Delta to use fuel drop to cut debt, return cash to investors

By Jeffrey Dastin

(Reuters) - With plummeting oil prices expected to cut airlines' costs by billions of dollars, Delta Air Lines Inc (DAL.N) said Tuesday that it will channel the savings toward debt reduction and returning more cash to shareholders.

The Atlanta-based carrier expects to reduce spending by at least $2 billion in 2015 thanks to the oil glut, which has driven down global prices by more than 58 percent since June, executives said in a conference call. Fuel is the largest variable cost for airlines, often representing a third or more of their total operating expenses.

Delta said it likely will apply the savings toward its adjusted net debt, which tallied at $7.3 billion at the fourth quarter's end. Also on the table is giving more cash back to investors if its board approves, which would come on the heels of $575 million returned to shareholders last quarter, Chief Executive Richard Anderson said in a conference call.

"It's painting a very positive outlook for the industry for 2015," CRT Capital Group analyst Michael Derchin said, referring to both the carrier's outlook and its quarterly earnings, which exceeded expectations even with a net loss caused by fuel hedging.

Delta's shares surged 7.3 percent, making it the biggest percentage gainer in the S&P500, while American Airlines Group Inc (AAL.O) shares rose 5.9 percent and United Continental Holdings Inc (UAL.N) shares gained 3.5 percent.

In the fourth quarter, Delta took a $1.2 billion hit to settle losing fuel hedges, which had failed to anticipate the sharp drop in oil prices. That was the largest factor in a $712 million net loss for the airline in the quarter.

Existing hedges likely will force Delta to pay more for fuel in 2015 than its unhedged competitors, such as American Airlines, although Anderson said that if oil prices remain at current low levels, "we are set up to fully participate in recent fuel declines during 2016.

"In addition, our hedge book provides excellent protection, should fuel rise from current levels," he added.

The airline earned 78 cents per diluted share in the fourth quarter, excluding the fuel hedging and other special charges, topping the average analyst estimate of 77 cents per diluted share, also excluding the charges.

Anderson didn't say whether funds would be returned to shareholders through share buybacks or dividend hikes, but in the past the carrier has used a mixture of both.

Delta executives played down the possibility that the cash freed up by lower oil prices would go either toward lowering fares or buying jetliners, in line with similar statements from rivals.

Based on the airline's forecasts, "not even the most pessimistic investor can claim that Delta is handing over fuel savings to passengers," JPMorgan analyst Jamie Baker said in a research note.

Anderson said on the conference call that Delta does not expect to make any big fleet orders. The carrier only might buy a "few more airplanes" when some of its existing jets reach retirement age, he said.

Delta expects to pay on average $2.25 to $2.35 per gallon of jet fuel for 2015, Chief Financial Officer Paul Jacobson said during the earnings call.

The estimate is far below the airline's adjusted fuel expense for 2014, which was an average $2.87 per gallon. Delta has said a 1 cent change in its fuel price is worth $40 million for the carrier.

(Reporting by Jeffrey Dastin in New York; Editing by Jeffrey Benkoe and Christian Plumb)