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Delta Paid $5.78 a Gallon in May

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Captain Fulough

Active member
Joined
Jan 30, 2005
Posts
43
Airlines and hedging. A necessary evil but not always good.

Earnings Preview: Delta Air Lines
7:38 AM ET, 07/23/2012 - Associated Press
ATLANTA -- Delta Air Lines Inc. gets a chance to explain why falling oil prices have hurt its finances when it reports second-quarter results on Wednesday.

WHAT TO WATCH FOR: Delta has made big bets on the price of oil. The idea is to offset the risk of a sudden rise in the price of jet fuel, which is an airline's biggest expense. However, those bets can go either way _ falling oil prices can turn the airline's financial hedge into a money-loser. Delta has already said that happened during the quarter that ended June 30.

"The rapid decline in fuel prices resulted in a significant change in value for our open fuel hedges, which run through 2013," Delta wrote in an investor update on June 27. Delta said it expects to lose $155 million on fuel hedges that settled during the quarter. It also said it expects another $800 million paper loss for fuel hedges that were worth less than it paid for them at the end of the quarter, but hadn't settled yet.

It paid the equivalent of $5.78 per gallon of jet fuel in May, including $2.41 per gallon worth of bad fuel price bets. In a note soon after the May results were released, Wolfe Trahan analyst Hunter Keay called that price "astonishing."

WHY IT MATTERS: Other big airlines make oil price bets, too. But Delta's efforts to control its fuel prices have been especially noteworthy. It bought a refinery near Philadelphia and this month began a $90 million project to maximize its jet fuel production.

Delta "is almost certainly working to reverse these hedge positions, but likely at a high cost," Keay wrote. If Delta can't unwind the hedges, or if oil prices don't rise, Delta will be in "an unenviable competitive position," Keay wrote.

Delta has declined to talk about its hedging strategy.

It did catch a break, though, on the last day of the quarter, when oil prices leaped 9.3 percent in a single day, to $84.96. That will translate into a bigger fuel bill, but a smaller hedging loss as of the end of the quarter. Oil prices have kept climbing, with crude closing on Friday at $91.44 per barrel on the New York Mercantile Exchange.

WHAT'S EXPECTED: Analysts surveyed by FactSet are expecting earnings of 68 cents per share, although they typically exclude one-time items such as fuel hedging losses. Revenue is expected to be $9.68 billion. Delta has estimated that it will have an operating margin of zero to negative 2 percent. Not counting the fuel hedge losses for future quarters and other special items, its operating margin would have been 8 percent to 10 percent, Delta said.

LAST YEAR'S QUARTER: It earned $198 million, or 23 cents per share. Revenue rose 12 percent to $9.15 billion. It would have earned 43 cents per share if not for one-time items.
 
"Delta has declined to talk about its hedging strategy."

See that elephant in the room, don't talk about it.
 
They'll do better running the Refinery. A simpler operation that they have experience with.

:eek:
 
I think I read that potential $800 million paper loss could happen, but that is if Brent crude falls more, and it actually has come up. The last day of the quarter it came up 9.3% in one day. So, if oil does rise again, not as bad. At least the airline made $2.5 billion last year in ancillary revenue. Too bad SWA doesn't charge for bags (even though AirTran does)....


Bye Bye---General Lee
 
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My God! Their hedges are shot! Their culture is lost! They took a concessionary contact! They fly to crappy cities I don't want to go to! They're hanging on by a thread--I'm not sure how much longer they can stay in business!

Just kidding--trying out my General Lee impression. What do you guys think?

Bubba
 
Dead on (and I have him blocked but for some reason everyone has to quote him so I see it anyway) but you left out mentioning LBB! He has to mention LBB, always!
KBB
 
How could Lubbock actually be that bad? It's a college town for fukc's sake! I'd imagine good times can be had without looking too hard.
 
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. At least the airline made $2.5 billion last year in ancillary revenue. Too bad SWA doesn't charge for bags (even though AirTran does)....


Bye Bye---General Lee

DAL = Last place in customer service.

SWA actually takes pride in attempting to make customers happy. We don't need to charge for bags at this time, so we don't. Someday maybe.
 

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