What Can Investors Expect from Delta Air Lines in 1Q15? (Part 3 of 5)
Drop in crude oil prices
In the past year, oil prices took a U-turn and dropped by more than $50 per barrel. This led to a global fall in crude prices. The trend is expected to continue this year as well. The spike in oil prices helped lower the fuel costs for most airline companies. Their stocks reflected the lower fuel costs.
Delta’s (DAL) fuel cost accounts for 33% of its total operating expense. American Airlines’ (AAL) fuel cost is 35% of its total operating expense. United’s fuel cost (UAL) is 34% of its operating expense. Jet Blue (JBLU) and Southwest (LUV) have higher percentages. Their fuel costs account for around 37% of their total operating costs.
Companies that are able to control their fuel costs are at a competitive advantage. Delta forms a 2.32% holding of the SPDR S&P Transportation ETF (XTN). It has a 3% holding of the Dow Jones Transportation Average Index Fund (IYT).
Effect on Delta
Delta has an active strategy of hedging its fuel costs. This helped the company guard against the volatility in oil prices. However, in the past year this strategy has gone against the company. Delta faced severe hedging losses of about $2 billion in 4Q14. The company is also expected to absorb hedging losses and further enjoy a savings of about $1.7 billion over the course of the coming year. Delta expects to suffer hedging losses of about $800 million for 1Q15. It closed out some of its hedges for the rest of the year for a $300 million loss.
Hope for a healthier year ahead
Delta expects these losses to subside to a large extent in the coming year with about $300 million losses in the second half of the year. This should help bring its fuel costs in line with the industry average for the second half of 2015. The company can also use these lower prices to lock in favorable hedges during the rest of the year. Next year, the company has very few hedges in place. This should keep its jet fuel costs in line with the market price.
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