Delta’s Two Aces: Delta was the least profitable among the U.S. Big Three last quarter. Expect that to change.
Something highly unusual happened in the first quarter of 2015: Mighty Delta found itself dead last in its contest with American and United for profit margin supremacy among U.S.-based global airlines. How unusual was this? It was, in fact, the first Q1 since 2011 in which Delta’s operating margin, excluding special items, wasn’t No. 1 among the Big Three—it was No. 2 that year behind United. But more significantly, looking at full years rather than individual quarters, Delta has now bested American and United (including results from pre-merger partners) for eight straight years—every year, in fact, since 2006, when Delta hadn’t even yet emerged from bankruptcy.
So will 2015 break the streak? Is this the year, as the first three months suggest, that Delta will lose its crown? Has it lost its competitive edge versus American, the new profit champion last quarter and an airline just now wringing synergies from its US Airways merger? Is Delta even losing major ground to United as it implements reforms?
In reality, Delta fell to last place last quarter for one simple reason: extremely adverse fuel hedging, at a time when unhedged American, which beat Delta by seven full margin points for the quarter, enjoyed the full fruits of collapsing oil prices. United, for its part, suffered far more modest fuel hedge losses than Delta. Even so, it managed to beat Delta in terms of operating margin only, well, marginally—not even a full point. Remove fuel costs from the equation, and Delta still beat not only United but even American too.
Delta’s bad hedges are wearing off, meanwhile. So its margins will likely swell as the year progresses. American will still retain a major fuel cost advantage if prices don’t surge. But it also faces other challenges Delta doesn’t, like a reservation system cutover—a task always fraught with risk, even if American has gone to great lengths to mitigate this—and a yield-battering fare war in its largest market: Dallas-Fort Worth. In Q1, American’s passenger unit revenues shrank 2% y/y even though it cut ASM capacity 1%. Delta’s PRASM fell 2% too, but that was far less alarming, as Delta flew 5% more ASMs than it had flown a year earlier. United, meanwhile, held PRASM flat on flat capacity. Not bad. But its bigger challenge is costs, not revenues—it’s the highest-cost airline of the Big Three.
Delta’s costs, to be sure, will likely rise with its new pilot contract. Perhaps this even triggers memories of a pilot deal signed just before 9/11, one so lucrative for pilots that it…
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