that integrating a used aircraft and it’s service logs are no small task, even when you already operate that type. Would this be factored into the upfront costs of used aircraft?

Glen Towler
Guest
I went to a talk at the local Royal Aeronautical Society and the guy giving the talk . Works in aircraft leasing and he said its much cheaper for airlines to lease newer aircraft than to buy older ones . For many reasons mostly fuel burn and less time on the ground for maintenance . New Zealand is a great example during our summer aircraft here are busy and of course in the north its winter so not so many aircraft are needed so airlines can lease out there aircraft to NZ and other countries . Of course during our… Read more »
Scott
Guest

Wait….someone who works in aircraft leasing says it is cheaper to lease planes??? Well that settles it! :)

Werner
Guest

If lots of new airplanes is the key to airline success, there must be lots of successful airlines in the world.

T110E5
Guest

Where is the greenie weanie factor in this analysis?

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