What Are The Measures Undertaken By Delta To Keep Its Fuel Costs Under Control?

December 30th, 2016 by Trefis Team
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The year 2016 has been a volatile one for the aviation sector, with the uncertainty around the fate of oil prices, the outcome of the U.S. presidential elections, and the political clout in Europe. After losing most of their gains in mid-2016 due to foreign exchange headwinds and pressure on passenger yields, airlines saw their stock prices rise again post the third quarter results.

Generally the U.S. airlines hedge their jet fuel purchases to protect themselves from sudden upward movement in crude oil prices. The only airline, until recently, which chose to not do so was American Airlines. The decision to leave their oil purchases unhedged led to a huge windfall of gains for the company in 2014 when the oil prices collapsed. On the other hand, Delta Airlines acquired a refinery four years ago to protect itself from fluctuations in oil prices. However, this strategy only led to exposure to the price of oil instead of the price of jet fuel. Consequently, in the year 2016, the company expects its refinery to incur a small loss.

Rising Oil Prices

As Delta enters 2017, it will be affected by the increasing oil prices. Jet fuel prices are forecast to increase nearly 30% in the coming year, resulting in additional costs of approximately $1.2 billion for Delta. The headwinds relating to jet fuel prices are expected to be the greatest in the first quarter of the year. Further drag on fuel costs would be the fact that the company has no open hedge positions it can utilize to offset price increases.
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Measures Undertaken Keep Costs Under Control
The carrier hopes that its refinery will be able to give it an edge. Currently, Delta has a price advantage of 2-3 cents on jet fuel prices. By driving efficiency through integrating supply chain, the company hopes to widen this gap further. In 2017, Delta expects a $50 million contribution from its refinery. Some other initiatives the company is undertaking to deal with higher fuel prices include upgauging and refleeting initiatives.
Historically, Delta has been able to achieve a 1.5% improvement in its fuel consumption by optimizing its routes and fleet. However, it had bought a number of second hand aircraft as a response to rising oil prices in 2013-2014. At the time a good decision, as it saved capital expenditure, the old aircraft are fuel guzzling and are coming of age now.
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In order to prevent the bottom line from being affected, Delta plans to address its aging fleet, by buying new aircraft that save almost 20%-25% more fuel than an older fleet. It aims to increase the average seat per departure in its narrowbody fleet by 5% between 2016-2018, while retiring its 50 seaters and replacing 150 seater MD88 with 180-190 seater A321s. The company said that the newer technology aircraft offer added efficiency and protection from fuel price increases by driving down costs.
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Furthermore, Delta has a world class maintenance facility in Atlanta that has ensured that the carrier’s maintenance costs are the lowest in the industry. By decreasing the taxi time by 2.5% over the last two years, while improving its operational performance, the carrier has been able to save $100 million in fuel costs in 2016.23122
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