Delta announced its 4Q15 numbers and they were very good. Operating revenues came in at $9,502m and adjusted pre-tax income jumped 42% year over year. Delta missed its targets and there has been some negative chatter about this.
But here’s the big driver to watch. Delta says it expects to face more than a 50% decline in fuel prices. CEO Richard Anderson said in a statement. “With over $3 billion in potential savings from lower fuel prices and numerous commercial, operational and cost initiatives already in place, we expect to again perform in the top tier of the S&P Industrials on earnings growth, margins, and cash flows this year despite global economic challenges.”
He may be under stating the outlook. It could be much better than that. The chart can been found here, where you can change the review period. The chart shows five years worth of history.
The drop in fuel prices is simply amazing. But what does it look like for the US airlines? The next chart gives that perspective. Here we track the average fuel costs with flight hours and the most current DoT data is through September 2015. As the chart shows at that time the typical fuel price was $1.39 per gallon. By January it had dropped to $1.08 or by 22.3%.
Delta said it is expecting fuel costs in the range of $1.20 to $1.25 per gallon for the first quarter. We are way below that already. More production is being added so prices are going to go even lower. January 11th saw 0.925 per gallon. That is a drop of over 33% since September.
The drop in fuel prices helps Delta more than its competitors because it has kept an older fleet. Overall the entire airline industry is reaping super profits from much lower fuel costs. The only cloud on the horizon is that employees, who have suffered through pay cuts (and layoffs), are now going to demand their share of the windfall. They are entitled to it.