Delta Air Lines, one of the world’s largest carriers, announced in January that its president, Ed Bastian, will take over as chief executive in May. He replaces industry veteran Richard Anderson, who will become Delta’s executive chairman.
Bastian will have big shoes to fill. Anderson led the airline to its best year ever in 2015 with $5.9 billion in pretax profits—a 29% jump from 2014.
The strong performance stems in part from a successful merger with Northwest in 2008, overseen by Anderson. The deal bucked the market perception of airlines mergers as failed transactions that may boost market share but don’t reduce operating costs as much as expected.
Delta’s bottom line has steadily improved in recent years in a complex business environment. Even as global macro conditions have weakened, creating challenges for the air travel industry, the airline’s global passenger traffic grew by 6.5% in 2015, according to the International Air Transport Association (IATA), driven by lower airfares. Delta led the market in passenger count.
Low oil prices are also a factor in the improved performance at Delta and other airlines. Energy costs have historically been one of the industry’s biggest challenges, and several airlines actively hedge against higher prices. Currently, the crude oil price is behind 80% of the movement in the price of jet fuel, which is the biggest single expense for Delta and other airlines.
Lower crude oil prices saved the company $5.1 billion in 2015 and may save it another $3 billion this year, Bastian noted in a recent earnings report. Delta manages fuel price risk through a hedging program that includes different contract and commodity types; the portfolio is rebalanced according to market conditions.
But Bastian and his counterparts should be prepared for changing market conditions. Oil prices will eventually rebound as supply is shut in, the oil sector consolidates and exploration and production companies reduce capital spending, notes Citigroup in its recent report on crude and jet fuel. The bank’s global head of commodities research, Ed Morse, says “It makes sense to consider forward hedging of jet fuel under today’s unusual circumstances.”
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