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Delta Air Lines Reduces Costs to Improve Profitability

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Managing non-fuel CASM

Delta Air Lines (DAL) has aimed to reduce costs for the past several quarters. As a result, its CASM-Ex (costs by available seat miles), which excludes fuel, profit sharing, and special items, has grown by less than 2% for the last seven consecutive quarters.

In fact, its CASM-Ex decreased by 1% to $0.0964 in 1Q15 compared to $0.0977 in 1Q14. DAL’s operating CASM also decreased by 8% to $0.14 in 1Q15 from $0.1424 in 1Q14.

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Delta’s CASM-ex saving was primarily due to fleet upgauging, which resulted in higher fixed costs compared to variable costs. In 2014, Delta took delivery of 84 aircraft and retired 89 aircraft. Around 60 of the 89 aircraft retired were 50-seaters. This also resulted in maintenance savings, as parts from retired equipment were recycled for use in other aircraft.

Fuel hedging costs

The dramatic fall in crude oil prices should have resulted in huge fuel costs savings for all major airlines. However, this fall was unanticipated, and major US airlines except American Airlines (AAL) hedged their fuel prices at a higher rate without anticipating the fall in crude oil prices. As a result, major airlines, including Delta Air Lines (DAL), United Continental Holdings (UAL), Alaska Air Group (ALK), JetBlue (JBLU), and Southwest Airlines (LUV), have incurred hedging losses.

However, DAL has now restructured its fuel hedges. The majority of its hedging losses, about $1.1 billion, have been incurred this quarter. From 3Q15 onward, DAL will pay 25% lower fuel prices compared to 1Q15 and 2Q15.

These long-term cost-saving initiatives should result in improved margins and should benefit shareholders. Improved margins will be and have been a positive for airline stocks. They should also benefit ETFs that have significant exposure to airline stocks such as the iShares Transportation Average ETF (IYT) and the SPDR S&P Transportation ETF (XTN) .

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