Why Delta’s 737 Order Reminds Me of Baseball

Boeing, Delta

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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21 comments on “Why Delta’s 737 Order Reminds Me of Baseball

  1. What do you think will eventually replace the 757 to Hawaii? Do you think they’ll cut capacity with the 737’s or will the neo’s be able to match the 757 performance?

    1. The 757s aren’t going away in the immediate future, so they will probably stay around for a bit. The domestic 767s should also be able to be used I would think.

      Alaska uses 737-800s for all their (west coast-)Hawaii and transcontinental flying, which works well for them. It is a reduction in capacity, but Delta also has 738s that can take over some routes.

    2. The 757 will be around through the end of the decade at least. They’ll probably be retiring the 757s that make 10 daily flights between ATL and MCO.

    3. Yeah, I’d bet that it will be 757s and then eventually 737s. The 767 might hang around for LA to Honolulu but the outer islands will most definitely be narrowbodies.

  2. Cranky, I’m thrilled to read someone who read and understood Moneyball (unlike virtually all of the baseball press).

  3. How could you mention Cal without his ‘dog’ Spot…..lol. Haven’t thought of Cal since I lived in L.A.

    People buy usused cars so what’s wrong with buying a current version of an airplane instead of waiting for something newer down the road.

    1. But Delta isn’t even buying used. They’re just buying the “new” 2009 models that people never looked at.

      Excellent strategy, and should be a great aircraft with the Sky Interior.

      1. The Sky interior is definitely cool…mostly for the overhead bins. I’ve been on a few of CO’s new 737s with Sky, and what I’ve seen is the FAs need some training in actually using it. They all seem pre-occupied with the novelty of the touch screen and the lights. It’s actually pretty annoying when the mood lighting changes color 7 times in 5 minutes like some kind of disco. Who do they think they are…Virgin???

    2. You’ll have happy to know that Cal is still alive and kicking, though barely. He’s still in Long Beach if you need to buy a Ford . . .

    1. They still have the A330 from NW (which seems to be successful). But otherwise, the MD-88s/90s are the only non Boeing aircraft left, and the 88s are going away too.

      1. Fred, they have 120-some Airbus narrowbody jets.

        Because I was curious I went and summarized how Delta’s fleet breaks down by original manufacturer:

        Narrowbody Airbus: 126
        Narrowbody Boeing: 260
        Narrowbody Douglas: 29
        Narrowbody McDonald Douglas: 145
        Widebody Airbus: 32
        Widebody Boeing: 128

        There are a total of 720 planes in the fleet, 560 or 78% are narrowbodies, 160 or 22% are widebodies. 158 or 22% are Airbus jets. 388 or 54% are Boeing Jets. 29 or 4% are Douglas Jets :-(. 145 or 20% are McDonald Douglas Jets.

        So Airbus is the second largest part of their fleet, and makes up 23% of the narrowbody fleet.

    2. Only some of the A320s are going away, but there are still plenty of A319s in the fleet as well. I imagine those will stick around until it’s time for the next replacement order, so there’s no total victory for Boeing here.

      The MD-88s still haven’t been replaced with anything and the MD-90 fleet is growing, but you can consider those Boeing in terms of aircraft purchases these days.

  4. The way Cranky explains it here, it kind of reminds me of Northwest going against the industry conventional wisdom by keeping its DC-9s around forever.

  5. This is kind of parallel to what Doug Parker said in response to a question on US’s last earnings call. He said that there wasn’t enough economic advantage to converting their cuurent order to make it worthwhile. there’s more to aircraft economics than fuel burn.

  6. This reminds me of the hybrid vs. standard gas car debate. Sure, the hybrid model of the same vehicle gets 40 miles vs. 25-30, but for that you pay several thousand dollars more. Well, how much gasoline can you buy with the money you save? Usually a lot more than you’d actually use, if you drive a typical 10k miles/year. I think Delta is letting the accountants make the decisions here and for once I agree that’s the right move. 99.9% of the general flying public won’t care if the 737 they are on has a new technology jet or not.

  7. CF, do you have any more 411 on their MD90 purchases? I found that to be a very interesting nugget. DL has done this in the past w/ some of its preferred aircraft, including the L10’s in the early 90s (eastern, pan am) and late 90s (twa). In the late 90s, I once flew an L10 that was so new to DL, I found TWA markings in parts of the F cabin!

    Seems like there is a lot of bang for the buck to be had in such purchases, especially compared to new a/c purchases and when the airline already has a critical mass of those planes to make parts availability and servicing that much easier.

    1. They’ve been doing this for a couple years now. I believe they’ve picked up most MD-90s that are available for sale. I think the Saudi aircraft might be the only non-desirables because of a different cockpit. (Someone correct me if I’m wrong on that one.)

      The strategy is that especially with a hub now in Minneapolis, those airplanes can serve a lot of medium haul routes really well. And they’re so cheap to buy that they’re rock stars right off the bat. Remember, the MD-90 engines are basically the same IAE engines that you find on Airbus narrowbodies today (now the ex-NW ones). So they’re quite fuel efficient.

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