A decade ago, Delta Air Lines (NYSE:DAL) became known as a savvy acquirer of used aircraft. However, as its fleet aged and its cash flow surged toward the middle of the past decade, Delta began ordering brand-new jets in increasing numbers. By late 2019, management was talking about a new fleet strategy focused on fleet simplification and a shift to new-technology aircraft.
However, the COVID-19 pandemic caused Delta to rethink its fleet strategy once again. The airline has regained interest in used jets and has reportedly finalized at least two deals for used aircraft recently.
Why Delta used to love used aircraft
Delta exited the Great Recession with a weak balance sheet and plenty of aircraft in need of replacement: most notably, 71 DC-9s that were 35 years old on average. It also needed to expand its fleet over the following years to take advantage of the recovery in air-travel demand.
The airline solved this conundrum by scouring the globe for out-of-favor jets that it could buy or lease cheaply. These included a slew of MD-90s acquired from various foreign airlines and 88 Boeing 717s subleased from Southwest Airlines. Delta's experienced maintenance organization gave it a competitive advantage in managing the resulting operational complexity.
By leaning on cheap used aircraft for most of its growth and replacement needs in the five years after the Great Recession, Delta was able to generate solid free cash flow despite the slow economic recovery. That allowed it to steadily pay down debt, bolstering its balance sheet.
Delta Air Lines net debt (quarterly), data by YCharts.
More recently, Delta changed strategies. First, cash flow soared beginning around 2014, giving Delta the flexibility to ramp up capital spending. Second, it became difficult to find parts for MD-90s a few years ago, exposing a drawback of buying "orphan" aircraft that were produced in small numbers. As a result, Delta has been spending billions of dollars a year on new jets recently and buying few (if any) used aircraft.
The calculus has changed
The pandemic changed management's perspective in three key ways. First, the full-service airline accelerated the retirement of hundreds of jets last year in order to simplify its fleet and reduce costs. Second, the pandemic caused Delta to burn billions of dollars of cash, making balance sheet restoration a key priority for the next few years. Third, used aircraft values have tumbled due to the sharp drop in air travel demand -- particularly outside the U.S. and China.
Once again, used aircraft represent an elegant solution, allowing Delta to replace the jets it plans to retire in a cost-effective manner. It has agreed to lease seven Airbus A350s from AerCap, according to The Air Current (subscription required). These jets were previously operated by LATAM, which decided earlier this year to permanently eliminate the A350 from its fleet, even though its oldest A350s were delivered in 2016.
Delta plans to augment its A350 fleet with some lightly used jets. Image source: Delta Air Lines.
The Air Current also reports that Delta has reached a deal to buy 29 Boeing 737-900ERs that Asian budget carrier Lion Air previously operated. And the airline could potentially expand its used aircraft plans further, depending on market conditions.
A new take on an old strategy
While Delta appears poised to scoop up dozens of used jets, it hasn't actually reverted to its fleet strategy of a decade ago. The used jets it is pursuing this year are quite young: particularly the A350s. Moreover, they fit with the airline's fleet simplification plans. Delta has 130 737-900ERs in its fleet today, averaging less than five years of age. It also has 15 A350s, plus orders for 20 more.
Despite pursuing relatively modern aircraft this time around, Delta is likely to secure big discounts relative to pre-pandemic prices, as the supply of used jets continues to outstrip demand by a wide margin. Thus, it will be able to continue modernizing and simplifying its fleet -- and reaping the associated cost savings -- while keeping capex in check.
Investors got a glimpse at the alternative last month, as United Airlines ordered 270 new jets to update and expand its fleet. This boosted United's capex commitments by more than $12 billion to a staggering $35.9 billion. Delta's move to capitalize on the availability of cheap, modern used jets looks far more shareholder-friendly and will enable the company to fix its balance sheet much faster than rivals.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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