Delta Air Lines, the US' second largest airline, expects
fourth-quarter 2016 fuel costs to rise to $1.60-$1.65/gal, which
will contribute to higher fares in the future, a company executive
said Thursday.
Speaking on Delta's third-quarter results call, CFO Paul Jacobson
said fuel costs have risen for the first time in about two years,
noting that there is a "three- to five-month lag before these costs
work into the pricing structure."
The airline's third-quarter fuel costs were $300 million, or an
average of $1.48/gal worldwide. This is 18% lower year on year, and
includes a 4 cents/gal loss from Trainer operations, Jacobson said.
Third-quarter 2016 USGC prompt pipeline jet averaged $1.297/gal,
while New York Harbor barges averaged $1.346/gal, S&P Global Platts
assessments showed. Delta swaps gasoline and diesel from the
refinery for jet fuel around the world and its fuel cost reflects a
global price.
So far in the fourth quarter, spot prices are higher, with USGC
prompt jet at an average $1.46/gal, while NYH barges are changing
hands at $1.49/gal.
Delta's 190,000 b/d Trainer, Pennsylvania, refinery is currently
running at about 180,000 b/d, about 95% of capacity, a source
familiar with refinery operations said Thursday.
Delta still expects the 2016 loss from the refinery to be in the
"$100 million range," Jacobson said on the call, noting that the
"cracks remain consistent" with the low levels seen in the third
quarter.
Currently, cracks, or refinery margins, are strong due to lower
regional refinery rates on refinery turnarounds and snags, Platts
margin data showed. East Coast refinery run rates fell 2.3
percentage points to 80.5% for the week ended October 7, the lowest
since May, according to Energy Information Administration data
released Thursday.
Trainer runs a significant amount of Nigerian Bonny Light, importing
2.73 million barrels in June, EIA data showed. So far in the fourth
quarter, US Atlantic Coast Bonny Light cracking margin netbacks are
$7.00/b, compared with the third-quarter average of $5.28/b, Platts
margin data showed.
Platts margin data reflects the difference between a crude's netback
and its spot price. Netbacks are based on crude yields, which are
calculated by applying Platts product price assessments to yield
formulas designed by Turner, Mason & Co.
Last year, Delta's fourth-quarter $1.85/gal fuel cost included $54
million paid out in mark-to-market costs to settle fuel costs early.
By unwinding hedges and buying out hedges, Delta was able to take
advantage of lower jet prices on the spot market.
Delta has no fuel hedges currently in place, Jacobson said.
Going forward, Delta is also limiting growth in the number of seats
it will sell and miles it travels, as overcapacity cut into
third-quarter revenues, cutting into jet fuel demand.
Third-quarter available seat miles were 69.028 billion, up 1.5% from
the year earlier, while passenger revenue miles fell to 0.2% year on
year to 58.973 billion.
"With our focus on building a more sustainable and durable business,
we will be taking a cautious approach to 2017 by keeping our
capacity in line with the December quarter's 1% growth level," CEO
Ed Bastian said on the call.
Delta's passenger unit revenue, or PRASM, fell 6.8% in the third
quarter to $9.071 million. PRASM is a key measure of airline
profitability, calculated by dividing passenger revenue by available
seat miles.
--Janet McGurty,
janet.mcgurty@spglobal.com
--Edited by Annie Siebert,
ann.siebert@spglobal.com
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