Aircraft Selection Lessee Perspective Part 2 PDF

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how escalation cost, BFE (Buyer Furnished Equipment) and SFE (seller furnished equipment), data and software related issues affect Delta's decision. Dan Pietrzak, managing director of a/c transactions Delta. 1984 AE graduate ERAU. 1. Largely operate own fleet, about 3/4 fleet, owned Delta long haul with airframes. Risks to strategy to be eclipsed by newer technology fleets. Fuel performance, some of newer a/c coming out with better fuel performance. How evaluates risk? What risks see associated Delta strategy of long-term ownership? Delta strategy works well in risk diversification because we're also dealing with tried-and-true technologies. We tend to buy a/c in small batches and in the sense that granted, we just ordered 50 new widebody. That's not small. As an order in itself. But when you think of the size of Delta's fleet and how infrequently we have an order of that magnitude, I think by the fact that we do order typically in smaller batches and more frequently. One, it gives us the flexibility to react to changing market conditions and things are always changing. The one challenge about ordering a/c too far in advance is that technology can change. You might think you’re ordering the latest and greatest, but by the time you get it may not be the case. But we've also found, and this is no fault of those carriers who only buy the latest and greatest. But the A380 had its lengthy delays when it entered service 787, no doubt had also its share very visible and costly delays. Both of those a/c, initial a/c out of the box came out quite heavy. In many cases did not meet the mission profile as not only promised in a contract, but more importantly, back to one of my three legs of the stool. It wasn't able to fly the mission that we were focusing on. When Northwest, when 787 dash 8 was purchased, and we were the second customer right behind ANA. The view at the time at Northwest was we were going to be flying deep into China and direct from the states, bypassing the Tokyo hub. If the merger would not have happened, Northwest would have taken those deliveries at as per the contract. Let's step aside from the fact that there were also many years late. But those the first 20 or so a/c out of, they couldn’t make the mission. Being the first person to be in line with the new technology, you pay the price of being the guinea pig. But I think that what we have found is typically the a/c that are the last off the production line are some of the most reliable. Case in point would be 757 300. We only wish they made more of those a/c today. It's a perfect a/c from a CASM standpoint. The industry, we love affair for the 757, even today, American, Delta, United and have plans to keep the 757 in their fleets until the a/c can fly no longer. But here's an a/c that the maintenance people like, the flight ops people, the flight crews were flying the a/c. But it was it's cheap to maintain and but more importantly, it was proven. By getting the end of the production line, you have all the PIP programs and the service bulletins, and the investment made in the fixing, whatever problems are where you're getting the benefit of that. Now, I understand you can't operate the old technology forever. But by doing it in incremental pieces, the way we have been doing has worked for us. We have a very reliable fleet. It’s interesting to note that even when the DC 9 was last retired, it had the second highest dispatch reliability in the fleet, because it's old doesn't necessarily mean it's not working effectively. Our model, Delta model of also having we like kind of the humor within the company is we have one of everything, but at the same time we're able to put the right a/c on the right road. That has worked well for us, too. After the merger, we were able to basically move a

