Delta will wait for new planes to mature: CEO
(Reuters) - Delta Air Lines (DAL.N) is letting a wave of orders for the newest planes on the market roll by, giving the jets time to prove themselves before buying, its chief executive told Reuters on Wednesday.
While other airlines have ordered more than 3,000 of the next generation narrow-body models, the Boeing 737 MAX and the Airbus A320neo, Delta says it is playing it safe.
"We'd rather get toward the end of a production line" and buy the jet after it has the kinks worked out and has been lengthened to hold more passengers, Chief Executive Officer Richard Anderson said in an interview at Reuters' New York headquarters.
The economics of stretched planes, he said, "are always better than the original economics."
Delta stands out its willingness to take a different tack than its rivals. On Friday, it will unveil a $1.2 billion overhaul and expansion of its passenger hub at New York's John F. Kennedy Airport that, along with new interiors on older jets, will make its offering more competitive in that key market.
But as it grows globally, Delta faces rising pressure from tougher U.S. peers and from foreign airlines that are aggressively buying new planes, often with help from the U.S. Export-Import Bank.
Robert Mann, an airline consultant in Port Washington, New York, said Delta has been able to focus on improving its business as United Continental (UAL.N), US Airways Group LCC.N and American Airlines are distracted by mergers. But he expects competition among the major U.S. carriers to ramp up once the restructurings are completed.
Delta "has enjoyed a multi-year lead and they've capitalized well on it, but competition doesn't stand still," Mann said.
Delta said buying planes later in the production cycle allows time for technical problems, such as batteries that grounded Boeing's 787 Dreamliner, to be solved and prices fall.
"Our ideal solution for buying airplanes is to compete Boeing against Airbus against used airplanes; compete GE (GE.N) against Pratt (UTX.N) and Rolls-Royce (RR.L) so that we always have multiple engine manufacturers and multiple airframe manufacturers at the table," Anderson said.
In 2011, Delta ordered 100 Boeing 737-900ER models due to be delivered starting later this year, but it has not bought either the Boeing 737 MAX or the Airbus A320neo.
U.S. rivals United, Southwest Airlines (LUV.N) and AMR Corp's (AAMRQ.PK) American, which plans to merge with US Airways this year and form the world's biggest carrier, have already placed orders for the re-engineered jets that are due for delivery over the next few years.
Anderson said Delta's deal with Boeing allowed it to convert the last 40 of the 737-900ER aircraft it has on order to the newer MAX model.
"We will evaluate it, but we would rather see some other people fly that engine around for a while," Anderson said. CFM International, a joint venture of General Electric and France's Safran (SAF.PA), makes engines for the 737 MAX.
"We would rather see proven products that have cash-on-cash returns from the moment we take delivery," Anderson said. "That is much more important."
Delta has made headlines since Anderson became CEO in 2007. It started the wave of major U.S. airline mergers with its 2008 purchase of Northwest Airlines. It made an usual swap with US Air, giving up landing slots at Washington National airport in exchange for slots at New York's LaGuardia. Last year, it surprised competitors by purchasing a refinery to lower its fuel costs. And it acquired 49 percent of Virgin Atlantic to gain more gate access at London Heathrow, a key business market.
It has also taken an activist role on behalf of the U.S. airline industry in opposing U.S. Export-Import Bank loan guarantees that allow foreign carriers to buy big planes [ID:nL2N0E31L7]).
Anderson, who was accompanied to Reuters by company President Edward Bastian, said Delta is only targeting wide-body aircraft purchases by state-owned companies that have access to market loans. Delta itself benefits from export credits for smaller, Bombardier CRJ900s jets.
"They do have to pick the target carefully because they do get some benefit associated with some program," Mann said.
Anderson said Delta would give up those credits if all export guarantees were removed.
The Atlanta-based carrier, No. 2 in traffic behind United Continental Holdings (UAL.N), expects to post its fourth straight annual profit this year. Earlier this month, it said it would pay its first dividend in a decade as part of a plan to return $1 billion to shareholders over the next three years.
"We will continue to be opportunistic" in managing the business, said Anderson.
"Every business has to have both that organic strategy and what I call inorganic strategy, which is joint ventures, asset purchases, vertical integration and other creative transactions to be certain that you are keeping an advantage over the competition," Anderson added.
HARD BARGAIN ON 787
Airbus recently began talking up the lower ownership cost of its A330 wide-body jet as it defends the model against a proposed new stretched version of Boeing's Dreamliner called the 787-10X. Airbus told a U.S. industry conference in March that the A330, whose sales have held up better than expected due in part to 787 delivery delays, could compete with the 787, implying price discounts to outweigh higher fuel consumption.
"We operate 33 A330s and were a launch customer in the U.S.," Delta's Anderson said. He added that should Boeing hope that its stretched 787 will take sales from the A330, "its prices have to come way down."
Anderson declined to comment on reports that Delta is looking at placing orders for around 20 narrow-body jets and 20 current-generation, wide-body A330s or Boeing 777s.
Shares of Delta rose 0.3 percent to $18.18 on Wednesday.