Delta Plunges on Guidance

Fueling Deeper Losses

It may be darkest before the dawn, but the rising cost of fuel has blackened Delta's outlook. The carrier said that rising fuel costs accounted for $47 million in losses, about half the increased first quarter loss estimate. For much of the first quarter, crude oil has been near $36 a barrel, more than $6 above most Wall Street expectations.

Despite restructuring operations to fly more efficiently, Delta and others have been unable to offset stubbornly high oil prices. In 2003, Delta used 5.5% less fuel than in 2002, but fuel costs nonetheless rose 15.5%, which is why fuel accounted for 14% of Delta's total expenses in 2003, up from 12% in 2002.

Fuel may be a big factor in Delta's woes, but in a surprising move, the company said it has unwound its hedging positions. In its 10-K, the company revealed that it settled all of its fuel hedge contracts prior to their settlement dates in February, netting the company $83 million in cash.

"We estimate that effective gains of $34 million, net of tax, will be realized during 2004 as fuel hedge contracts settle and the related aircraft fuel purchases being hedged are consumed and recognized in expense," the company said in the SEC filing, noting that $17 million of the gain will be recognized in the upcoming quarter.

But while the move has helped Delta increase its cash position, Morgan Stanley analyst William Greene wondered if its balance sheet and deep losses would prevent it from hedging oil down the road. According to Morgan Stanley research, every $1 move in the price of a barrel of oil would move Delta's earnings per share by roughly 25 cents. (For more on how oil affects the airlines, please read "Airlines Poisoned By Oil.")

"Presumably [liquidating fuel hedges] raised some cash and locked in gains to be amortized over future periods," said Greene, in a note. "However, this leaves Delta unhedged at a time when its credit outlook is not improving, which may make it more difficult to establish future hedge positions."