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Delta Reaps Fuel Savings From Refinery Ownership

Madhu Unnikrishnan
April 13th, 2022 at 2:29 PM EDT

The rising cost of fuel is a concern for Delta Air Lines, but the Atlanta-based carrier enjoys a benefit few other airlines in the world can claim: Its own oil refinery.

Delta will see a benefit of 20 cents per gallon of jet fuel from its refinery, which acts as a hedge against the spike in fuel. In particular, the refinery supplies fuel for Delta’s York operations, but Chief Financial Officer Daniel Janki said Monroe Energy’s output acts as a 40-50 percent fuel hedge across Delta’s network. In the first quarter, the refinery knocked about 7 cents off each gallon of jet fuel Delta consumed.

When Delta first bought the Trainer, Pa., refinery from Conoco Philips — now Philips 66 — in 2012, analyst opinions were mixed. Some argued it was a stroke of genius on the airline’s part, while others said it was too far afield from Delta’s core operations to make sense for an airline with no experience in selling or marketing petroleum products. The years since have been up and down for the refinery but now, with oil prices spiraling up in the wake of the Ukraine war, the refinery is proving its worth.

The refinery generated $1.2 billion in revenue in the first quarter, compared with $48 million in the same quarter in 2019, Delta said in its first-quarter results. About 80 percent of its output is diesel and gasoline, prices of which have surged. “Our Monroe refinery provides a unique benefit, acting as a partial hedge to elevated cracks,” Janki said. “This is especially true with New York Harbor Jet cracks, where our production at Monroe provides 100 percent offset.”

Delta so far has not faced any pushback from passing on its increased fuel costs to consumers. Fuel costs almost 30 percent more than it did in the fourth quarter of last year.

Consumers Eager to Spend

On the contrary, Delta believes consumers are eager to spend money, and executives pointed to the change in consumer behavior, with spending shifting spending from retail to travel and experiences.

“Consumers have not been traveling over the past two years, so they’re prioritizing that spend now,” Delta CEO Ed Bastian told investors during its first-quarter earnings call on April 13. “They are looking for experiences.”

Bastian pointed to credit card data from both Delta’s co-branded credit card with American Express and from increased spending on hotels and rental cars. During the depths of the pandemic, consumers redeployed cash they ordinarily would have spent on travel to home-improvement and other retail purchases. “You’re seeing a pretty significant shift coming out of goods and retail into experiences and services,” he said. “And that’s not just the fact that people haven’t traveled, they’ve also saved money as they’ve accumulated some meaningful cash and discretionary income for what they have been doing over the last couple of years.”

Consumers in the U.S. are sitting on $2.5 trillion more in savings than they had before the pandemic, due largely to decreased spending on travel, restaurants, and other services curtailed by quarantines and lockdowns, data from the Federal Reserve Bank show. Although the household savings rate has declined from its pandemic-era high of more than 30 percent to pre-pandemic levels of roughly 7 percent, many higher-income households in the U.S. have significantly more to spend than they did before March 2020. This is despite the higher costs of goods and services from the highest rate of inflation in 40 years.

And when they spend money on travel, consumers are more likely to spend it on premium seats, Bastian said. Delta has bet heavily on the front of the aircraft, investing in new cabins on much of its fleet of aircraft, including planning a new transcontinental premium product on its Airbus A321neos. The airline is positioning itself as an upscale brand, and is well placed to capitalize on the trend, he said.

Delta reported its domestic premium revenue hit 100 percent of 2019 levels in March. Premium travel to Latin America and Europe also has recovered, with no measurable decline in demand due to the Ukraine war, and Delta sees significant growth possibilities in this segment as corporate travelers return.

In March, domestic corporate travel was 70 percent of three years earlier, and transatlantic business travel was roughly half. The federal pre-departure testing requirement for passengers returning to the U.S. is depressing demand for transatlantic travel, but Bastian said Delta is “encouraged” by signs that Washington may lift the requirement soon. He did not outline a timeline for when the requirement may be dropped.

Business travel also is expected to increase as more companies reopen their offices. In 2020 and through last year, small- and medium-sized businesses led the business travel recovery while large companies largely grounded their staff. This is changing, Bastian said, as a survey of Delta’s corporate clients revealed that 90 percent plan to travel more in the second quarter. But travel increasingly is skewing toward meetings and events – group travel — than it was before the pandemic, he noted.

Delta expects strong demand across its network this summer with one exception: Asia. Although demand has spiked in response to South Korea and Australia easing travel restrictions, travel to Japan and China remains difficult. “We expect that heavily restricted regions, such as China and Japan, will continue to put pressure on overall Pacific unit revenues until borders fully reopen,” Hauenstein said. The company expects most restrictions to ease in the third and fourth quarters of this year.

A Hiring Spree

By this summer, Delta will operate 84 percent of its 2019 capacity, and is on a hiring spree in order to staff its operations. The carrier has hired 15,000 people since January 2021, with 4,000 joining the company since the start of this year. This staff is replacing the 18,000 Delta employees who took voluntary separation packages when the carrier downsized in response to the pandemic.

Where Delta most needs employees is on the ground: Staff at airports, reservations centers, and maintenance personnel. It competes directly with retail and other industries for these employees. The company has not struggled to hire pilots and flight attendants, although Bastian admitted training these employees will take time. “Pilots have a training pipeline and it will take some time before pilots are fully in category and where we want them positioned; it’ll probably take another year or two,” he said. “Flight attendants, [and] likewise, we’re hiring flight attendants and there’s a queue as to how much many people we can put through the training pipeline.”

Delta is raising all employees’ pay by 4 percent in May. As of April 1, the company dropped its $200 insurance surcharge for unvaccinated employees, as Delta moves toward treating Covid-19 as a recurring seasonal disease, Bastian said.

And Now, the Numbers

The first quarter was split into two halves: The first, with demand dampened by the Omicron variant; and the second, a dam break of pent-up demand for travel. After the February Presidents Day holiday in the U.S., demand rose sharply, Bastian said. The carrier reported an operating loss of $793 million for the quarter, but was profitable in March and generated an operating margin of almost 10 percent.

Delta reported first-quarter revenues of $8.2 billion, 21 percent lower than the same period in 2019. Cargo revenue of $289 million was 51 percent higher than in 2019, and is expected to rise in the second quarter as companies scramble to restock after lockdowns in China disrupted the supply chain. Delta expects revenues to recover to 93-97 percent of 2019 in the third quarter, and the company is forecasting an operating margin of 12-14 percent.

“We are thrilled with the performance of our team. We have been waiting two years to see this,” Bastian said. “We are ready to go. Customers are ready to go. We are looking forward to a strong summer season.”

Madhu Unnikrishnan
April 13th, 2022 at 2:29 PM EDT

Photo credit: Delta Air Lines is reaping the benefit of owning an oil refinery with high fuel prices. Delta Air Lines

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