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.
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.
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.
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 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.
Allegiant has started to replace the older MD80’s with used A320’s, slightly larger planes and 25% more efficient on fuel costs.
That’s not true. The A320s are supplementing the MD-80’s; not replacing them.
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 and get airplanes that are in the same ballpark in terms of operating costs.
Now this strategy only goes so far. There aren’t many cheap MD-90’s and 717’s available in the world. Delta has been very clear that it doesn’t have a “Used Airplane Strategy”. Its strategy is more “opportunistic”. When these types of opportunities are available, it will take advantage. But Delta has bought, and will buy even more, new airplanes in the future.
I think the idea is the mix of aircraft gives them the opportunity for low ownership costs, reasonable fuel efficiency and maximum flexibility.
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 and a Gen2x on a 787 is probably less than 5%. The real attraction of aircraft like the 787 isn’t the SFC it is in the substantial reduction in airframe weight per seat. One of the reasons the 757 saw a resurgence in use, especially on long thin routes is that while the SFC on the RB211-535E isn’t spectacular, the airframe weight per seat is substantially lower than any other aircraft with comparable range. The equation for fuel burn is essentially(Lift/Drag)xWeightXSFC. In other words reducing the weight of the airframe by 10% has the same impact as reducing the SFC by 10%.
The other side of the coin is that an aircraft that has RB211-524G/H engines is probably fully paid for, so the capital cost of ownership is essentially zero. The Joker in the deck is maintenance, and the FAA has been pretty good at recognizing aging aircraft issues, and issuing expensive airworthiness directives that can wipe out the capital cost savings leaving you with the worst of both worlds, the high fuel expense, and maintenance expenses that rival or may exceed capital costs of a newer aircraft.
As cranky suggests, the more hours you operate the aircraft per day, the more attractive new,more fuel efficient airframes look. The capital costs are pretty much fixed each month whether you fly the airplane 3 hours or 300 hours. The more you fly the aircraft, the lower the capital cost per ASM is.
If you don’t fly the airplane very much (typical of many secondary air freight operators), the capital costs drive the equation, and you often see these carriers operate older aircraft, or even aircraft that started out as passenger aircraft as freighters. So while the big airfreight operators fly the newest most fuel efficient freighters (because of the very high utlization), the smaller guys are often operating much older equipment because the low utilization means the cost equation is dominated by the capital cost.
What Delta has been quite good at is buying relatively recent airframes at what could only be called bargain basement prices. While these aircraft don’t have ASM fuel costs as low the latest and greatest, they often are not far behind, and of course, these aircraft have very low capital costs, and are new enough that there shouldn’t be any massive maintenance surprises. That’s the good news, the bad news is that maintenance can be a nightmare, if there an engine/airframe combination exists, there is a pretty good chance Delta has them in the fleet!
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, which is very expensive.
The MD-90 is pretty efficient. The 757 is efficient enough for certain runs. The MD-80, while not very fuel-efficient, may be efficient enough on shorter hauls. The Boeing 717 may be more efficient on shorter hauls than an A319 or a 737-700.
I am surprised DL is keeping the MD-80s, and even upgrading their cockpits. One reason DL is keeping the MD-80 around may be the DC-9 had an unlimited service life, and the MD-80 was originally certified as a DC-9 variant (DC-9-80). I am kind of surprised there is no serious reengining proposals for the MD-80. AA looked at it but decided not to. It seems a reengined MD-80 might be a good cargo plane to replace the 727s out there.
Finally, DL is managing its fuel costs differently from other airlines through the use of its Trainer refinery.
The bigger problem I see for DL is what it will do when it has to retire its 767-300ER fleet due to aircraft age. There is no airplane in that size category. An A330-200 is the smallest long-haul option, but it is more of a 767-400ER size with a 767-300ER range. The 787-8 is a 767-400ER size with a 777-200LR range. Either aircraft would be overkill for TATL routes. DL will have to change to fewer direct flights with bigger airplanes, or more of a European hub option like NW used to do out or AMS. I still have to wonder if there would be an option for a 767-8X, that is a 767-300ER with 747-8 engines and other improvements (such as aluminum-lithium construction) to replace the TATL 757-200s, 767-200ERs, and 767-300ERs.
Finally, when DL retires its 747-400s, it has to decide if it wants a bigger airplane (777-300ER or A350) or more 777-200LR and A330-300 class airplanes. While I love DL’s NRT hub, I think DL will go smaller and also offer more direct flights.
Will Boeing still sell you a 767-300?
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 dated Brent post as a marker with a wholesale cost of jet of $~123. Having a refinery does nothing about the $108 and introduces a host of operational risks (see BP Texas City 2006 among others).
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 like a smart strategy to me.
sjc user – You’re just thinking about recent purchases. Delta has also been active on the used market for 757s and 767s over the years. I remember back in the 1990s when they picked up some ex-Gulf Air 767s. They also acquired several of the TWA 757s from American and some ex-ATA 757s. So this isn’t a new phenomenon for the airline. As Brad says, it’s an opportunistic strategy.