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lot of a/c around the fleet, at Northwest we didn’t have the flexibility of having 777 200 LRs. Delta, they didn't have the gauge of a 74 at the time. We were able to put the right a/c on the right route. 2. Matching a/c technical performance with operational requirements, how evaluate 2 different strategies of giving up some technical perfect match on specific routes to have larger type, larger diversity of fleet with associated costs that go with that? The reason I use Southwest and JetBlue were the two primary operators that really put a strong value into standardization. A lot of that drives right to their core, their business model, where they are very concerned with turn times at the gate. When you're flying so many missions per day and many of the airports they serve, they're very concerned about being able to load and offload quickly. But is what I find interesting is when you look at the airlines today, there’s quite a bit of CASM everyone's growing up with. The A319s are being replaced by the A320s. The 737 800 is being more favored than the 737 700, where us and United are very happy with the 737 dash 900 ER, we're all up gauging in. The industry is very cyclical and we're favoring CASM over frequency. That whereas Southwest, JetBlue still have very high levels of frequency and their turn times are very important to them. That's why I thought it was very interesting where even when Southwest elected to go to a 737 800, that it got the press that it did. It's the same a/c. They're just adding a few more seats, but that's how much of a deviation it was all for their business model. For those airlines, Spirit now included frontier standardization to them, especially when it is only one a/c in their fleet type. They want to maintain that as much as possible. For an airline the size of Delta, United and American, it's very difficult to serve all missions with one a/c type. It's very difficult to serve the diversity of missions we have even with a one family of a/c. That's one of the advantages of having a diverse fleet, is the fact that you still need an economies of scale. You don't really like to operate only 3 or 4 a/c of a particular model. But because once you make that investment in simulators and tooling and spare part inventories, there is obviously a savings that can be add by spreading that cost across the fleet. Where it comes from a revenue management standpoint, though, we benefit from having the right a/c on the right mission. 3. Up gages, one of the future up gages is A350, been ordered. Delta largely Boeing operation, although not exclusively by probably 1/3, maybe, as is Airbus. How you evaluate differences, advantages and disadvantages between Boeing and Airbus products? Is there a general statement or is it an a/c-by-a/c basis? One of the challenges, both Boeing and Airbus in selling the new technology airframes has been the maintainability and reliability of composite material, especially on airframes and structural components, things like flight control surfaces. Composite technology has been flying since even the 777 200 ER introduced it on flight control surfaces, but there still is quite a bit of concern within the major airline and MRO community of investing in this infrastructure, tooling, and knowledge base to teach the mechanics as to how to repair that structure. We're still very comfortable with aluminum airframes. When you even look at the C series there, when here, that is a very state of the art a/c, but they elected to go without a composite airframe on the basis that they figured it was going to be on the ground for many short hubs as opposed to a wide body

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looking more for the lighter weight application. But they also picked it for durability. It's still a lot easier to have a baggage cart or a catering truck if you hit an a/c. We all are very comfortable with how to do that aluminum repair. This will be something that just comes with time. But there is a general concern about the a/c out of service time that would be required in replacing a significant piece of carbon structure. The secondary issue that we're seeing with the majority of the OEMs is just the advent of digital data and not just the digital data, but the amount of the data where many of the aftermarket maintenance programs that we’re seeing being offered by the OEM, not just the airframe, but the engine providers, is a/c health monitoring, engine health monitoring. It's the sharing of data. We’re finding it's not the technology to record the data, to transfer the data, to review the data. It's now bridging into discussions and debate as to who owns the data. We're seeing that the proprietary data right type of issues is bleeding into a/c acquisitions and engine acquisitions at a rate that I believe is alarming. For case in point, we also purchased a few simulators as part of our last transactions for new a/c and the just the rights alone for the simulator data. It took longer to negotiate the simulator data package than it did the actual purchase of the a/c. So and some of that isn't just because of the complexity, but also just because we seem to be breaking new ground on proprietary data each time, we purchase an a/c or an engine or simulator, for that matter. That is also going to be a challenge going forward. 4. What's that seat number? What's sweet spot that’s missing right now that you'd really like to be able to purchase? It's a 100-seater since the DC 9 replacement, now the 717 replacement. That’s the challenge. I do believe that Bombardier has a great product. They've got their own other business challenges they need to get through. They need to get to the first delivery. The E Jets, new E 195 2 is a good a/c, but I'd like to see Boeing and Airbus as well as the engine manufacturers. The gear turbo fan is an engine that has been well tested on flight test a/c and then within Pratt Whitney test facilities. Time will tell, but that could be a game changer as well, too. But we need to come up with some efficient a/c on the smaller size for mainline a/c that will from a return on capital again, that it would drive us to purchase a new a/c for 100 seat market as opposed to a maybe a substandard a/c, but only because it's much cheaper to acquire then....