Delta Raises Second Quarter Margin Guidance On Lower Fuel Prices

by Trefis Team
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Delta Air Lines
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    Quick Take
  • Delta increased the lower limit of its second quarter operating margin guidance to 10%-11%, from 9%-11% indicated earlier.
  • This increase was driven by the recent drop in jet fuel prices and the stable demand environment for flights.

The sharp decline in jet fuel prices over the last three months coupled with a stable demand environment caused Delta Airlines (NYSE:DAL) to raise its second quarter operating margin guidance in a filing last Thursday, June 13. According to U.S. Energy Information Administration, jet fuel spot prices declined from $3.22 per gallon in February to $2.73 per gallon in May, driven in part by the weak outlook for global economic growth. [1]

From Delta’s perspective, this sharp decline in jet fuel prices will likely lower the carrier’s second quarter fuel costs by nearly 10% on a year-over-year basis. In the second quarter, Delta anticipates to incur fuel costs in the range of $3-$3.05 per gallon, compared to $3.37 per gallon it incurred in the prior year period. [2] [3] This decline will impact the carrier’s operating expenses significantly as fuel costs constitute around a third of its total operating expenses.

At the same time, the demand for flights in most markets including the United States, Latin America and Asia-Pacific has either held steady or posted moderate growth from last year. This has allowed space for Delta to forecast a double-digit operating margin. The carrier currently anticipates its second quarter margins to lie around 10%-11%, up from its previous guidance of 9%-11%. [2]

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This increase in Delta’s second quarter margin outlook has also eased concerns regarding the recent weak growth in its unit revenues – the amount collected from each passenger for a mile of flight. The weakness in the yen and the impact from sequester on domestic demand have lowered Delta’s unit revenue growth in recent months and also raised concerns on the continued performance of its strong profit growth in 2013.

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Notes:
  1. U.S. Gulf-coast kerosene-type jet fuel spot price, June 17 2013, www.eia.gov []
  2. Delta’s Form 8-K filing, June 13 2013, www.delta.com [] []
  3. Delta’s 2012 Q2 10-Q filing, July 25 2013, www.delta.com []
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