Delta’s fuel cost
Fuel expense is Delta’s largest expense. It comprised 27% of Delta’s total operating expense in 2Q14. Although Delta’s fuel purchase cost increased with the increase in market price of jet fuel, total fuel expense decreased to $2,934 in 2Q14. Delta’s (DAL) fuel price per gallon of $2.93 in 2Q14 was the lowest among its peers. All of its competitors including American (AAL), United (UAL), Southwest (LUV), and JetBlue (JBLU) had a fuel price per gallon between $3.02 and $3.09. The fuel price per gallon decreased by 3% to $2.93 per gallon in 2Q14 from $3.03 after mark-to-market adjustments in 2Q13. This was primarily due to gains from hedging and profits from its refinery operations.
Fuel hedging gains
Airlines manage the risks of volatility in fuel prices through financial products called derivatives. Commodity derivatives, such as futures and options, are contractual agreements to purchase the commodity at a fixed price within a specified period based on expected future price of the commodity. Investors gain if prices move according to their expectations. Delta recorded $99 million of fuel hedge gains in 2Q14 against a reported loss of $116 million in 2Q13.
Monroe’s Trainer refinery turns profitable
The Trainer refinery that Delta invested in 2012 to reduce fuel price has turned profitable in 2Q14 as expected by the management. This is the first time the refinery has reported profits since its acquisition. For more details on the refinery impact refer to the Market Realist series “Delta’s unique strategy: Owning a refinery to contain fuel costs.” If the refinery continues to make profits, Delta will be the only U.S. airline with this unique competitive advantage. In 2Q14, it provided 166,000 barrels per day of jet fuel for its airline operations and brought down fuel expense by $13 million.