Larger Aircraft, Added Seats Propel U.S. Airlines' Expansion
The U.S. airline industry understands that sometimes you've got to spend money to make money.
Recently, two major carriers revealed plans to expand and boost profit margins by doing just that.
With about $4.4 billion at its disposal as of the end of 2014, United Airlines has decided to tap into its deep cash pile to help purchase new aircraft in 2015, according to Jeffrey Dastin of Reuters.
United could pay for as much as half of the cost of individual planes, while borrowing the rest. There are 25 planes that United has yet to finance set to enter its fleet in 2015 but another 22 planes that have financing in place, per Dastin.
"In my almost 18 years in this business, that would be the first time for me," said United chief financial officer John Rainey, referring to paying that amount of cash for a aircraft. He called the move "an indication of where this industry is."
Daston notes that oftentimes airlines finance their purchases of planes by leasing them from a trust of investors in what is known as enhanced equipment trust certificates. "Rainey said the airline for the first time in recent history could rely solely on class-A certificates for future financing, with rates likely under 4 percent," writes Dastin.
The class-A certificates require the borrower to pay more cash than the other certificate classes that come with higher rates.
But United isn't alone. The American Airlines Group announced class-B certificates this month at a rate of 3.7 percent and class-A certificates at close to 3.4 percent, both down significantly from similar certificates that were announced back in September 2014.
The use of cash for aircraft benefits shareholders by repressing debt and turning those planes into assets that the company can then borrow against. "The number one thing that airlines should be doing with their cash is repairing their balance sheets," said industry analyst Jim Corridore. "The industry has come a long way."
While United eyes new aircraft, another major carrier, Delta Air Lines is looking to replace smaller aircraft and add more seats in an effort to increase profit.
According to Kelly Yamanouchi of the Atlanta Journal-Constitution, Delta is in the process of retiring and replacing 50-seat regional jets with larger and more efficient aircraft. More disconcerting for passengers, Delta has also been adding seats to planes via slimline seats and "re-engineered galleys that had been used for food service."
However, during a presentation earlier this week, Delta chief financial officer Paul Jacobson assured investors that the airline "can put significantly more seats on the airplane without jeopardizing seat comfort or legroom."
Yamanouchi also points out that larger aircraft fit more First Class seats, which in turn generates more revenue for the airline.
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