Boeing Close To A Game-Changing Delta Win? (NYSE:BA)

In recent years, Delta Air Lines (NYSE:DAL) has been preferring aircraft from jet maker Airbus (OTCPK:EADSF) (OTCPK:EADSY). With orders for the Airbus A321ceo, Airbus A321neo and the Airbus A330-900 instead of the Boeing 787 and Boeing 737 MAX, Airbus was the clear preferred pick for Delta Air Lines. However, Boeing and Delta Air Lines are now in negotiations for the purchase of Boeing 737 MAX jets. So, ordering aircraft from Boeing once again would be a big deviation from the line the company has been following for years. In this analysis, I will explain why it would make sense for Delta Air Lines to order the Boeing 737 MAX, but also why this might be a tactic.

Delta And Boeing: A Troubled Relation

The relation between Boeing and Delta Air Lines has not been a smooth one. The friction between Boeing and Delta Air Lines is one that originated years ago as Delta Air Lines lobbied against the Ex-Im Bank, which Boeing used to provide financing solutions to state-owned carriers in the Middle East. These state-owned carriers had an unfair advantage over the competition and Delta Air Lines believed that by providing financing solutions via Ex-Im Bank, Boeing supported this unfair advantage.

The result was that Boeing and Delta Air Lines have been at odds. Delta stopped buying big with Boeing, it cancelled its order for the Boeing 787, showed no interest in the Boeing 777X for reasons that now appear to be justified and openly criticized the pricing of Boeing wide body aircraft. Delta Air Lines targeted Boeing claiming it had bought a second-hand Boeing 777 for less than $10 million. CEO Andersson, even tried to make things worse for Boeing when he specified the actual amount paid for the jet was $7.7 million. This put pressure on Boeing’s share prices as lower than anticipated prices for second-hand aircraft could mean that Boeing would need to price its new aircraft more attractively to compete with the aircraft that were coming off lease and also to compensate for the reduced value retention. What Delta Air Lines did not mention was that the aircraft it acquired was not good for anything other than spare parts, but the goal seemed to be putting pressure on Boeing and not to provide an accurate representation of the facts. What also did not help was that Boeing targeted Bombardier’s C Series (now Airbus A220) for which Delta Air Lines had placed orders.

Delta Air Lines Fleet And Orders

The Delta Air Lines fleet provides various clear reasons why the US carrier would be looking to acquire jets from Boeing. We see that overall, Boeing still has a 57% market share. What might be somewhat surprising is that Airbus has a bigger market share in the wide body fleet, which might be surprising given that generally Airbus is known for its strong single aisle product. However, the Boeing wide body share has recently declined due to the elimination of the rather inefficient Boeing 777-200ER fleet of 18 aircraft and 14 Boeing 767-300ERs while the Airbus A350-900 and Airbus A330-900 are replacing these jets further amplifying a market share reduction for Boeing.

In the single aisle segment, Boeing still somewhat surprisingly has the overhand, but looking at the future things can change drastically. In the single aisle segment, by 2025 the Boeing 717 is expected and the fleet of Boeing 757-200s will likely have more than halved by 2027. Again, these jets will be replaced by Airbus aircraft which will give Boeing a 37% market share compared to 63% for Airbus in the single aisle segment, while in the wide body segment Airbus likely will have an 80% share putting the combined market share at 65% for Airbus versus just 35% for Boeing.

Using the TAF Boeing Backlog Monitor, we see that at this point Delta Air Lines does not have a single aircraft on order with Boeing. So, how did we get here? For that, we have to look at Figure 1 which shows that Delta Air Lines placed 168 orders with Boeing since 2000 but its last big order was for 100 Boeing 737-900ERs in 2011 with options for 30 more which were incrementally firmed in 2015 and 2017. So, you could say that for the past decade, Delta Air Lines has not looked to acquire aircraft from Boeing.

One can even wonder whether Delta Air Lines was really interested in ordering the 10 aircraft purchased in 2017. The company made clear that these aircraft were exercised by Boeing in 2017:

[***] Additionally, on March 14, 2017, Boeing notified Customer of its exercise of ten (10) model 737-900ER Put Option Aircraft pursuant to Letter Agreement DAL-PA-02022-LA-1501328 (Put Option Letter Agreement ). This Supplemental Agreement incorporates the ten (10) exercised model 737-900ER Put Option Aircraft, which are considered Incremental Aircraft, as defined in the Purchase Agreement. [***]

It is likely that as part of its transition to Boeing 737 MAX production, Boeing exercised the put options forcing Delta Air Lines taking these end-of-production-life aircraft. That Delta had not ordered big from Boeing after 2011 is not a big surprise as the airline sued the Ex-Im Bank in 2013 over financing loans provided to Air India, by the end of 2015 Delta put pressure on Boeing saying it bought a second-hand Boeing 777 for a price far below the suggested base value, and in 2017 Boeing filed a trade dispute against Bombardier after Delta agreed to purchase C Series jets in 2016. We see that in the years that Boeing and Airbus have been at odds, Delta also stopped ordering from Boeing.

In the years that Delta Air Lines and Boeing were battling each other, the US airline went on a shopping spree with competitor Airbus buying over 250 jets valued more than $15 billion according to data analytics from The Aerospace Forum. While this was not a bad decision at all as the airline acquired end-of-production life Airbus A321ceos and with the Airbus A321neo, which is a phenomenal product, it does put Delta Air Lines in a tough spot. The same spot that makes an order for the Boeing 737 MAX a very plausible scenario.

