Topic of the Week: Delta’s Sweet 717 Deal

I’m not sure if you saw it, but Southwest said that it is actually going to pay the convert the 717s into Delta’s configuration so that the airplanes are ready to go. They’ll also do maintenance work to deliver them like brand-spanking new airplanes. Delta got a fantastic deal, and Southwest looks like it was pretty desperate to get rid of them. Is this the right move for Southwest at such a high cost?

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41 Responses to Topic of the Week: Delta’s Sweet 717 Deal

  1. Jon says:

    Looks on paper that Delta got a fantastic deal and delivered a nice “Welcome to Atlanta” gift to the LUV crew.

    On a related note, this article states that fares at ATL reached a record high. As suspected, there’s no “SWA Effect” magic to spread at ATL. And with their higher costs, they couldn’t keep fares down where FL had them.

    http://m.ajc.com/business/average-air-fares-hit-1485411.html

    • Ted says:

      I’m not disagreeing with you, you may be right. I would just say that Southwest only has about 20 or so flights in ATL right now. AirTran’s costs have not snapped up to Southwest’s yet because the crews have not fully integrated. So 20 flight impacting the, what 1000+ that Delta has every day? You’re not going to see the needle move, even if they were giving away the flights for free. It’s just too early to tell.

      • CF says:

        Ted – It’s true that Southwest doesn’t have a lot of flights in Atlanta, but as noted in the article it has taken over pricing and revenue management functions for AirTran flights and really started to push fares up there. This market is only going to get more expensive as it turns into a Southwest operation. I’d look for Spirit to start getting some ideas there . . .

  2. A deal that places an entire sub-fleet of aircraft with another airline willing to take an airliner that is by all accounts an orphan in the airline world is a good deal at almost any price. And one wonders if SWA isn’t performing the work primarily in its own shops which would certain help keep the costs of that deal down for SWA.

    • But DL loves the orphans. They’ve got the largest MD-90 fleet as well.

    • CF says:

      Greg – I doubt Southwest is doing the work itself. Southwest outsources most of its maintenance.

      • Roger says:

        Presumably AirTran had some sort of arrangement in place for maintenance and couldn’t just immediately break it, so they probably had to be paying someone for a while anyway.

        Any idea how long maintenance contracts usually run for, and fees for early breakup?

  3. Roger says:

    I was initially a proponent of the AirTran/LUV merger, but now I’m worried my hometown airport (KPWM) is going to be dropped. I’m not sure PWM can support more than 3 or 4 737’s a day in the winter.

    As for the 717-200 deal, I think it was a win win for both sides.

    • Derek says:

      I think also the 717 would be perfect for the PWM-ATL route on the Delta side. They fly 3 nonstops per day usually on the MD80. Probably going to see a reduction in available seats on that route probably not a frequency adjustment. As for losing PWM with LUV, you might be right. They are in MHT and BOS pretty good already and is it worth it if they go from 3 down to 2 flights a day to BWI ?

  4. Jason H says:

    Delta just seems to be making all the right moves from a business perspective. Not just getting WN to pay to prep the 717 to move to Delta, but announcing today that they are shutting down Comair as of Sept 29, buying the oil refinery to try to hedge in a lateral manner, upgrading the interior of all but their 50-seat fleet, cutting their 50-seat fleet to a relatively miniscule level, and putting wi-fi into their international planes.

    It’s almost like they are making money! HA!

  5. Is it unusual for an airline to not do maintenance on airplanes they are selling to someone else? Since the aircraft are in daily use with AirTran you would think they are kept in good working order already, so what else is there to do?

    But I can understand if you want to get rid of something badly, you may do something out of the ordinary to move things along.

    • As I recall WN is going to be doing the heavy checks on the 717s, are they not?

      It is common for airlines to ground a plane when it gets to the point of needing a heavy check and for the new purchaser to have to perform the heavy check.

    • CF says:

      It’s normal for airlines to do regular maintenance, but my understanding is that they are going to be doing engine overhauls and more in order to ensure the airplanes won’t need heavy work for a long time. That’s not standard, as far as I know.

  6. Obviously, both sides feel they are winning something. Since the parties involved have access to actual cost and benefit figures and know how the aircraft will be utilized in their respective systems, I have to believe they know what they’re doing.

  7. Noah says:

    Seems like a win-win.

