United Continental Holdings Inc (UAL) Embraces Bigger Regional Jets but Still Lags Delta Air Lines, Inc. (DAL)

However, Delta Air Lines, Inc. (NYSE:DAL)’s fleet restructuring was enabled by its deal with Southwest Airlines Co. (NYSE:LUV) for used (i.e. cheap) Boeing 717s. United would most likely buy new Embraer SA (ADR) (NYSE:ERJ) 190/195 or Bombardier CSeries planes for $30 million-$40 million each if it decides to continue upgauging its domestic fleet. In other words, United will have to spend billions of dollars on capex to fully catch up with Delta in the race to get rid of 50-seat aircraft. Since United already has very high capex commitments through the end of the decade, management may understandably shy away from additional fleet restructuring actions.

Who’s the real winner?
While United Continental Holdings Inc (NYSE:UAL) is clearly following the same path as Delta toward “upgauging”, it will have trouble matching Delta’s 50-seat fleet reductions. Delta benefited from good timing, insofar as Southwest was looking to get rid of its Boeing 717s at the same time that Delta was thinking of adding planes of that size. United will either have to invest a significant amount of capital in small mainline aircraft or maintain its higher usage of 50-seat (and smaller) regional aircraft.

The real winners in all of this are Embraer and Bombardier, which have a near duopoly on the regional jet market. United’s recent orders have done wonders for Embraer by helping it to rebuild its order backlog. Moreover, United’s pilot contract paves the way for the company to add 100-seat aircraft from Embraer or Bombardier eventually. The obsolescence of the 50-seat regional jet should drive strong demand for replacements for the rest of the decade.

The article United Embraces Bigger Regional Jets but Still Lags Delta originally appeared on Fool.com and is written by Adam Levine-Weinberg.

Motley Fool contributor Adam Levine-Weinberg is short shares of United Continental Holdings (NYSE:UAL) and has the following options: Long Sep 2013 $33 Puts on United Continental Holdings. The Motley Fool recommends Embraer-Empresa Brasileira and Southwest Airlines.

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