The rising cost of fuel is a concern for Delta Air Lines, but the Atlanta-based carrier enjoys a benefit few other airlines in the world can claim: Its own oil refinery.
Delta will see a benefit of 20 cents per gallon of jet fuel from its refinery, which acts as a hedge against the spike in fuel. In particular, the refinery supplies fuel for Delta’s York operations, but Chief Financial Officer Daniel Janki said Monroe Energy’s output acts as a 40-50 percent fuel hedge across Delta’s network. In the first quarter, the refinery knocked about 7 cents off each gallon of jet fuel Delta consumed.
When Delta first bought the Trainer, Pa., refinery from Conoco Philips — now Philips 66 — in 2012, analyst opinions were mixed. Some argued it was a stroke of genius on the airline’s part, while others said it was too far afield from Delta’s core operations to make sense for an airline with no experience in selling or marketing petroleum products. The years since have been up and down for the refinery but now, with oil prices spiraling up in the wake of the Ukraine war, the refinery is proving its worth.
The refinery generated $1.2 billion in revenue in the first quarter, compared with $48 million in the same quarter in 2019, Delta said in its first-quarter results. About 80 percent of its output is diesel and gasoline, prices of which have surged. “Our Monroe refinery provides a unique benefit, acting as a partial hedge to elevated cracks,” Janki said. “This is especially true with New York Harbor Jet cracks, where our production at Monroe provides 100 percent offset.”
Delta so far has not faced any pushback from passing on its increased fuel costs to consumers. Fuel costs almost 30 percent more than it did in the fourth quarter of last year.
On the contrary, Delta believes consumers are eager to spend money, and executives pointed to the change in consumer behavior, with spending shifting spending from retail to travel and experiences.
“Consumers have not been traveling over the past two years, so they’re prioritizing that spend now,” Delta CEO Ed Bastian told investors during its first-quarter earnings call on April 13. “They are looking for experiences.”
Bastian pointed to credit card data from both Delta’s co-branded credit card with American Express and from increased spending on hotels and rental cars. During the depths of the pandemic, consumers redeployed cash they ordinarily would have spent on travel to home-improvement and other retail purchases. “You’re seeing a pretty significant shift coming out of goods and retail into experiences and services,” he said. “And that’s not just the fact that people haven’t traveled, they’ve also saved money as they’ve accumulated some meaningful cash and discretionary income for what they have been doing over the last couple of years.”
Consumers in the U.S. are sitting on $2.5 trillion more in savings than they had before the pandemic, due largely to decreased spending on travel, restaurants, and other services curtailed by quarantines and lockdowns, data from the Federal Reserve Bank show. Although the household savings rate has declined from its pandemic-era high of more than 30 percent to pre-pandemic levels of roughly 7 percent, many higher-income households in the U.S. have significantly more to spend than they did before March 2020. This is despite the higher costs of goods and services from the highest rate of inflation in 40 years.
And when they spend money on travel, consumers are more likely to spend it on premium seats, Bastian said. Delta has bet heavily on the front of the aircraft, investing in new cabins on much of its fleet of aircraft, including planning a new transcontinental premium product on its Airbus A321neos. The airline is positioning itself as an upscale brand, and is well placed to capitalize on the trend, he said.
Delta reported its domestic premium revenue hit 100 percent of 2019 levels in March. Premium travel to Latin America and Europe also has recovered, with no measurable decline in demand due to the Ukraine war, and Delta sees significant growth possibilities in this segment as corporate travelers return.
In March, domestic corporate travel was 70 percent of three years earlier, and transatlantic business travel was roughly half. The federal pre-departure testing requirement for passengers returning to the U.S. is depressing demand for transatlantic travel, but Bastian said Delta is “encouraged” by signs that Washington may lift the requirement soon. He did not outline a timeline for when the requirement may be dropped.
Business travel also is expected to increase as more companies reopen their offices. In 2020 and through last year, small- and medium-sized businesses led the business travel recovery while large companies largely grounded their staff. This is changing, Bastian said, as a survey of Delta’s corporate clients revealed that 90 percent plan to travel more in the second quarter. But travel increasingly is skewing toward meetings and events – group travel — than it was before the pandemic, he noted.
Delta expects strong demand across its network this summer with one exception: Asia. Although demand has spiked in response to South Korea and Australia easing travel restrictions, travel to Japan and China remains difficult. “We expect that heavily restricted regions, such as China and Japan, will continue to put pressure on overall Pacific unit revenues until borders fully reopen,” Hauenstein said. The company expects most restrictions to ease in the third and fourth quarters of this year.
