Return on Investment? - Upgrading 747s
 

This is from Richard Anderson:

"During the Delta Air Lines third-quarter earnings report on Thursday, CEO Richard Anderson reminded shareholders the 70s are long gone, announcing that the 16 remaining 747s in its fleet would be retired by 2017."

How much does it cost to upgrade a 747. After all the 747s were upgraded recently, now the news from ATL is they will be "retired". Did/Will DL recoup the cost by 2017?

Just wondering - I am not a finance person.

I don't think the decision to retire them was based on the ongoing maintanance and operating costs.

I don't know how much DL spent to refurbish them but a former DL employee/current DL cheerleader no longer posting on airliners.net (some of you may know who I'm talking about) posted elsewhere that DL spent something like $10 million each to refurbish the 747s.

This is overly simplified, but look at it this way: A $250 million widebody is expected to last about 25 years, so the annual depreciation is about $10 million a year.

DL took a special charge of $397 million in connection with the retirement of the 747s:

DL has been working the hell out of the 744 fleet and probably wishes it had more. Fuel consumption and refurb charges are more than balanced out by the fact that they're bought and paid for and provide welcome TPAC lift. Retirement in 2017 will mean they've given 22-28 years of service and the recent refurbs, along with C checks, etc. are just part of the predictable cost of owning / operating over that timespan. They still got their money's worth and then some.

If DL wanted more service from 744s it probably wouldn't have just retired aircraft that first entered service in 1999 (x2) and 2002. These may have been due for heavy maintenance but they're not the oldest in the fleet.

With low-cycle aircraft like these I think it's probably C-check timing that drives retirement schedules, not frame age.

Part of DL's financial return comes from being able to offer lie-flat aisle access in J and AVOD in coach all across the long-haul widebody fleet. Ask regular long-haul AA and UA flyers if that's worth anything.

Probably one of the biggest reasons was fuel costs.

But if fuel costs stay where they are, they might well rethink the decision and keep the birds in the air until the C checks.

An accounting decision in no way forces an operational decision in such.

Only 4 of the 744's are "bought and paid for". The remaining 12 are leased. When the decision to refurb was made back in Sep 2010 (completed in 2012), I would suspect they intended to keep them past 2017. They certainly would have factored fuel and maintenance costs in that decision. I think they just found that the economic recovery has not met their expectations from back in 2010 and the 744's are just too much aircraft for their needs.

Prior costs to refurbish are "sunk costs" they are gone and paid for. If in present conditions, they can increase margins by using alternate aircraft, prior costs are completely irrelevant.

I would say the decision probably is significantly influenced by the 2 engine wide body aircraft being more efficient than the 4 engines on the 744.

It's not the first time something like this has happened. AA refurbished a large number of 727 in the late 1990s that wound up in the desert in less time than these 747.

^

Delta is also reducing the need for trunk route flying, specifically in the US-NRT market as they draw down NRT interport flying in favor of US-Asia non-stops. The 747 is an excellent aircraft for moving a lot of people a long distance. I see Delta shifting their flying towards smaller markets with non-stop service from the US. For where they need more lift the 777 is a good balance between size and range.

That was 9/11 reverb.

On a cash basis, no. There's no way their original ROI (for the cabin upgrades) assumed a useful life of 4 years. All businesses make mistakes, the good ones identify them early and do something about it.