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Delta’s Fuel Cost Outlook in 2016: Can It Get Any Better?

Ally Schmidt

Delta's 1Q16 Earnings Are In, but What Do We Make of Them?

(Continued from Prior Part)

Operational costs fall

Delta Air Lines (DAL) saw its operating expenses decline by 3% YoY (year-over-year), from $8 billion in 1Q15 to $7.7 billion in 1Q16. Most of this savings came from declining fuel costs.

Fuel savings and utilization

Delta Air Lines fuel costs for 1Q16 fell by over $608 million, as fuel expenses declined by 33% in 1Q16. Fuel prices fell by 55% YoY to $1.33 per gallon. Lower fuel hedging helps as well. Notably, Delta ended its fuel hedges in 2015 and does not have any open hedges going forward.

DAL’s restrained capacity growth and targeted capacity cuts in international markets have helped improve capacity utilization. This, is turn, helps margin performance. Keep in mind that DAL makes up 1.97% of the PowerShares BuyBack Achievers Portfolio ETF (PKW).

Outlook

In 2Q16, Delta expects fuel costs to decline by 40% to $1.48–$1.53 per gallon. It also expects significantly lower hedge losses of $200 million in all three remaining quarters of 2016. Fleet improvement will also improve fuel efficiency.

All these factors should help improve margins throughout 2016. In 2Q16, Delta expects to see its operating margin to improve to 21%–23%. Delta is the only airline to see that kind of margin expansion in 2016. Peers American Airlines (AAL), United Continental Holdings (UAL), and Alaska Air Group (ALK), however, saw similar margin expansion in 2015.

However, investors should remember that airline industry margins are expected to have peaked. And it’s only a matter of time before fuel prices rebound as important economic production starts falling. Such events will likely hit margins. On the other hand, if fuel prices fall further, DAL might see further margin expansion.

Keep reading for a discussion of Delta’s debt.

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