By this summer, Delta will operate 84 percent of its 2019 capacity, and is on a hiring spree in order to staff its operations. The carrier has hired 15,000 people since January 2021, with 4,000 joining the company since the start of this year. This staff is replacing the 18,000 Delta employees who took voluntary separation packages when the carrier downsized in response to the pandemic.
Where Delta most needs employees is on the ground: Staff at airports, reservations centers, and maintenance personnel. It competes directly with retail and other industries for these employees. The company has not struggled to hire pilots and flight attendants, although Bastian admitted training these employees will take time. “Pilots have a training pipeline and it will take some time before pilots are fully in category and where we want them positioned; it’ll probably take another year or two,” he said. “Flight attendants, [and] likewise, we’re hiring flight attendants and there’s a queue as to how much many people we can put through the training pipeline.”
Delta is raising all employees’ pay by 4 percent in May. As of April 1, the company dropped its $200 insurance surcharge for unvaccinated employees, as Delta moves toward treating Covid-19 as a recurring seasonal disease, Bastian said.
The first quarter was split into two halves: The first, with demand dampened by the Omicron variant; and the second, a dam break of pent-up demand for travel. After the February Presidents Day holiday in the U.S., demand rose sharply, Bastian said. The carrier reported an operating loss of $793 million for the quarter, but was profitable in March and generated an operating margin of almost 10 percent.
Delta reported first-quarter revenues of $8.2 billion, 21 percent lower than the same period in 2019. Cargo revenue of $289 million was 51 percent higher than in 2019, and is expected to rise in the second quarter as companies scramble to restock after lockdowns in China disrupted the supply chain. Delta expects revenues to recover to 93-97 percent of 2019 in the third quarter, and the company is forecasting an operating margin of 12-14 percent.
“We are thrilled with the performance of our team. We have been waiting two years to see this,” Bastian said. “We are ready to go. Customers are ready to go. We are looking forward to a strong summer season.”
Ethiopian Airlines Recovery Inches Forward
Ethiopian Airlines is beefing up its schedule to the U.S. with additional flights to Washington Dulles, an addition that comes even as its traffic recovery proceeds slower than it expected.
The Star Alliance carrier will begin thrice-weekly flights between Dulles and Lomé, Togo, that continue on to its Addis Ababa base in June, Ethiopian U.S. Regional Director Samson Arega said. The flights will complement Ethiopian’s existing daily service to Addis Ababa from Washington, which is a hub for codeshare partner United Airlines. Ethiopian also flies between Chicago O’Hare, Newark, and New York JFK and Addis Ababa. The New York-area routes operate with a stop in Lomé.
Lomé is the main base for Ethiopian’s affiliate carrier, Asky Airlines.
Ethiopian’s Houston flights, which were suspended after just five months in May 2020, have yet to resume. Arega said the airline plans to return to the Texas city but has no timeline yet.
The additional Washington flights come as Ethiopian’s passengers continue to return slowly. Arega said that 70-75 percent of pre-pandemic passenger traffic has returned, and the airline expects that number to rise as it moves into the peak summer travel season. It forecasts recovering 80-85 percent of 2019 numbers next year.
Ethiopian’s passenger recovery, while progressing from roughly 65 percent last summer, appears to be moving slower than anticipated. Arega’s predecessor Nigusu Worku said in August that the carrier forecasted traffic recovering to roughly 80 percent of pre-Covid levels by the end of 2021.
Asked about the slower recovery, Arega said it was currently “low season” for Ethiopian.
Many factors beyond seasonal demand could be at play. The Omicron variant set back the recovery for most airlines from December through February. In addition, Russia’s invasion of Ukraine on February 24 raised fears of further disruption to the recovery though many Western airline executives have since said they saw little disruption in booking trends.
Another potential factor is the 18-month civil war in Ethiopia. The regime of Ethiopian Prime Minister Abiy Ahmed has been accused of brutal tactics in the conflict with the Tigrayan ethnic group.
Asked about the civil war, Arega said Ethiopian saw no impact on bookings. The same goes for the conflict in Ukraine, he added.
“We’ve passed so many storms in this industry,” said Arega on the jump in oil prices since February. While Ethiopian is not “immune” from the increases, it can manage the added expense, he added. A sentiment is shared by executives at most other major airlines.
