787fan

i've mentioned this before - the PRASM increase is absolutely meaningless when avg stage length out of SEA has DRASTICALLY shrunk - going from primarily intercontinental long haul routes and existing DL hubs (many of which are quite far from SEA) to a whole bunch of quick hop services to places like Juneau and Vancouver

all this ignores what's the CASM increase at SEA and the load factor at SEA.

luckypierre

On the assumption that most airline fuel purchases are made on a contractual basis, isn't it a little early for this huge windfall to be showing up in the financials?

transportprof

It all depends on how much of UA's fuel consumption has been hedged for 2014, and beyond. Hedging smooths out the peaks, but also the valleys, of volatile prices for fuel. It could take a while for the full effects to flow through to the bottom line.

Kacee

They only hedge a portion of their future fuel requirements.

transportprof

Yes - but what portion? The larger the portion, the longer it will take for the price drop to flow through.

Kacee

Not much. As of Dec. 31, 2013, 24% for 2014, and only 8% for 2015. UA 10-K.They've been burned before by price drops.

coolbeans202

As a point of comparison, my understanding is that US Airways dropped its hedging program entirely some time ago, and that it's carried over to AA. So if anybody is going to see the immediate benefits of fuel price drops it'll be AA.

http://www.dallasnews.com/business/a...-and-saves.ece

spin88

Delta is the most exposed to hedging (they currently project a $1.2B loss in 2015 due to hedging), and they will get the least benefit from falling fuel prices this quarter. You are correct that AAL will get the most benefit. UA is in the middle.

That said, operationally, Delta is doing the best by far. Their current (as of yesterday) PRASM projection is + .5 to 1.5% (midpoint of +1%) on a ASM of +3.5% (see page 10 of http://ir.delta.com/files/doc_presen...APs%281%29.pdf

Notably Delta will continue to grow domestic ASM (+3% in 2015) while having slower growth internationally (+1% in 2015) which is a much better mix than United which will have +1% domestically (50% of which is from adding slim line seats), while having a outsized +3-4% increase in International capacity. Delta's upgraging/adding domestic ASM is turning out to be a better strategy than United's "expand overseas" as to fleet plans.

These are very good projections given all of the system changes Delta is making and the ASM being thrown at LAX and SEA and JFK. Notably Delta states it has a 7% raise in corporate revenues so far this year. (See page 17 of link). So while certain posters have derided their strategy of building a good network (JFK, LAX, SEA additions, West Coast Shuttles) Delta thinks the pay off - and so far they appear to be correct - comes in a better HVFer mix and more business travel. This used to be United's strategy.

United has falling ASM and traffic (especially domestically), and projected (as of 10/23) PRASM to be a midpoint of flat in the 4th Q.

Notably, AA's projections have also not been so good on the revenue side (they just lowered them to a midpoint of flat) but in fairness a large part of this is their much larger exposure to Venezuela. What appears to be happening is that DAL is continuing to do very well on the revenue growth side, while UAL continues to do poorly, and AA is not doing as well under Parker as they did before (which is odd, I would have expected a shot in the arm due to having a larger network).

BearX220

Thank you for your analysis. Some folks here are turning handstands to make DL's growth and margin improvement look foolhardy, but I guess it's difficult to process when you believe UA's cuts and shrinkage are smarter. Smisek's timing re: fuel prices makes him a very lucky boy. The bottom line will out though.

transportprof

Didn't Delta also buy an oil refinery from Phillips 66 a couple of years back? I wonder how the collapse of oil prices will affect that investment?

787fan

And those tricky accountants would assign the whole $1.2B loss to "specials" so it'll look like they haven't done anything wrong (artificially inflating OpInc), when in fact, fuel hedging is very much integral to operations.

DL can pretend to grow PRASM, but yet their Q3 gaap net income still came out the WORST among the Big 3 legacies. Worthless revenue growth if nothing ends up at the bottom line.

spin88

They did, and frankly (even though I own a lot of Delta ) I don't totally understand the impact. Refining is a business where you make money on the spread between Oil and resulting distilates, the "crack spread" (how is that for a term of art!). Its impacted by the price of oil, but only indirectly (if the spread stays the same in $$ failing/raising prices don't impact a refiner).

As Best I can understand it, Delta bought the refinery as operating it they could produce MORE jet fuel (you can change the mix of resulting products) which would reduce the crack spread between jet A and Oil, which would allow them to lower their costs. They would also have (to some extent) the ability to smooth out supply, reducing price spiking. However, to the extent a market failure existed (too little JetA being produced, resulting in a wide spread) Delta buying a refinery will help them, but also others as well, so I don't think it can be looked at as a competitive move (to distinguish them from say AA or UAL) but rather only on its own as a business proposition.

However, this is not the same thing as hedging, which is a bet. Delta bet the price of oil would stay high (they assume the current pattern would hold) and given their slightly less fuel efficient fleet, that was a risk they wanted to prevent. The Saudis desire to pressure the Iranians and Russians however overwhelmed that trend, making it a bad bet.

787fan

They deserve what they get ($1.2B loss, wiping out entire quarter's worth of pre-tax pre-special pre-everything profits) for the amount of hubris at DL HQ

and now that they're gutting DL GM and preventing C+ access until 72 hours, their transformation to destroy any residual worth of their FF program is now complete.

spin88

Boy, you are so right. Those "tricky accountants" will treat it as a "special" how down right crooked of the folks at Delta to so, not like the "untricky accountants" at United who... treat it as a "special"

You might check, but every single quarterly result from UAL, records in "specials" the MTM impacts of fuel hedges. Its at the bottom of the notes.

The reason why, is that while the hedges change in value, the loss (or gain) may not actually be incurred at the end, hence MTM accounting.

This said, there is a broader point, which is that (a) you have an underlying business, that makes/looses money, and (b) you have events that are removed from that day to day underlying business which can be written up as "specials" as they don't reoccur each month.

Some of those "specials" impact the company's cash position (e.g. severance payments, the large signing bonuses that UAL put as "specials" or the costs of "merger related activities") and some of them (such as depreciation changes, early retirement of assets) have a far less direct cost. We can slice and dice the specials (adding them back in, or keeping them out) but its a judgement call.

Because Airlines are complex business (with things like major hedges, lots of depreciation) the actual question of how well the business is doing at its core functions is a little more complex than simply taking GAPP. And if you want a good example of why GAPP is not gospel, what was Delta's GAPP income last year? I bet you did not know that Delta's GAAP income last year was $10.54B.

787fan

please go look at their quarterly earnings before responding. quarter over quarter over quarter DL has more than $600M of specials to write off. do you see UA at the same level of forgery ? absolutely not.

using GAAP income as the standard, you just proved that DL's performance collapsed YoY. and that $10.5B is worthless because most of it is paper write-up while a lot of these specials directly impact cash flow.

UA beat DL last quarter, period. no spinning to change that fact.

ps : dictionary.com it's spelt GAAP not GAPP.