The second largest U.S. airline
Delta Air Lines
) has become the first carrier to enter into the fuel business with
its purchase of Trainer refinery in suburban Philadelphia from
), the downstream business spin-off of
). The deal was announced at the end of April.
This strategic move will help Delta to reduce fuel costs by $300
million per year and ensure availability of jet fuel in the
Northeast, which is currently experiencing a shortfall in fuel
supplies. The facility can currently refine about 185,000 barrels
per day. Delta intends to spend $100 million to upgrade the
facility that would, in turn, boost jet fuel production of about
52,000 barrels per day. The transaction would further provide about
80% of the company's domestic jet fuel needs.
The Trainer refinery was shut down last year as it was
struggling to generate profitable business given rising crude
prices, which were weighing on its margins. Delta expects to
restart the production in September.
Delta spent an average of $2.86 per gallon for jet fuel prices
last year, up 37% from $2.09 in 2007, according to statistics from
the Bureau of Transportation. Based on this data, the company's
fuel expenses accounted for 36% of total operating expenses last
Besides, Delta Air Lines is making continued efforts to reduce
its fuel costs through fare hikes, hedging strategies and capacity
cuts. The company is successfully passing the increased fuel costs
to customers in the form of fare hikes. Delta is planning
cautiously on capacity cuts, which is expected to be down 1-3% year
over year in the second quarter, with a 1-3% reduction in both
domestic and international capacity. However, Pacific capacity is
expected to grow 7-9% on the resumption of Detroit-Narita flights
and the normalization of capacity for Japan.
Additionally, Delta Air Lines is involved in fuel hedging
strategies, which provide a cushion to the rising fuel prices.
Delta Air Lines is 70% hedged for the second quarter at a jet fuel
price of $3.05-$3.40 per gallon and 40% hedged for the third
quarter at a jet fuel price between $3.05 and $3.45 per gallon
using collars and call spreads.
We are currently maintaining our long-term Neutral
recommendation on Delta Air Lines. For the short term, the stock
retains a Zacks #3 (Hold) Rank.
CONOCOPHILLIPS (COP): Free Stock Analysis
DELTA AIR LINES (DAL): Free Stock Analysis
PHILLIPS 66 (PSX): Free Stock Analysis Report
To read this article on Zacks.com click here.