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Can Delta Air Lines’ Fuel Costs Continue to Fall in 2016?

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Jul. 28 2016, Updated 1:21 p.m. ET

Operational costs fall

In 2Q16, Delta Air Lines saw its operating expenses fall by 3% YoY (year-over-year). Its operating expenses fell from $8.2 billion in 2Q15 to $8 billion in 2Q16. Most of the savings came from falling fuel costs and a decline in profit sharing.

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Fuel savings not as expected

In 2Q16, Delta Air Lines’ fuel costs fell by 16.5%, or more than $408 million. Fuel prices fell by 19% YoY to $1.97 per gallon. However, this rate is much higher than DAL’s earlier estimate of $1.48– $1.53 per gallon. The higher fuel prices were a result of increased taxes, hedging, and a loss in refinery operations.

Flat utilization

DAL’s restrained capacity growth and targeted capacity cuts in international markets have helped maintain capacity utilization. This, in turn, helps margin performance.

Outlook

Management expects fuel costs to fall to $1.52–$1.57 per gallon from $1.80 per gallon seen in 3Q15. However, management expects fuel saving to be over. Ed Bastian, Delta’s CEO, said, “As we look to the remainder of the year, the large year-on-year savings driven by lower fuel are largely behind us, and it is important to achieving our long-term financial targets that we get unit revenues back to a positive trajectory.”

As a result, margins are expected to remain flat. For 2Q16, Delta expects to see its operating margin remain flat in the range of 19%–21%.

However, investors should remember that if fuel prices fall further, DAL could see further margin expansion.

The Guggenheim S&P 500 Equal Weight Industrials ETF (RGI) invests 1.4% of its holdings in DAL. It also invests 1.5% of its holdings in American Airlines (AAL), 1.4% of its holdings in Southwest Airlines (LUV), and 1.4% of its holdings in Alaska Air Group (ALK).

In the next article in this series, we’ll discuss whether Delta can reduce its debt in 3Q16.

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