Delta Air Lines (NYSE: DAL), the country's second largest carrier in terms of air traffic, was one of the few companies that reported first-quarter results that fell below analyst expectations. Although the company benefited from better volumes or traffic and improved pricing power, soaring jet fuel prices remained a constant source of concern.
In fact, Delta recently announced it will purchase a refinery from ConocoPhillips (NYSE: COP) for $150 million, in what will be a unique attempt to curb fuel expenses.
Rough road
Delta posted earnings of $124 million during the quarter, as compared to a loss of $318 million in last year's first quarter. However, the scenario is not so pretty considering once the one-time special items such as gains for fuel hedges are excluded from this number, the company lost $0.05 per share.
The company's bottom line was hit by a $250 million increase in fuel costs, which it countered by $45 million in gains through fuel hedging. Hedging is popular among companies that need oil as a raw material on a regular basis. JetBlue Airways (Nasdaq: JBLU) also hedged its fuel costs to the tune of 42% of its consumption in the first quarter and 26% in the second quarter.
In a bid to cut down on costs and return to profitability, Delta is also resorting to measures such as reducing unprofitable routes and shrinking capacity by as much as 3% in order to take advantage of the rising demand for air travel and improve its pricing power.
More passengers, more revenue
On the bright side, Delta generated $8.4 billion in revenue, a noteworthy 9% increase as compared to the previous year. Travel demand has picked up and the company seems to be seeing fuller planes. This is clear as passenger revenue per available seat mile (a key metric used to measure an airline's profitability) increased by 14%, benefited by better rates and stronger demand in the Atlantic and Pacific regions. This figure looks impressive when compared to United Continental's (NYSE: UAL) meager 5.2% increase on this metric.
The Foolish bottom line
Delta Air Lines is stuck with high fuel costs, but it's not the only one to face such a situation. However, an overall improvement in demand for air travel, coupled with the company's strategy of curtailing costs to improve its pricing power is likely to boost Delta's prospects in the long run. To stay updated on this stock, add Delta Air Lines to your watchlist. It's completely free!
