DL: Cash flow machine with fuel cost advantage


Corn Field
Dec 5, 2003
Here is a good summary of DL's financial strength, why it is so much stronger than its US peers, and shows that DL has a fuel cost advantage (30% of revenues compared to 32% for AA and UA) despite not ordering as many latest generation aircraft.

It also demonstrates how DL has the strength to engage in the strategic advances that it is doing and why rumors of further aircraft orders could well happen without DL taking on more debt or harming its greatly strengthened finances.


"For 2013, Delta Air Lines generated so much cash flow that it contributed $250 million above required funding to its defined benefit pension plans. In addition, the company paid an incredible $506 million in profit-sharing expenses and returned $350 million to shareholders through dividends and stock buybacks.For the full year, the airline generated nearly $5 billion of operating cash flow and $2.1 billion of free cash flow."

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that would be about 1% of the cash flow that DL generates.

And, again, DL can't say that TRAINER has pushed down the overall price of jet fuel in the NE but, somehow, the crack spread is lower than it has been in years.

Perhaps DL's investment to put more jet fuel into the market has helped push down the cost of jet fuel which has had a far larger impact than the nominal operating losses the refinery has accrued which DL has to report for accounting purposes.

Still, DL spends less as a percent of total revenues on fuel than its competitors. That is a revenue comparison. Either DL is generating much higher revenues than its competitors so that fuel is a smaller piece or else they have managed to use their fuel and fleet more efficiently to overcome not having as many of the newest aircraft.

Just for comparison, in the late 90s, AA, DL, and UA were each generating $3 billion or so of cash per year. But they were also ordering and taking delivery of $2B of new aircraft per year. It's not hard to see how DL is managing its business differently when it is generating almost twice as much cash - with NW now part of the picture - but spending almost half the amount they spent back then.

It is precisely from financial strength that DL can achieve its strategic objectives and still ensure a strong future for the company and its stakeholders which include employees, customers, mgmt, and investors.
Gee best profit margin isnt DL, its NK!
Spirit has become the most profitable U.S. airline in terms of its operating margin and return on invested capital. Spirit’s 16.2 percent margin is highest among U.S. public airlines, as is its 26 percent return on capital, according to data compiled by Bloomberg. Allegiant Travel (ALGT), the nation’s other ultralow-cost airline, has the second-best operating margin—12.7 percent—followed by Alaska Airlines (ALK) and Delta Air Lines (DAL). Spirit shares have gained 439 percent since its mid-2011 public offering at $12.
Not surprising that NK and G4 have the highest margins, but they're also niche carriers in comparison.

Spirit only carries ~11M pax per year, and Allegiant is ~7M per year.

By comparison, DL carried 165M pax last year. Combined, NK and G4 may be on the order of what DL carries via SLC annually, and SLC isn't DL's largest hub...

What's frightening is that Allegiant is still pulling off a 12.7% margin operating fuel-hungry MD80's; NK's more expensive A320 fleet really does pay for itself with a 26% ROIC.
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Two dimensions to this story:
As to the fuel component of the story, DL and UA are the only two airlines that report quarterly fuel price guiadance s as part of their monthly traffic reports. IN the most recent traffic report, DL’s expected price is 15 cents per gallon lower than UA’s. In the 4th quarter of 2013, for which all US airlines have reported fuel prices, DL had a fuel cost advantage over AA, UA, and WN but which only amounted to 2 to 4 cents.
If DL is really widening the gap in fuel prices between itself and other carriers – even if just UA – it marks a significant shift in the competitive landscape in the US airline industry – and augers a potential repeat of what WN was able to do about 10 years ago when WN was able to hold onto fuel hedges which other carriers had to let go of due to their weakened finances. WN significantly expanded its growth because of its fuel cost advantage.
It is not known if DL’s fuel cost advantage relative to UA will be just a DL-UA advantage or if DL is really beginning to reap the benefits of its enhanced fuel strategy of which Trainer is part. DL has said that Trainer is refining Bakken crude this quarter and that upgrades to the refinery would start increasing the output of jet fuel. DL still has hedges in place and has said they are paying off.
IIRC, Parker said (and someone correct me if I am wrong) that new AA would either quit hedging or dramatically reduce new AA’s hedging based on US’ ability to keep fuel prices close to or below industry average without hedging over the past five or so years. UA does still hedge as does WN and AS and other carriers.
If DL really does come up with a fuel price advantage of 15 cents or more per gallon, it translates into a cost advantage that could be as high as $500 million per year on an annual basis compared to AA or UA but proportionately just as significant relative to other carriers. That is a potentially enormous advantage that combined with DL’s already lower non-fuel CASM could provide the basis for DL to significantly grow its network.
Quarterly reports will be out in the next few weeks and the fuel cost item will be one of the most interesting to watch. Given that passenger pricing in the industry is fairly firm thanks to consolidation, success at reducing major cost items will have a direct impact on profitability.

