Atlanta-based Delta Air Lines (NYS: DAL) is preparing to buy 100 spanking new 737-900ER (extended range) aircraft from Boeing (NYS: BA) valued at around $8.58 billion to replace its ageing fleet of narrow-bodied aircraft. The jet can carry 200 passengers and is the largest in the family of 737 aircraft.
France-based Airbus and Boeing have been battling each other in a neck-and-neck race for the order from Delta. Both companies had made presentations to Delta recently, and it seems Boeing has emerged victorious since Delta's directors would vote on the purchase of its aircraft.
Boost for Boeing
This is good news for Boeing since the company had recently lost its exclusive ties with AMR's (NYS: AMR) American Airlines to supply aircraft. Delta Air Lines used to have all Boeing aircraft until its acquisition of Northwest Airlines in October 2008 brought with it some Airbus planes. Boeing might not get the full $8.6 billion from Delta since airline companies usually bargain for huge discounts on the official price. Delta's order is the second largest for the 737-900ER, right behind Indonesia's Lion Air.
The 787 Dreamliner nightmare
Boeing is expecting government approval for its new fleet of 787 aircraft soon. Boeing has reportedly accumulated a mind-blowing $16 billion worth of 787 inventories in the past three years, waiting for regulatory approval and subsequent delivery as early as next month. The company manufactured so many of these jets that it ran out of room and had to park the extra aircraft at leased space close by and at a facility in Texas.
Even if you take the regulatory approval as a done deal, Boeing's production costs are still set to increase because the planes would still be there for weeks and perhaps months to come.
Recently, Delta had reported lower-than-expected earnings as the airline company faced increasing pressure from rising fuel costs that have outstripped revenue growth. Delta's net income dropped from $467 million in the year-ago quarter to just $198 million this quarter. Quarterly revenue increased by 12% to $9.15 billion, while operating revenue increased by 19%. Fuel and related costs increased by an astounding 36%.
Rising fuel costs aren't worrying Delta alone. In the second quarter, US Airways Group (NYS: LCC) reported a 54% jump in fuel and related costs; Southwest Airlines (NYS: LUV) also reported a shocking 64% rise in fuel and oil costs, while United Continental's (NYS: UAL) aviation fuel costs took off by a gravity-defying 117%.
As with its competitors, costs are now forcing Delta to reduce expenses through different means, such as reducing aircraft traffic where demand has not kept pace with rising fuel costs and discontinuing loss-making services to small cities such as Butte, Mont.
In order to boost revenue, Delta has invested in improving the customer experience by buying new airplane seats and offering better food and wine on board.
The Foolish bottom line
With an increasingly competitive environment and rising costs, Delta has to defend its bottom line. Delta's new fleet would increase overall fuel efficiency and reduce maintenance costs. However, in the short run, I would say that Delta could do more to effectively control costs while boosting revenue.
As for Boeing, I think this is great news for the American aircraft manufacturer since this would come as a boost after bleeding business to rival Airbus. Besides that, Boeing would finally be able to unwind its record inventory and recover much of its working capital. Both Delta and Boeing, in my opinion, would be interesting stocks to watch out for.
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At the time thisarticle was published Keki Fatakia does not hold any shares in the above mentioned companies.Motley Fool newsletter serviceshave recommended buying shares of Southwest Airlines. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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