Overall, Delta Air Lines (NYSE:DAL) put up good numbers in 2015. In fact, CEO Richard Anderson glowed, "Our 2015 performance was a record for Delta on all fronts." As the boss, he has to be a big company cheerleader, so take that excitement with a grain of salt (there were some key negatives). However, after an earnings increase from $0.78 a share in 2014 to over $5.60 a share last year, you can understand his excitement. What's more interesting, though, is that 2016 earnings could end up even higher.
If you look at Delta's top line, the numbers aren't great. Revenue was up a modest 1% for the year and declined 2% year over year in the fourth quarter. That's a trend that appears to be going in the wrong direction and warrants a little attention.
All the airlines are basically facing the same top-line issues. United Continental Holdings (NYSE:UAL), for example, saw a full-year revenue decline of 2.7% last year. The problem boils down to slowing global growth and the impact of a strong dollar. Delta is trying to adjust. For example, it has shifted capacity from weak markets to stronger ones and made it easier for customers to buy higher-priced seats.
But the numbers are the numbers. Delta's passenger unit revenue, basically the revenue it makes per passenger mile flown, was down slightly in 2015. (This is why the CEO's "across the board" comment was a bit of hyperbole.) Worse, the airline expects passenger unit revenue to fall a bit as we head into 2016, too. So this year won't probably be the best year yet for the top line, with lower ticket prices being a big part of problem.
But when you examine the cost side of the equation, things look a lot different. Delta is looking at a veritable pot of gold: falling oil prices.
At the end of 2014, Delta was paying $2.62 a gallon for jet fuel. At the end of 2015 it was paying around $1.85 a gallon. That's a huge improvement, and one that falls pretty quickly to the bottom line, since fuel is one of the biggest expenses an airline faces -- thus the massive earnings improvement in 2015.
But here's the thing, Delta is expecting fuel costs to be even lower as it heads into 2016. It's projecting jet fuel costs of between $1.20 to $1.25 a gallon in the first quarter. A portion of the improvement is related to fuel hedging losses that aren't expected to repeat themselves. And that fuel price drop should be more than enough to offset any revenue declines and push the bottom line higher again. Since oil doesn't appear to be heading materially higher anytime soon, if the early 2016 oil price trends are any indication, that suggests the full year could see a nice boost from low fuel prices as well. So as long as oil prices stay relatively low, 2016 could end up being another good year for fuel costs.
And that, in turn, should lead to a further improvement on the bottom line even if the top line remains a bit weak. That said, the absolute cost of jet fuel is less important than the relationship between fuel costs and unit revenue. For example, if oil heads higher and jet fuel goes along for the ride, Delta might be able to raise prices and offset the bottom line hit. Conversely a price war could push fares lower than expected and crimp the benefits offered by low fuel costs. In other words, keep an eye on fuel costs and unit revenue trends. But as long as the trends in place now stick around, 2016 could wind up being a pretty good year on the bottom line.
Are there other moving parts at Delta? Of course there are, but the scale of the change in fuel prices has pretty much swamped them all. As 2016 progresses, it's probably the biggest issue to watch.
A volatile commodity
That said, it wasn't all that long ago that fuel prices were a veritable lead weight on earnings. Thus, you shouldn't expect this period of falling fuel prices to last forever. But for 2016 anyway, it looks as if low fuel costs could make this year one of Delta's best.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.