January 19, 2016 / 12:26 PM / 2 years ago

Delta Air Lines sees profit margins doubling from cheap fuel

(Reuters) - Delta Air Lines Inc (DAL.N) on Tuesday said a billion-dollar windfall from low fuel prices will far offset slumping sales to Europe after the November Paris attacks, forecasting its profit margin will more than double in the first quarter.

Delta planes line up at their gates while on the tarmac of Salt Lake City International Airport in Utah September 28, 2013. Picture taken September 28, 2013. REUTERS/Lucas Jackson

Shares were up around 3 percent in afternoon trading, despite Delta reporting a fourth-quarter adjusted profit of $926 million just short of analysts’ average estimate of $928 million, according to Thomson Reuters I/B/E/S.

With fuel prices chopped nearly by half from a year earlier, Delta said it expects an operating margin between 18 percent and 20 percent in the first quarter, up from 8.8 percent in the same period in 2015.

Delta, the third-largest U.S. airline by capacity, has also bet that fuel will stay lower for longer.

In order to pocket each dollar that oil prices decline, Delta has closed its fuel hedges for 2016, exiting contracts at a cost of $100 million to $200 million per quarter, its Chief Financial Officer Paul Jacobson said Tuesday on an investor call. The financial instruments protected against rising oil prices but required a payout when prices fell.

Delta expects $3 billion in fuel savings this year, Jacobson said. A spokesman confirmed that labor has surpassed fuel as Delta’s largest cost.

The guidance appeared to outweigh investor concerns about lower unit revenue in 2016.

For the first time, Delta provided details on the longer-term impact of the Nov. 13 Paris attacks claimed by Islamic State, in which 130 people died.

Delta, the U.S. partner of Air France KLM SA (AIRF.PA), expects the Paris attacks to hurt unit revenue in the first quarter by 0.5 percentage points, its President Ed Bastian said on the call. He added that Delta has had less demand from corporate clients for international travel since the attacks.

Delta now expects passenger unit revenue, which compares ticket sales to flight capacity, to drop between 2.5 percent and 4.5 percent in the first quarter. That includes a headwind from the strong dollar, which has lowered the value of foreign sales in dollar terms for months.

Yet the decline is “better than many had feared,” UBS analyst Darryl Genovesi said in a research note. In the fourth quarter, the measure fell 1.6 percent.

Delta has slowed capacity growth to Europe since the attacks and expects to slash seats abroad by as much as 2 percentage points in 2016 to counteract weak demand, Bastian said.

Reporting by Jeffrey Dastin in New York; Editing by Frances Kerry and Lisa Shumaker

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