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 a 738, and the last on a MD90. I had one mechanical delay and it was on the A330-200, which was the newest plane I flew. Go figure.
I can sum it up succinctly. The answer is: “Depends.”
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 exit markets as it is reconfigured and the 717’s become more prevalent in the fleet and to see the A319 redeployed to more markets like LAX-RDU and LAX-BNA.
The MD90’s that DL is flying are mostly built in the mid 90’s making them fairly young (as a fleet it is younger than the DL A320 fleet) and are incredibly flexible in usage. It is capable of flying to every single continental domestic market in the US from Minneapolis (which is the second largest DL hub).
DL isn’t afraid of buying new aircraft either. While buying 717’s (don’t forget, SWA is not only letting them go, they are paying for the conversion and paying a “fee” to DL to take them) and MD90’s, DL has also started taking 100 brand new 737-900’s and have placed orders for brand new A330’s and A321’s. Also, DL announced last week that they were sending out requests for bids on brand new widebody aircraft to replace the entire 747 fleet and a lot of the 767 fleet so the new aircraft will also be flowing in. Richard Anderson made it clear that he was very interested in the A350 as one of the replacements.
Overall, the slightly used approach by DL has been very successful and it is difficult to replicate at other airlines as the market of available usable aircraft isn’t all that large and the key to making it work is a low initial purchase cost.
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 on TATL or is it too big? Maybe a derated 787 would be a better fit for TATL?
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
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 couple of days before the flight, but how about this:
FAA aircraft number (N-xxxxxx),
Date aircraft manufactured and date of last major overhaul or maintenance activitiy,
Previous operators, if any, and date(s) when they operated the aircraft,
Dates when engines were installed and when they last had major maintenance work, if any,
If there is a FAA site that gives all this info, then all we’d need is the FAA number and those who cared, could do their research without having the airline do it for us. (I’m not aware this is there, however.)
Given all this, I.m not sure what we would consider good, or bad, but at least we’d have it.
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 wants data about everything, even if they’re not qualified to act on it. I can overwhelm you with the domain specific knowledge I have, but unless you stop and study or ask someone knowledgable, its just meaningless data.
FWIW, Knowing what I know, I’d rather have an experienced pilot, on an older, perhaps not as well maintained airplane, than a newer pilot on a new perfectly maintained plane. Good pilots are much more able to correct for problems than new pilots.
The other problem is just looking for the number of days since a plane was maintained can be problematic, as sometimes incorrect maintenance is a direct cause of a crash. (See Air Midwest Flight 5481)
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 the dark and the airlines seem to relish it.
One of the complaints I have with this industry is that there are so many variables that are involved, yet we consumers, even us smart ones (well, sort of), still are missing a lot of information when we buy the ticket. How old is this airplane? I don’t know, when I buy the ticket. Has it been in this airline’s hands for some time? Have they maintained it well. Sure, the FAA knows, but I don’t when I buy the ticket. And then, why is a regional craft being used for this flight? For the airline to save money, I guess. (Yes, yes, the are other reasons, but….) And, are the pilots properly certified, qualified, experienced in ways we think they should be, or in ways we might be to compare airlines. I see stuff like this in my doctor’s office, even at the beautician, but in the airplane? No. this pilot being flying this type of aircraft…this specific model, and how does all this compare among airlines competing. (I guess the FAA knows, but how do I know?) Oh, is this crew well-rested or they have they just commuted in from Pensacola to fly me to Seattle? How does this compare with another airline?
And then my pet peeve, the nonsense about the changes in fares and the sheer number that exist. Did’t I read the other day that the best time to buy a ticket is 54 days ahead of the flight? That’s crazy. 54 days? Who has the ability to figure out one’s travel plans that far ahead of time? And if I buy and have to change, well, there’s a $200 change fee. And then, 25 different fares on a single flight, all available at the same time. That’s nuts! I challenge that this is all about supply and demand. No, it’s the airline’s manipulation of inventory, for its advantange and my disdvantage. Well, if the airlines can manipulate the inventory, they can tell me in advance what the aircraft number is, too.
Sorry, Nick, far more than just reponding to your good comments. Thanks to you and to Cranky for consistently laying so well, so many different things about this industry. I love flying on our airlines but I just think dealing with them is the pits. I don’t think it has to be that way.
Sorry JayB, but there is no possible way an airline could tell you what airplane would fly your flight when you book it unless you buy your ticket the same day you travel. The number of variables is mind-boggling. Planes break, flights are delayed, crews get sick, etc. A million things can impact the airplane that will actually fly you somewhere.
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 why you see the MD88 on shorter stage length flights.
Personally, I really like the 3-2 seating – and hope Delta orders the C-series, which will be 3-2.
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.
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..
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?
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 winter NZ is leasing out there aircraft. Another reason that newer aircraft are better is passenger appeal who wants to ride on a scruffy old plane ?
Wait….someone who works in aircraft leasing says it is cheaper to lease planes??? Well that settles it! :)
If lots of new airplanes is the key to airline success, there must be lots of successful airlines in the world.
Where is the greenie weanie factor in this analysis?