Cargo remains a lucrative business for Ethiopian. After being a lifeline for the airline during the pandemic, air freight revenues remain elevated above pre-pandemic levels at roughly half of all receipts — down from a peak of roughly 60 percent — Arega said. The carrier’s March commitment for five Boeing 777-8 freighters will allow it to increase air cargo capacity by 50 percent.
Ethiopian’s new CEO Mesfin Tasew Bekele, who succeeded Tewolde GebreMariam on March 23, is continuing the airline’s successful strategy of building a pan-African franchise, said Arega. Bekele is focused on “sustainable” growth for the group, he added.
JetBlue, Alaska Cuts Lend to Summer Staffing Concerns
JetBlue Airways is the latest airlines to pull back planned schedules as the combination of staffing issues and bad weather limit its ability to recover from operational disruptions.
The New York-based carrier told staff on April 8 that it would reduce capacity by 8-10 percent through the end of May in order to mitigate the impact of weather and air traffic control disruptions, CNBC reported and confirmed by the airline. “You can expect to see a similar size capacity pull for the remainder of the summer,” said JetBlue President Joanna Geraghty in a memo. The move followed the cancellation of more than 300 flights over the previous weekend.
JetBlue’s capacity cut through the end of May includes previously announced cuts of 6-8 percent, and only represents an incremental 2-4 percentage points, Wall Street analysts noted.
The news followed Alaska Airlines decision the week before to reduce its schedule by 2 percent through the end of June citing a pilot-training backlog and shortage of cockpit crew. The Seattle-based carrier has also suffered by operational difficulties in recent weeks.
The schedule cuts come as U.S. airlines forecast strong demand and full flights for the peak summer travel season. Leisure travelers have returned in force. Corporate flyers, for the most part, have sat on the sidelines of the recovery but are expected to come back in larger numbers than they have since the pandemic began. The combination of robust demand and fewer flights — industrywide schedules have yet to return to 2019 levels — will translate into higher fares for travelers, and improved yields for airlines.
“Airlines are still operating on razor-thin margins, and hiring/training has been an ongoing obstacle,” MKM Partners analyst Conor Cunningham wrote in a note to investors on April 11. “Last summer there were several operational meltdowns during surging demand times. Erratic weather patterns are generally the start and then staffing snowballs the issues. Managements are all hyper-aware of this situation and are desperate to avoid it given the ripple effect through the network.”
Pruning schedules also benefits airlines as they navigate elevated oil prices. Brent crude, the benchmark for global oil, stood at $111.70 per barrel after close on April 15, according to Bloomberg. That’s down from a peak of $129.02 per barrel on March 7 but still up significantly since the beginning of the year.
The staffing at U.S. airlines is the most worrisome when it comes to summer schedules. The Big 4 — American, Delta, Southwest Airlines, and United — already have cut flights this spring due to trained staff shortages both in their ranks and those of their regional affiliates. On April 5, Southwest said it would slow pilot hiring due to a shortage in flight instructors, though the carrier did not indicate whether that would force it to cut summer schedules more than it already has.
U.S. domestic passenger capacity is gradually falling for the peak three-month June-August period compared with 2019, Cirium schedule data show. Capacity was scheduled as flat during the week of April 11, which is down from up 1 percent the week prior. And capacity has been trending down since airline executives provided guidance updates for the summer in March.
“The current environment in the U.S. is unique in that capacity is artificially constrained due to labor supply issues (notably pilot training bottlenecks) and aircraft delivery delays versus robust demand,” wrote Raymond James analyst Savanthi Syth on April 3.
Syth said further “cuts will likely continue through the summer” in order to mitigate operational issues. However, she doubts that they will be as deep as the up to 10 percent that JetBlue plans in May.
EasyJet Plots Strong Summer
EasyJet is predicting summer demand almost at 2019 levels, but the outlook is tempered by continued losses during the first three months of this year when the carrier grappled with the Omicron variant and a sharp drop in demand.
Capacity at the UK-based discounter rose as high as 80 percent of 2019 levels in March, and was two-thirds of 2019 for the fiscal quarter that ended in March. By comparison, during the same quarter last year, capacity was just 9 percent of 2019 levels, EasyJet reported in guidance to investors on April 12.
EasyJet saw the sharpest increase after January 24, when the UK ended most of its pandemic-era travel restrictions. Capacity lagged at 50 percent of pre-pandemic levels before the travel restrictions were eased and while the Omicron variant surged in the UK and Europe. Bookings are returning to their pre-pandemic balance between European and UK points-of-sale. Last year, bookings skewed 70 percent from Europe and 30 percent from the UK; now, bookings are back to being evenly split between the UK and Europe.
