Delta Air Lines
plans to move away from flying larger planes to save costs, but in doing so, it may be sending a message to pilots.
The carrier plans to delay the delivery of two Boeing 777-200 aircraft, originally intended for the first half of 2005, and will instead sell them in the second half of 2005. The move will cut capital spending by $300 million and comes at a time when the carrier is performing a top-to-bottom re-examination of its business model while seeking pay cuts from unionized pilots.
"Delta must continue to create a path to rebuild its balance sheet and maintain effective cash-flow management," said Michele Burns, Delta's CFO, in a statement late Tuesday. "Reducing major capital spending, such as purchasing aircraft, is an essential way to contribute to this goal."
Furthermore, Delta said that it did not plan to accept three Boeing 777s intended for delivery in 2006, opting to either sell those planes or use the value of the planes to acquire other Boeing aircraft.
While the carrier said it was pleased with the performance of the eight Boeing 777s currently in service, this isn't the first time that Delta has deferred delivery of planes or announced plans to sell them. In October, Delta announced that it would sell 11 of 19 Boeing 737s scheduled for delivery in 2005, while deferring the other eight until 2006.
The carrier did not disclose the potential charges associated with the sale of the planes, but its recently released fourth-quarter results showed that the carrier took a $26 million hit related to the sale of those 11 aircraft.
Delta's cuts to capital spending come a week after the carrier put $325 million in convertible notes on sale and said that its nationwide rollout of its low-cost Song unit would be delayed as the company reassesses its options. The carrier hopes to achieve $1 billion in additional cost savings in 2004, but in order to get there, it will have to convince pilots represented by the Air Line Pilots Association to cut their pay well before their current contract expires, in 2005.
The sale of planes and its negotiation with ALPA may not be unrelated. While the carrier will save money by selling the Boeing 777s, it also sends a message to pilots. The Boeing 777 seats upwards of 550 people, the largest aircraft in Delta's fleet, and the pilots who fly them are some of the most experienced and best paid among all its work groups.
"Pilots like to fly bigger planes -- they get paid more to do so," noted David Strine, airline analyst at Bear Stearns. "Between the lines, Delta may be sending a message to pilots that the situation remains serious and that the top end of the fleet is tough to grow while the company is booking big time losses and remains in cash preservation mode."
Shares of Delta gained 11 cents, or 1.1%, to $9.74. The pilots union had yet to return a telephone call seeking comment.