Airlines are winners in crude oil rout

January 20, 2015 09:04 AM

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Delta Air Lines Inc.’s fourth-quarter profit beat analysts’ estimates, boosted by cheap fuel and strong demand in the U.S.

The carrier benefited from a 39% reduction in crude oil prices during the period, even as its costly fuel hedging contracts limited gains. More passengers flying domestically also buoyed Atlanta-based Delta, helping offset pressure on international routes.

Delta is the first U.S. carrier to publish fourth-quarter earnings. Analysts estimate the six largest airlines will report a combined $2.72 billion in profits, excluding one-time items. That’s a 65% increase from what the industry earned at the end of 2013, according to data from the companies.

“As we begin 2015, we have a significant opportunity from lower fuel prices, which will drive more than $2 billion in fuel savings over 2014,” said Chief Executive Officer Richard Anderson.

Profit was 78 cents a share, Delta said in a statement today. That surpassed the average estimate of 77 cents a share by 18 analysts compiled by Bloomberg.

Delta said its operating margin is forecast to be 11% to 13% in the first quarter. It estimates a fuel price of $2.45 to $2.50.

Fuel is typically the largest expense for airlines, accounting for as much as one-third of total operating costs. The six largest U.S. carriers spent almost $32 billion on fuel during the first nine months of 2014, according to data from the companies.

Delta’s hedging contracts are expected to eat into the company’s profits this year. In December, Delta said its hedges would hurt full-year 2015 earnings by $1.2 billion. Some analysts believe the hedge losses will exceed that as fuel costs continue to slide. Wolfe Research analyst Hunter Keay on Jan. 15 said Delta may face a $1.8 billion hedge loss this year.

Delta’s shares rose 79% in 2014. The stock declined 6.8% this year through Jan. 16 to $45.84.

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