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.
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.