A Boeing 737 MAX Order Is Restoring The Balance

So, the tough spot that Delta Air Lines is in is that since it spent the past decades living at odds with Boeing, and while that gave Airbus the opportunity to rake in $15.2 billion worth of orders, it also meant that everything started to skew heavily towards the European jet maker. Delta Air Lines has no unfilled orders with Boeing left while it has a backlog of 225 Airbus aircraft directly orders from the European jet maker.

The result is that while Delta Air Lines likely has been able to get good prices for the Airbus aircraft it purchased, its strength in negotiations with Airbus significantly weakened. In order to maintain negotiation power with both jet makers, having an order for the Boeing 737 MAX would be beneficial to Delta Air Lines. In October 2020, Delta Air Lines was already in negotiations with Boeing as the US jet maker pitched for around 40 Boeing 737 MAX and back then I highlighted the same reasons for purchasing Boeing 737 MAX jets. Since then, the reason to buy the Boeing 737 MAX has only increased. Delta Air Lines is now looking to buy 100 Boeing 737 MAX 10 jets which competes against the Airbus A321neo. Airbus has been having good sales momentum on for the A321neo selling nearly 1,300 units since Delta placed its initial order for 100 aircraft. The result is that Airbus is in an oversold position on the program and that made the European jet maker less flexible on pricing for the aircraft. So, by buying Boeing aircraft or even suggesting to buy Boeing aircraft Delta Air Lines is also sending a strong warning to Airbus to remain flexible on the pricing else the European jet maker risks losing a piece of the pie to Boeing again.

After all, Delta’s business is not to run an all-Boeing fleet or an all-Airbus fleet or to deny Boeing orders. The airline is in the business of carrying people from A to B at the best revenue and costs. While having a fuel-efficient fleet really does help, keeping acquisition costs for aircraft low is also of utmost importance and Delta knows that more than any other airline as it previously did not purchase the most fuel-efficient aircraft but really looked at the full picture assessing, which aircraft would be most cost efficient. In some cases it will the Airbus A321neo, but it might very well be the Boeing 737 MAX and to keep access to aircraft at the best prices ordering with the competition once in a while is in the best interest of the airline and it is widely applied strategy.

Boeing’s New Mid-Size Jet

The fact that Delta Air Lines has no orders outstanding with Boeing is not solely because of the spat between the airline and Boeing. In fact, since Ed Bastian became CEO of Delta Air Lines it seems that there has been more interest in considering purchasing jets from Boeing again. Delta is especially charmed by a new mid-size jet from Boeing, which could replace the Boeing 757 and Boeing 767. The only problem is that Boeing never launched such a jet. Boeing, airlines and analysts have been talking about such an aircraft for much of the past decade but due to the difficulties the US jet maker is facing now as well as a complex business case from financial point of view and technology insertion a launch has not occurred to date. By buying the Boeing 737 MAX 10, Delta Air Lines could also look to try to push Boeing more launch a jet that could replace its 190 Boeing 757 and Boeing 767 aircraft and possibly even convert some orders a new jet once Boeing decides to go ahead with a launch.

Chances For Boeing

Also, for Boeing being able to sell the Boeing 737 MAX jet to Delta Air Lines would be a big and important for various reasons. The first reason is that it would finally give Boeing jets to deliver to the airline again and that would open up opportunities to compete for repeat orders in the future. Delta Air Lines is an airline that could easily take delivery of 20-30 aircraft of single aisle types per year. Boeing is currently looking to rebuild its production rate and being able to deliver jets to Delta would provide a significant support to the company’s single aisle production rate. With production rate increases, unit costs would also come down again which would further improve Boeing’s competitive position on pricing. So, we would see rates go up and unit costs come down.

Additionally, Boeing is in a tough spot when it comes to getting the Boeing 737 MAX 10 certified in time and with a potential order from Delta Air Lines further supported by United Airlines (UAL) and Alaska Airlines the US jet maker can make a stronger case to request a waiver for the more strict regulations that would apply to the Boeing 737 MAX 10 citing the dependency of US airlines on the type.

With all of the factors above, Boeing has more than one reason to offer Delta Air Lines very attractive prices for a Boeing 737 MAX 10 order.

Conclusion

Delta Air Lines has not ordered any jets from Boeing in recent years and the jets that it did order were options being exercised as part of an agreement between Delta Air Lines and Boeing in 2011. So, for over a decade, we haven’t really seen Delta Air Lines showing renewed interest in existing Boeing products. Instead, the airline ordered jets from competitor Airbus but with no Boeing orders in backlog getting the best price for Airbus jets has also become more difficult even more so with the strong sales numbers that Airbus is seeing for the Airbus A321neo. So, I think it is very plausible that Delta Air Lines will be ordering the Boeing 737 MAX. In a less upbeat scenario, the airline is simply exerting pressure on Airbus to remain competitive on pricing.

While ordering from Boeing would be a break from the recent order trends, I could see why Delta Air Lines would be interested in getting the MAX 10. Delta Air Lines is known for thoroughly analyzing the full cost spectrum of aircraft when deciding on purchasing aircraft and I believe that Boeing has enough reason to provide very attractive pricing on the MAX 10. Delta is in the business of carrying people and cargo from point A to B at the highest possible profits and having access to flight equipment at the best prices in Seattle as well as Toulouse is of importance to their business.