Delta’s Focus On Profitability Bodes Well Long Term

by Trefis Team
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Delta Air Lines
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Delta Airlines (NYSE:DAL) has been focused on improving its margins and de-leveraging its business. Some of the efforts in this direction include the acquisition of the Trainer oil refinery complex, replacement of old airplanes with new, fuel-efficient ones, and reduction in debt levels. The acquisition of the Trainer oil refinery from ConocoPhillips is expected to bring down Delta’s fuel costs by $300 million each year while the replacement of old airplanes with new, fuel-efficient ones will reduce its fuel burn per Available Seat Mile (ASM). Both these factors will help drive up the airline’s operating margins. In addition, Delta has reduced its debt by 25% since end-2009, resulting in improved profitability, and the management aims to reduce the debt levels further.

Overall, Delta’s efforts to improve its operating margins and de-leverage its business bodes well for the investors. We currently have a stock price estimate of $9.13 for the airline, in-line with its current market price.

See our complete analysis of Delta here

Acquisition of oil refinery from ConocoPhillips to save on fuel costs

Delta is expected to save $300 million in annual fuel costs through its acquisition of ConocoPhillips‘ (NYSE:COP) oil refinery complex situated at Trainer, Pennsylvania. The company completed the acquisition in June earlier this year and aims to start production at the facility in October. Such backward integration is the first in the airline industry and should help improve Delta’s margins. Fuel costs for the airline in 2011 totaled $9.73 billion, constituting nearly 30% of its overall operating costs. [1]

Replacement of older airplanes with new, fuel-efficient ones to aid margins

The airline also aims to lower its fuel burn per ASM and aircraft maintenance costs by replacing its old aircraft with new, fuel-efficient ones. It ordered 100 Boeing 737-900ER, 18 B-787 Dreamliners and 11 MD 90 aircraft as part of this effort. [1] In addition, in July Delta finalized the lease agreement with Southwest (NYSE:LUV) and Boeing to add 88 B-717-200 aircraft to its fleet. [1] The improvement in fuel consumption per seat with the addition of these aircraft is estimated at 15-20% and deliveries are scheduled over 2013-2018.

Reduced debt levels

Delta has steadily reduced its debt from $17.2 billion at the end of 2009 to $13 billion at the end of Q2 2012. [2] Such a substantial reduction in debt levels has improved its profitability. And, the company intends to reduce these levels further to $10 billion by end-2013. This has also lowered the airline’s interest expenses, down 11% from $233 million in Q2 2011 to $207 million in Q2 2012. ((10-Q Q2 2012, news.delta.com))

All in all, the company is focusing not only on protecting its operating margins by fuel-price hedging but also on improving them through innovative steps such as the acquisition of the Trainer oil refinery. This, combined with its success in reducing debt levels, should eventually benefit the investors in the long run.

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Notes:
  1. 10-Q Q2 2012, news.delta.com [] [] []
  2. 10-K 2009, news.delta.com []
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