Tags: Delta | Airline | Fuel-Cost | Savings

Delta Leads Airline Rally on Outlook for Fuel-Cost Savings

Thursday, 11 Dec 2014 05:49 PM

Shares of Delta Air Lines Inc. led a rally among U.S. carriers Thursday as the company projected a $1.7 billion fuel benefit even after accounting for hedging losses.

The Bloomberg U.S. Airlines Index closed up 2.6 percent, the sixth gain in seven trading sessions, on a day when crude oil fell to its lowest settlement price since July 2009. Spirit Airlines Inc. was the lone carrier in the 11-company gauge to post a decline.

“2015 should be a fantastic year,” Chief Executive Officer Richard Anderson told investors at a presentation in New York. The third-largest U.S. airline is forecasting pretax profit of more than $5 billion next year, up from a projection of $4.5 billion for 2014.

Anderson set the tone for the airline industry’s rally by predicting that Delta will return at least $1.5 billion to shareholders next year, raising its forecast for fourth-quarter operating margins and quantifying the benefit from lower bills for jet kerosene. That benefit includes the drag from a $1.2 billion loss on contracts that pegged the price of fuel higher than the market.

Shares of Atlanta-based Delta rose 4.6 percent to $48.33 at the close in New York. The stock has advanced 76 percent this year, compared with a 10 percent gain in the Standard & Poor’s 500 Index.

‘Full Participation’

Delta is among carriers with the greatest fuel hedges, and analysts have said that could keep it from benefiting as much as its peers from plummeting oil prices. Delta said today it expects to see “full participation” in fuel savings in 2016.

Next year, Delta sees fuel prices at $2.40 to $2.50 a gallon, down from $2.69 to $2.74 a gallon it had projected to pay in this quarter. Jet fuel was at $2.07 a gallon today, having fallen 34 percent this year.

By comparison, Southwest Airlines Co. expects to pay $2.30 to $2.40 a gallon for jet kerosene next year, based on the forward curve and including the effect of hedging, Chief Executive Officer Gary Kelly said today in a speech in New York. At least a portion of its fuel needs are hedged through 2018.

Kelly said Southwest is participating in about 80 percent of the decline in prices. He said that he was “surprised by the collapse in oil prices,” that current rates “don’t feel stable to me,” and that the industry needs to be prepared for an eventual rebound.

Higher Margins

Delta expects fourth-quarter operating margins of 11.5 percent to 12.5 percent, Anderson said. That compared with an October forecast of 10 percent to 12 percent.

In April, the board will consider renewals of its dividend and share buybacks, Delta said.

Anderson and President Ed Bastian reinforced their message that the airline industry has differentiated itself on service in recent years, and Delta expects to be rewarded.

“We are not a commodity,” Anderson said. “This is a really difficult business, this is not soybeans, wheat and corn. It’s really hard to do this well. And we don’t want to be priced at commodity levels.”

Helane Becker, an analyst at Cowen & Co., asked why Delta’s stock is relatively cheap compared with its rivals. Delta has a price-to-earnings ratio of about 15, compared with almost 26 for Southwest Airlines Co.

“We are getting some level of credit, it just can’t come fast enough,” Bastian said.

In one trouble spot, capacity on flights to Asia is still exceeding demand, and Delta said it plans to cut capacity by 6 percent to 8 percent on Pacific routes in 2015. Any capacity growth will come from domestic routes, it said.

Fare Strategy

Glen Hauenstein, Delta’s chief revenue officer, took a jab at discount rival Spirit Airlines, which is known for industry-low fares and for charging extra for things such as beverages and carry-on bags. Delta recently rebranded its five fare offerings, ranging from the premium Delta One to the bare-bones Basic Economy.

Delta wants to show passengers the differences between fare classes, so that a business traveler who pays $800 for a last- minute ticket sees more value than someone who bought early and got a ticket for $139, Hauenstein said.

“Our lowest fare has a lot more content than their lowest fare,” he said of Spirit. “Whatever services you want, we will always be best in class.”

Paul Berry, a Spirit spokesman, declined to comment on Hauenstein’s remarks.

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Shares of Delta Air Lines Inc. led a rally among U.S. carriers Thursday as the company projected a $1.7 billion fuel benefit even after accounting for hedging losses.
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2014-49-11
Thursday, 11 Dec 2014 05:49 PM
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