Delta Air Lines, the US' second largest airline, expects fourth-quarter 2016 fuel costs to rise to $1.60-$1.65/gal, which will contribute to higher fares in the future, a company executive said Thursday.
Speaking on Delta's third-quarter results call, CFO Paul Jacobson said fuel costs have risen for the first time in about two years, noting that there is a "three- to five-month lag before these costs work into the pricing structure."
The airline's third-quarter fuel costs were $300 million, or an average of $1.48/gal worldwide. This is 18% lower year on year, and includes a 4 cents/gal loss from Trainer operations, Jacobson said.
Third-quarter 2016 USGC prompt pipeline jet averaged $1.297/gal, while New York Harbor barges averaged $1.346/gal, S&P Global Platts assessments showed. Delta swaps gasoline and diesel from the refinery for jet fuel around the world and its fuel cost reflects a global price.
So far in the fourth quarter, spot prices are higher, with USGC prompt jet at an average $1.46/gal, while NYH barges are changing hands at $1.49/gal.
Delta's 190,000 b/d Trainer, Pennsylvania, refinery is currently running at about 180,000 b/d, about 95% of capacity, a source familiar with refinery operations said Thursday.
Delta still expects the 2016 loss from the refinery to be in the "$100 million range," Jacobson said on the call, noting that the "cracks remain consistent" with the low levels seen in the third quarter.
Currently, cracks, or refinery margins, are strong due to lower regional refinery rates on refinery turnarounds and snags, Platts margin data showed. East Coast refinery run rates fell 2.3 percentage points to 80.5% for the week ended October 7, the lowest since May, according to Energy Information Administration data released Thursday.
Trainer runs a significant amount of Nigerian Bonny Light, importing 2.73 million barrels in June, EIA data showed. So far in the fourth quarter, US Atlantic Coast Bonny Light cracking margin netbacks are $7.00/b, compared with the third-quarter average of $5.28/b, Platts margin data showed.
Platts margin data reflects the difference between a crude's netback and its spot price. Netbacks are based on crude yields, which are calculated by applying Platts product price assessments to yield formulas designed by Turner, Mason & Co.
Last year, Delta's fourth-quarter $1.85/gal fuel cost included $54 million paid out in mark-to-market costs to settle fuel costs early. By unwinding hedges and buying out hedges, Delta was able to take advantage of lower jet prices on the spot market.
Delta has no fuel hedges currently in place, Jacobson said.
Going forward, Delta is also limiting growth in the number of seats it will sell and miles it travels, as overcapacity cut into third-quarter revenues, cutting into jet fuel demand.
Third-quarter available seat miles were 69.028 billion, up 1.5% from the year earlier, while passenger revenue miles fell to 0.2% year on year to 58.973 billion.
"With our focus on building a more sustainable and durable business, we will be taking a cautious approach to 2017 by keeping our capacity in line with the December quarter's 1% growth level," CEO Ed Bastian said on the call.
Delta's passenger unit revenue, or PRASM, fell 6.8% in the third quarter to $9.071 million. PRASM is a key measure of airline profitability, calculated by dividing passenger revenue by available seat miles.