    Unfortunately, for southwest, the cost of another fleet type just isn’t worth the marginal routes or cities that become a reality only with 717 vs 737. They seem to think it is worth it to dump those aircraft at a great discount (even though their CASM is Below the 737 classic). Delta, whose operation is used to every fleet type imaginable sees no real marginal loss from one more type, but a big gain as the 717 is very efficient for its size.

    Southwests future is in 737-800 and one day 737-9, bigger, not smaller, as all expenses rise and passenger numbers grow. It will be the easiest and fastest way to reduce cost without cutting staff or pay.

    My only question or issue is if Gary Kelley lied to everyone when he said he likes the 717 pre-merger, then dumps it so quickly and below cost post-merger. Is the environment that different? Surely he understood the multi-fleet complexity at that time, and much of the economics…

    • Ted says:

      CASM can’t be below the 737, it’s basic airline economics. The cost to operate the trip is about the same, but you’re dividing it by fewer ASMs (seats). If the CASM was anywhere close to even with the 737, they would keep it. Just like if CASM on 50 seaters was anywhere close to the 75 seaters, we wouldn’t be having this discussion.

      And on the Gary Kelly question, remember you don’t fully get to see the “books” until after the deal closes. Before the deal, he probably knew what the cost was, but didn’t know the individual components and ratios. So, if pilots were 30% of the op cost, and he thought they may have been 5%, if you then equalize pay that has a substantial impact on the analysis.

      • CF says:

        Ted – But that’s the point. If CASM was all that matters, then Southwest would only operate an A380 on every route. The key is getting the lowest CASM possible on an airplane where you can maximize your profit by filling every seat at a decent fare. There are a bunch of markets that can’t support a 737 but might do well on a 717. For Southwest, it has basically said there’s no interest in those markets.

        • Noah says:

          First, I agree with cranky, but secondly, does anyone have info on 737 classic vs 717? I know a 737NG will win, but I thought the classics guzzle gas…

          • I don’t think there is a whole lot of difference between the ASM costs on a 717-200 and a 737-300. The BRW engines on the 717 have roughly the same SFC as the CFM56’s on the 737-300. The fuel burn is pretty much going to be related to the actual weight of the aircraft. The number I like to look at deadweight of the airframe per passenger. That is about 640 pounds per seat on the 717, and 550 pounds per seat on the 737-300. The short answer is the fuel component of the ASM cost is probably a little lower on the 737-300. So at the end of the day the issue becomes the purchase price and how many seats are you likely to sell at workable yield. The 717 probably has lower maintenance costs (MD tended to build relatively simple airplanes), and because of the different capabilities (the 737 is a considerably more capable aircraft), the 737-300 probably cost substantially more than 717.

        • Ted says:

          Yes, but you’re making the assumption that the trip cost is within range of the 737. If they’re equalizing the pilot rates, I don’t think that assumption holds true. I think you’d see that the CASM is so significantly higher on the 717 that you couldn’t get the average fares you need to cover it, even on consistently full flights.

  8. Scott says:

    The 100-130 seat market is a very strange one within North America. Most mainline operators don’t want to touch it as it’s too small, and most regional contracts limit maximum size to approx 70 seats. This leaves aircraft like the EMB190 / 717 / CSeries somewhat orphaned in the NA market. Personally I think DL was very very smart to pick up some cheap 717s, and the operators that do have them seem to very much like them.

  9. Jim says:

    In order to convert the 717s to WN livery, it was going to cost approx $50mil…to do so for the 717s to DL livery and checks, it is an approx $100mil…only $50mil…

    $50mil to get rid of 88 a/c is not much…the cost of maintaining a separate mx base/crew/training/sims/scheduling/parts and such would be just as much, if not more.

  10. Jeff says:

    Boeing Southwest Delta
    737—–> 717——->
    Lose Win Win
    or
    Win Lose Win
    or
    Win Win Lose

    Which one is it…it can only be one.

  11. dan powers says:

    the 717 for delta as well as the a330…sets it up to merge with hawaiian…a 18+ 717 operator…the 717 (which has a MD-11 cockpit) also sets up delta to purchase the 30 MD-90’s( also MD-11 cockpits) that are waiting in the dessert for a new home. delta will have 100+ MD-90’s that are powered by the same engine used on A320’s at a fraction of the cost of a new a320

    • Noah says:

      Dan…sincerely hope your joking about DL + HA. Fleet commonality isn’t the only issue in a merger, and with the size of DL (variety of fleet) surely the type of HA’s 40 airplanes is not important in a 700 strong proposed combined fleet.

