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Are Delta Air Lines’ Cost Reduction Measures Effective?

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Cost reduction

Delta Air Lines (DAL) has been continually working toward restructuring its fleet and reducing its costs for the past several quarters. This has helped the company keep its non-fuel unit cost growth below 2% annually for the ninth consecutive quarter.

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Lower fuel prices cause hedging losses

Fuel costs account for a major portion of an airline’s operating expenses, and any fall in global crude oil prices would be welcomed by airline companies. Most airlines, including Delta Air Lines (DAL), make use of various hedging techniques to protect themselves from any sudden spike in crude oil prices.

Global fuel prices saw a sudden decrease since last year, which most airlines did not anticipate. Theoretically, such a huge fall in crude oil prices should have resulted in significant cost savings for all major airlines. However, aggressive hedging by Delta led to the company to suffer significant hedging losses.

This is in contrast to Delta’s major competitor American Airlines (AAL), which does not hedge fuel costs. United Airlines (UAL) has also been reducing its fuel hedges. Other competitors like Alaska Airlines (ALK) and JetBlue Airways (JBLU) also hedge their fuel costs.

Measures to keep costs low

Delta Air Lines is retiring its 747s, older 757s, and domestic 767s in order to lower its maintenance costs. It is also using hedging to protect itself from any sudden spike in oil prices in a cost-efficient manner.

The company has a refinery that helps keep its fuel expenses on the lower side. Apart from cost savings, the company is also working toward minimizing its tax exposure by increasing its pension plan contributions.

Are these measures paying off?

Delta Air Lines is reaping the benefits of its fleet restructuring and cost reduction initiatives. The company’s cost per available seat mile (or CASM) declined by 0.8% year-over-year for the second quarter. Delta’s fuel expenses declined over $463 million during the quarter, compared with the same period in 2014. The company’s debt reduction initiatives resulted in $46 million in interest savings for 2Q15.

These cost reduction initiatives 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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