Regarding Allegiant and Spirit, both are developing the ultra low cost/ultra low fare carrier concept which has been wide well developed in Europe by Ryanair and Easyjet among others but which is relatively new and much smaller in comparison. European travelers have grown used to the idea that they can get very low, highly unbundled air service with a certain amount of inconvenience, particularly given that the ULCCs in Europe generally have little access to the largest airports that the Euro legacy carriers use.
There are several major reasons why Allegiant and Spirit have an will continue to have a cost advantage over the US legacy carriers and the low fare carriers (B6 and WN):
1. The ULCCs are young and growing which means they have less seniority, lower paid staff and are adding more and more of them which helps keep average fares down. Part of the success CO had coming out of BK 2 was that they rapidly grew the company which helped keep their costs down, a strategy that DL is using as well driven in large part by their insourcing of regional carrier flying using the 717s. Every airline has to keep growing and adding lower cost employees in order to retain their cost advantage. It is precisely because WN is growing at a much slower rate than they historically have done that their cost advantage relative to the legacy carriers is shrinking.
2. The ULCCs are all about flying when the demand exists – and not an hour before or after. It is easy for any airline to create revenue premiums when you limit your flying to peak periods but it also means you have little ability to pursue higher yield business travelers who need frequency and a consistent reliable schedule. The ULCCs may or may not be there tomorrow which makes them even terribly attractive for high frequency leisure travelers. The fact that the LCCs generate high margins says that there is a segment of leisure demand that can be served when the demand is there and service pulled down when it is not there. However, any carrier should be able to flex its schedule enough to add leisure seasonal or day of week demand. DL’s Saturday Cancun operation and its redeployment of capacity from the Midwest and NE to Florida during the peak spring break period is something any of the US carriers can do. The best way for the legacy and LCCs to cut off the ULCCs is to add capacity into the markets which the ULCCs could serve, esp. from the legacy carriers’ strongest markets.
3. While most US travelers have adapted to the complexity of the service package that US network carriers are now offering, the unbundling of fares by the LCCs is even more difficult for customers to understand and DOT complaint data shows it. There will always be a continuum along which customers will fall regarding convenience and all-in-one price pricing vs unbundling in an attempt by a consumer to get a lower total price. The legacies and LCCs all have an advantage that their pricing is understood and supported by consumers and they, thru good revenue management, can win a certain number of consumers who aren’t willing to risk surprises and lack of operational reliability to get a total cost that might have been lower but also might have involved a lot lower level of service.
The ULCCs likely do have strong growth potential but the LCCs and legacies are better equipped to limit the advantages the ULCCs have (which is so far largely just price driven).
WorldTraveler said:
And, again, DL can't say that TRAINER has pushed down the overall price of jet fuel in the NE but, somehow, the crack spread is lower than it has been in years.

Perhaps DL's investment to put more jet fuel into the market has helped push down the cost of jet fuel...
Which helps all airlines operating in the Northeast. not just DL.
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You obviously missed the part that DL is paying 15 cents per gallon less than UA on a systemwide basis in this quarter according to each of their traffic reports this quarter.

If DL's costs are 15 cents per gallon lower and DL and UA are paying the same price in the NE, then something is even screwier someplace else.

Or maybe, just maybe, DL's refinery strategy is really beginning to translate into a competitive advantage.

We'll see in a couple weeks when each of the carriers report. Perhaps UA had a really bad quarter hedging but if they are not the only carrier that is at a disadvantage to DL, esp. in the NE, then it would lead to a very likely reality that DL is gaining the benefits of sourcing its own fuel, something that many on here and a host of know it all analysts said would never work for DL.
guess its bec most of us are not know it all like you  or other analysts   or may be it bec most of us don't think our airlines are as good as delta bec we all know delta rules  the rest druels
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if DL "druels" jet fuel then they really do have an advantage.
It is simply a matter of reading the published information and believing that it is very possible that what DL said it would do with Trainer and its fuel strategy is now happening.
Others who were so quick to say that DL could never accomplish what it said it would when it bought the refinery may well see the same numbers but they aren't about to admit that they were wrong.
Again, if DL is gaining a 15 cent per gallon fuel price advantage over even one airline, it is a major change in the competitive landscape.  If it is happening with multiple airlines, it is a game changer in the industry not unlike what WN did.
The difference is that DL is focusing its competitive advantage in int'l markets and key industry competitive markets. 
According to you, they're seeing far less of an advantage with everyone except UA, which sort of limits the game changing nature, no?
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no, I said that the only other carrier that reports fuel as part of their traffic reports is UA.  That is the only basis for comparison at this time.
DL's fuel cost advantage may or may not exist compared to other carriers.  AA, B6, UA, US, and WN all have large NE operations.  If DL has a fuel cost advantage compared to all of them and even others who aren't as strong in the NE, it means that DL has gained a true advantage which could be worth way more than the operational losses Trainer has suffered - and it still doesn't change that the overall price of fuel has been lower which has helped DL as well as others.
No one realistically expected that DL intended to help the entire industry lower its fuel prices so perhaps they had to just wait until things fell into place which would allow them to harness the savings and keep it for themselves.
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700's post regarding DL's older fleet bears consideration.

1.Virgin America -- 5 years
2.Spirit Airlines -- 5.2 years
3.Republic Airways -- 5.5 years
4.JetBlue -- 7.4 years
5.Frontier Airlines -- 8.2 years
6.Alaska Air -- 9.6 years
7.Hawaiian Airlines -- 10 years
8.AirTran -- 10.9 years
9.SkyWest -- 11 years
10.Southwest Airlines -- 11.7 years
11.US Airways -- 12.1 years
12.American Airlines -- 13.6 years
13.United Airlines -- 13.6 years
14.Delta Air Lines -- 16.9 years
15.Allegiant Travel -- 22 years

Aircraft Fleet age, clearly shows DL has the oldest fleet out of the major airlines.

Despite having an older fleet, mainline DL's fuel per ASM was within a couple of percent of AA and UA's.

DL's debt load is lower and is going down, not up.

DL's maintenance costs are the lowest per ASM of any of the US legacy carriers.

DL has modern cabins on the aircraft.

Pray tell, what is the disadvantage DL has with an older fleet?

And let's not forget that DL is in the process of taking delivery of 100 739ERs, has 30 321s and 10 333s on order, and the 717s that DL is taking are about 1/3 of the age of the DC9s they replaced - which are reflected in the age count above.

It is precisely the low debt levels that allow DL to throw out as much cash as it does.

If competitors don't really gain an advantage because of their newer fleet, then why spend the money?