Delta cuts profit guidance after a fuel miss. December needs a bigger refinery credit
Delta's revenue rose 16%, covering 151% of its extra fuel costs, yet full year earnings guidance fell 24% to $5.10 to $5.60 a share. December now depends on a 40 cent a gallon refinery credit, three times this year's best quarter.
Delta cut its full year profit guidance by 24%, and fuel explains most of September's miss. December now depends on a refinery credit three times larger than any quarter this year.
Delta sold $2.4 billion more in the September quarter than a year earlier. It spent $1.6 billion more on fuel. Adjusted operating income still fell, by $26 million to $1.66 billion. Those figures in Delta's September quarter results explain the guidance cut.
Adjusted revenue rose 16% to $17.6 billion. The fuel bill grew 62% to $4.1 billion. So revenue growth covered 151% of the extra fuel bill.
Demand is therefore not the problem, and fuel is paid for. What remains of the year on year profit gap is non fuel cost. Non fuel costs added another $0.8 billion. They rose 8% against capacity that was flat, and non fuel unit cost was 7.3% higher at 14.03 cents.
Full year adjusted earnings guidance fell from $6.50 to $7.50 a share to $5.10 to $5.60. That is a 24% cut at the midpoint. The cut is a fuel forecast miss in September plus a larger reset in December.
Free cash flow, the cash left after spending on the business, fell from a guide of $3 billion to $4 billion to about $2.5 billion. The shares fell about 1.5%, to about $81, in Friday morning trading according to Google Finance. The December guide rests on a refinery credit that is a multiple of anything Delta has booked this year.
The fuel shortfall against Delta's own plan is separate and large. In July the company guided to about $3.15 a gallon on the forward curve of 2 July, the market price for future delivery. The adjusted price came in at $3.61.
The 46 cent gap on 1,146 million gallons is about $527 million. That matches Delta's statement of more than $500 million of higher fuel costs than it guided in early July.
After tax at 24.2% and over 659 million diluted shares, which count every share that could be issued, the gap is $0.61 a share. The quarter missed the $2.25 midpoint of its earnings guide by $0.53, with adjusted earnings of $1.72. Fuel alone more than accounts for the miss.
The forward curve has now erred in both directions in consecutive quarters. April guidance assumed $4.30 a gallon for the June quarter, and the actual price was $3.93. That beat produced earnings of $1.56 against $1.00 to $1.50 guided.
Its July release then guided $3.15 for the September quarter and met $3.61. The misses were 37 and 46 cents, one favourable and one costly. A fuel price assumption has not been a safe anchor for this company's earnings this year.
The larger part of the cut is still ahead. Adjusted earnings for the first three quarters sum to $3.92. Those quarters earned 64 cents, $1.56 and $1.72.
The old $7.00 midpoint implied about $2.55 for the December quarter. The new guide of $1.15 to $1.65 has a midpoint of $1.40. The gap between those two midpoints is where the cut sits.
Of the roughly $1.68 of earnings the guide has lost since July, about $1.15 sits in the December quarter. That is two thirds. About $0.53, a third, sits in the September miss. Delta's chief financial officer says the guide puts December earnings consistent with last year at the upper end of the range. That makes a quarter that earned $1.55 a year ago a hard comparison.
The December guide includes, in Delta's words, "a refinery benefit of approximately $0.40 per gallon". That brings the projected all in fuel price, after the credit, to about $4.25 on the curve of 2 October.
Assume about 1.05 billion gallons, based on last year's fourth quarter volume. The credit is then worth about $420 million before tax. That is $0.48 a share, or 34% of the $1.40 midpoint.
Without the credit, December earnings would run from $0.67 to $1.17. Each 10 cents of credit moves the quarter by about $0.12 a share. That leaves little room if the credit slips.
Delta's refinery record this year shows how large a 40 cent credit is. The refinery benefit was 6 cents a gallon in the March quarter. April guidance for the June quarter pointed to a benefit of about $300 million, roughly 27 cents a gallon on 1,122 million gallons.
Delta delivered 11 cents, of which 5 cents came from discrete items tied to a temporary refinery outage. That is a 59% shortfall against the guide. Delta's July release then guided 5 cents for September and the quarter delivered 13 cents.
The refinery guide has missed once and beaten once this year. That mixed record offers little support for a credit this large. The December guide asks for 40 cents, three times the best quarter Delta has delivered.
Spot prices offer some cover. The US Energy Information Administration put Gulf Coast jet fuel at $4.416 a gallon in the week to 2 October. That is about 23 cents below the $4.65 Delta is planning on before the credit.
On 1.05 billion gallons, that is about $246 million before tax, or $0.28 a share. On paper, that absorbs a credit shortfall of about 23 cents. The credit would then land near 17 cents.
The cushion is smaller in practice. Delta's price carries taxes, into plane costs and a hedge book, the fuel contracts that fix prices, and spot prices do not. The refinery also works as a natural hedge, an offset built into the business. Strong refining margins lift the pre credit fuel price and the credit together, so the spread cannot be banked. The refinery credit remains the main variable in the quarter.
Rivals sit differently. A carrier without a refinery has no credit to offset a fuel miss. If the curve overshoots reality, its earnings take the full hit. If the curve undershoots, it collects a windfall.
Delta's January report will put the December refinery benefit below 25 cents a gallon. September's 13 cents was the best quarter of the year. A repeat of it would leave December earnings near $1.08 and full year adjusted earnings near $5.00, under the $5.10 floor of the guide.