      But I agree with the point that Delta now operates everything, so it is easy for them to acquire planes that are good values without having to look at change in operations costs

    • Todd says:

      By this logic DL and NW would never have merged. At the time of the DL merger, the only common aircraft in the NW fleet were 45 757-200s. Noah is right: fleet commonality is by no means the most important factor in a merger.

      • Fred says:

        Well, fleet commonality was/is a big deal for Southwest, otherwise the merger with AirTran probably wouldn’t have happened at all.

        • Noah says:

          Southwest was “interested” in Frontier despite their airbus operation (I happen to think they were more interested in seeing their books before the Denver offensive, but I digress…) I think common fleet is a good thing, but certainly not a requirement, or even in the top 3 things to consider (culture, routes, costs)

          • Fred says:

            Every merger is different so it’s hard to generalize at all, but for Southwest/AirTran the fleet commonality was definitely important. Especially since the merger is essentially Southwest dismantling AirTran and replacing the parts it wants with Southwest flights, culture doesn’t play a huge part and routes matter mostly so they get regulatory approval and so they have some room to expand.

    • David M says:

      Delta has tried to buy Hawaiian before. I can’t remember if it was the 1980s or early 1990s. Delta would face a lot of local opposition to the idea of a mainland company taking over a local Hawaii company.

  12. phllax says:

    These are going to be great airplanes to use out of the new LGA hub, and I wouldn’t be surprised to see them go to the Shuttle as well if capacity picks up due to AMTRAK improvement projects on the NEC, especially with the Hudson River Tubes at capacity.

    Does anyone else think they might find a place out here at LAX replacing the DLC CR9’s on some routes as they move them East when the CR2’s leave?

    • CF says:

      phllax – I agree that these are great airplanes for LaGuardia. They’ll do well in Atlanta as well, which is where Delta currently has the DC-9s for the most part. I don’t think we’ll see these in LA at all. There are just a lot more shorter haul options with this kind of demand in the east, so it’s not worth opening a base in the west. Besides SkyWest will have plenty of those 76 seat jets . . .

      • Sanjeev M says:

        I bet a lot of the late night 10pm DTW-regional East Coast will get 717’s. Routes like PVD, BWI, BUF which used to be DC-9’s but are now CR2 will go back to 717.

        Hope the 717’s have better legroom than the horrible DL A319’s.

  13. cannae says:

    Oh, and the best part is that Southwest is stuck paying the debt secured by the aircraft at a 10.41% rate….

  14. dan powers says:

    DL+HA fleet commonality…haneda slots…honolulu focus city…

    • Luvaulter says:

      I would say HNL hub. You can look at the HA route map and DL gets more traffic to SYD, ICN, & MNL and Japan (which includes DL’s FUK-HNL and all of Japan was NWA’s bread and butter) plus you add a flights across the south pacific. Both pilot groups are ALPA and what HA pilot would not want DL pay? Throw in a fence for a few years to keep HA A330 pilots on the A330. I really think its a no brainier. The senior management team at DL has made very smart decisions in the last few years I think think this will just add to the list and make DL a very profitable airline.

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  16. bill says:

    It is a good deal for both! SWA would never had been able to get rid of the whole fleet in one swoop as quickly as that. Boeing, certainly doesn’t want the aircraft back. And DL gets a efficient, reliable, low cost replacement for the CRJ’s in a very short time. I was thrilled to hear that the airplanes are getting new seats! Those FL coach seats are the worst in the business (the ex-TWA aircraft seats are OK, though). Those seats were one of the reasons I stopped flying FL and now fly DL exclusively (I am a commuter).

  17. Ozark says:

    @Roger attached you will find a link to USA Today which shows which AirTran Stations will stay and which will go…

    http://travel.usatoday.com/flights/post/2012/01/southwest-announces-which-airline-cities-make-the-cut/608722/1

    PWM (Portland, Maine) is on the list to remain for now, just like ICT (Wichita, KS)

  18. Bill says:

    I hope TRI,AVL, ROA and other CRJ markets get the 717’s in place of the CRJ’s.

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