MIAMI — Late last week, Delta Air Lines announced a major order for 50 new Airbus widebody aircraft, including 25 A330-900neos and 25 A350-900s. The order represents a major victory for Airbus over rival Boeing, who had been pitching its Boeing 787-9 and five new Boeing 777-200LRs as a stopgap offer until 787-9 delivery slots opened up. The order marks the conclusion of a RFP (request for proposals) issued by Delta in spring 2014 to replace portions of its Boeing 767 and Boeing 747 fleet, the latter of which will be retired by the end of 2017.
The A330-900neos will mostly fly trans-Atlantic missions, while the A350-900s will be used across the Pacific to replace 747-400s and (most likely 777-200ERs) on routes from Detroit and Seattle. For Boeing, the order is a major loss, due to the scale of the order, the fact that Delta is one of the Big 3 US carriers and the fact that Delta’s uptake of the 777-200LR, even temporarily, would help Boeing fill the production gap for the 777 Classic. Airbus, meanwhile, won a major coup, both due to scale, and due to a big win for the A330neo head to head against the 787-9 from a prestigious, name-brand customer.
Airbus won the competition for several reasons, but we would like to present our assessment of the key ones. For the purpose of this analysis, it is instructive to think of the RFP as two replacement competitions – the A330neo versus 787-9 for medium-haul routes and the A350-900 for longer-haul ones.
Availability Tilted in Favor of A330neo and A350
In terms of availability, Boeing was pitching a full suite of 787-9s against Airbus’ blend of the two aircraft. According to AirwaysNews sources at both airframers, Airbus was able to offer Delta more combined delivery slots for the A330-900neo and A350-900 in the 2016-2018 timeframe than Boeing could.
For Boeing, availability matters greatly, especially in terms of replacing the 747-400s and improving performance across the Pacific. Seattle is a relatively small Asian origin-and-destination (O&D) market (versus Los Angeles, San Francisco, New York, Chicago, or even Houston) and accordingly, Delta will have to rely on connecting traffic to fill airplanes out of Seattle. Strategically, the Seattle hub absolutely makes sense, but the traffic mix is problematic. Connecting traffic is lower yielding than O&D, and accordingly Delta needs the superior operating economics of new build aircraft versus 747s and 777s. This is one of the major reasons Delta rejected the stopgap 777-200LRs.
Delta’s Cash Focus Favored the A330-900neo
Our analysis of Boeing and Airbus pricing and costs, as well as our discussions with sources at the two airframers have led us to conclude that Airbus offered Delta a significant discount on the A330-900neo relative to the 787-9. Based on list prices, the 787-9 is cheaper than the A330-900neo, at $249.5 million versus $275.6 million. However, Boeing tends to offer discounts in the 45-50 percent range, while Airbus has the capacity to approach 60 percent (or even 65 percent if it sells at break-even) discounts on the A330-900neo.
The different propensity to discount arises due to a number of cost factors, chief among which is Boeing’s higher program development cost for the 787 versus the A330neo. Airbus has already paid off the A330’s development and production line costs with the A330ceo and A340, and is spending less than $5 billion in total to develop the A330neo, whereas Boeing must recoup nearly $30 billion in 787 development costs.
Delta is a unique beast amongst airlines in that it manages to free cash flow, instead of to profitability per se. The airline routinely emphasizes its free cash flow figures prominently in financial releases and management commentary, and its fleet strategy in the past has erred on the side of minimizing expenditures (MD-90 acquisition, 717 lease, et. al).
Based on our analysis and sources, we believe that Boeing offered Delta pricing in the range of a 44.5-47.5 percent discount. Taking the midpoint of that range, we calculate that Boeing’s discounted list price offer for the 787-9 to be $134.7 million, or $3.37 billion for a fleet of 25 aircraft.
Meanwhile, we believe that Airbus offered Delta a discount of between 53.5-56.5 percent, and once again using the midpoint of that range, you reach a list price of $124 million, or $3.10 billion for a fleet of 25 aircraft. So by opting for the A330-900neo, Delta will save $260 million in direct cash on the order alone (the technical range is $70 to $465 million, but the midpoint is usually a decent guide for reality). For a business concerned with cash flow, that is a meaningful effect.
Operating Economics Alone Justify the Purchase of the A330-900neo
We conducted an economic analysis of the 787-9 and A330-900neo head-to-head for a representative route, New York JFK–Frankfurt, from Delta’s trans-Atlantic network. The distance for the route is 3,350 nautical miles, and operating cost calculations were made based on a variable fuel cost scenarios (jet fuel at $3.50, $3.00, and $2.50 per gallon – the current IATA spot price is $2.31, but these reflect long-term scenarios). Discounts were as noted above, and depreciation was calculated based on a 12-year depreciation schedule.
As the data illustrates – the 787-9 has a slight advantage in cash cost per seat mile, whereas the A330neo actually outperforms the 787-9 once capital costs are considered. Beyond availability and cash savings, the A330-900neo is a viable choice for Delta on operating economics alone.
A350-900 and 787-9 Are Close Enough to Each Other in Operating Economics that Availability Carried the Day
We also conducted an economic analysis of the 787-9, A350-900, and head-to-head for a representative route, Seattle-Shanghai Pudong, from Delta’s trans-Pacific network. The distance for the route is 4,972 nautical miles, and operating cost calculations were made based on a variable fuel cost scenarios (jet fuel at $3.50, $3.00, and $2.50 per gallon – the current IATA spot price is $2.31, but these reflect long term scenarios). The A350-900 and 787-9 are assumed to sport identical 46% discounts with a 60% discount for the 777-200LR (as Boeing attempts to fill its production gap). Once again, a 12-year depreciation schedule is used.
As the data illustrates, the A350-900’s higher seating capacity gives it only a narrow disadvantage in cash operating cost per seat mile, but in terms of total CASM, the 787-9 has a small (<3.5%) advantage. Both aircraft are close enough in terms of operating cost that non-operating factors (commonality with the A330-900neo, availability, et. al) won the day for the A350-900. Furthermore, our analysis clearly illustrates why Delta rejected the stopgap 777-200LRs – a 16-20% operating cost disadvantage inclusive of capital costs is too large to stomach in a low margin hub like present day Seattle.