“Since travel restrictions were removed, EasyJet has seen a strong recovery in trading which has been sustained, resulting in a positive outlook for Easter and beyond, with daily booking volumes for summer currently tracking ahead of those at the same time in [fiscal year 2019],” EasyJet CEO Johan Lundgren said.
EasyJet plans to fly 90 percent of its 2019 capacity in the June quarter, and is forecasting a return to pre-pandemic levels in the September quarter, which is the final three months of the airline’s fiscal year. “We remain confident in our plans which will see us reaching near 2019 flying levels for this summer and emerge as one of the winners in the recovery,” Lundgren said.
Already a leisure-focused carrier, EasyJet is capitalizing on the current strength of leisure demand by expanding in European sun destinations this summer. The carrier secured additional slots at Greek airports and expects to be the largest airline in the Greek islands by the summer.
It plans to fund its expansion with the arrival of eight new Airbus A320neos this year, and seven in 2023.
EasyJet does not have much exposure to Eastern Europe and is not directly affected by the war in Ukraine. It did not operate any routes to Belarus, Russia, and Ukraine before the war and Western sanctions prohibited flying to those countries. The closest it comes is Budapest, Hungary, and Krakow, Poland, which together comprise less than 2 percent of EasyJet’s capacity. So far, bookings to those destinations have not softened, the carrier said.
The airline is affected by the rising price of fuel, but EasyJet is insulated by its strong hedge portfolio. The carrier hedged 64 percent of its fiscal second half fuel at $571 per metric ton, has hedged 42 percent of its fiscal first half 2023 fuel at $654 per metric ton. The spot price for fuel on April 11 was $1,100 per metric ton.
Despite the optimism, EasyJet’s losses continued in the fiscal fist half. The carrier is projecting a loss of between £535-£565 million ($697-$736 million) in the six months that ended in March. Costs rose to £2 billion, due to the higher fuel prices and costs associated with increasing capacity as well as the ending of government furlough support.
In Other News
- Wizz Air forecasts a €632-652 million ($683-705 million) net loss in its 2022 fiscal year that ended March 31. While the size of the loss was new, the airline was expected to lose money during the year that suffered from a number of blows not least of which was Russia’s invasion of Ukraine in February — Wizz still has four aircraft stuck in Ukraine — plus the Delta and Omicron variants. Speaking of the war in Ukraine, Wizz has reallocated all of its aircraft that would otherwise be flying to the country, Moldova, and Russia to other markets. Looking forward, Wizz like its peers is bullish on spring and summer demand: the airline will fly roughly 30 percent more capacity in the June quarter than it did in 2019, and roughly 40 percent more in the September quarter.
- Further north, AirBaltic reported a 41 percent revenue improvement last year over 2020, to €204.1 million ($220.6 million). But it was still a loss for the Latvian carrier, to the tune of €135.7 million, down from €265.6 million in 2020. AirBaltic carried 21 percent more traffic in 2021 than it did in 2020. The carrier is bullish about summer demand. “The forward bookings in the first quarter of 2022 are significantly above the previous year and confirm a very positive development out of the crisis,” CEO Martin Gauss said.
- Gol‘s new partnership with American Airlines was finalized on April 13 when the U.S. carrier closed its $200 million investment in the Brazilian airline. American now owns 5.3 percent of Gol, and the latter will enter into an exclusive codeshare with its new shareholder for three years. The deal is separate from American’s plan to invest in Chilean budget airline JetSmart.
Separately, Gol provided guidance for the March quarter. The airline forecasts a loss with a roughly negative 5 percent earnings before interest and taxes margin during the period. However, passenger unit revenues are expected to jump 45 percent year-over-year on a 4 percent decline in unit costs excluding fuel. Fuel prices are forecast to jump 60 percent year-over-year but, given Brazil’s large oil and gas sector, Gol executives have forecast that higher global commodity prices could be a boon for the airline. - It’s history repeating at WestJet‘s budget subsidiary Swoop. Bob Cummings, who launched the discounter in 2018, will return as its president from April 18. The WestJet Group alumni spent the last two years as CEO of Canadian regional carrier Central Mountain Air. In his return to Swoop, Cummings is likely to be tasked with the integration of Sunwing, which WestJet hopes to acquire by year-end.