Fuel Hedging Costs Delta $168M in Q2

By Bill Dries

Delta Air Lines Inc. lost $168 million, or 20 cents a share, on its fuel hedge strategy that the company touted when fuel prices were high.

Without that and another one-time expense of $171 million in severance costs from voluntary early retirements, Delta had a $586 million profit for the second quarter that ended June 30. The net income excluding special items was 69 cents per diluted share.

The Atlanta-based airline reported its Q2 financials in a Wednesday, July 25, earnings call.

During the quarter, Delta through its Monroe Energy subsidiary closed on it acquisition of an oil refinery, which is another part of its strategy to counter what is the airlines greatest expense – fuel.

But fuel prices dropped to $3.37 a gallon during the quarter. The per gallon price includes 16 cents in settled losses from the hedge program.

Delta CEO Richard Anderson said despite the loss and the low gas prices, hedging is a necessary precaution.

“Because if you are selling 330 days in advance and you cannot legally use fuel surcharges, we need the ability to take some of the volatility out,” he told analysts on the call.

The company expects the refinery to be operational starting in September or October with a modest loss as it ramps up. But Delta expects it to be profitable starting in December.

Delta also announced a new labor agreement during the quarter with the Air Line Pilots Association that allows it to move faster on retiring a larger number of 50-seat regional service jets as well as its purchase of Boeing 717 aircraft starting next year.

Delta chief financial officer Paul Jacobson said the two moves will “accelerate domestic fleet restructuring.”

Delta president Ed Bastian said the airline surveyed its business customers about their travel expenses and plans for the near future and found that 84 percent of those surveyed said they would either have the same spend or an increased travel spend with Delta.

“Corporate revenues continue to perform well,” Bastian said.

The domestic restructuring has hit Memphis International Airport particularly hard with major cuts to Delta air service at the airport in August 2011 and a new round starting next month that will take Delta’s average daily flights here from 150 to 125.

Passenger traffic at Memphis International, which is one of seven U.S. hubs for the airline, declined 18.1 percent in the fiscal year that ended June 30 compared to the previous fiscal year.

Civic leaders are now aggressively courting competing airlines and the Memphis-Shelby County Airport Authority recently approved a $1 million pool of incentives for new sustained air service.

Delta’s goal of cutting to 125 50-seaters has also scrambled the bankruptcy reorganization of Memphis-based Pinnacle Airlines Corp., a regional air carrier that flies under contract with Delta.

Delta executives on the call made no reference to the ongoing civic debate about the cuts in air service and markedly higher fares at Memphis International and weren’t asked about it by analysts.