Delta sticks to refinery after deep loss: Update

Adds detail from call.

Delta Air Lines' refining subsidiary this spring recorded its worst operating quarter since the company acquired it in 2012, adding to the airline's average cash burn through the quarter of $43mn a day.

Delta's 185,000 b/d refinery in Trainer, Pennsylvania, posted a $114mn loss for the three months ended 30 June — nearly matching the $116mn loss reported in 2013 under the first full year of ownership by the airline.

Almost all of the losses were in April, and the refinery was operating at break-even levels "on the current trends," chief financial officer Paul Jacobson said. There were no immediate plans to sell or shut the refinery as the airline looks to pare down to survive an expected two-year recovery.

"As with everything in the business, we are looking at everything," Jacobson said. "But our plans have not changed with respect to the refinery right now."

The refining losses increased costs for the small volume of jet fuel Delta consumed during the quarter by almost half, or by 69¢/USG, to $2.25/USG, before certain accounting and hedging adjustments. Trainer reduced average jet fuel costs in the same quarter of 2019 by 3¢/USG with $37mn of net revenue.

Delta purchased 165mn bl of jet fuel during the second quarter, or 15pc of the volume purchased in the same quarter of last year.

Implied US jet fuel demand fell to about 352,000 b/d in the first week of May, after a month of US air passenger screenings averaging roughly 5pc of year-ago volume, according to the US Transportation Security Administration. Screenings increased to an average 19pc of year-ago traffic in June and have averaged about 27pc of year-ago levels in July. Implied US jet fuel demand averaged about 924,000 b/d in the first week of July — roughly half of the jet fuel consumed in the same week of 2019.

Week-over-week passenger screenings have slowed their growth in early July, and ticket bookings fell from weekly increases of 20pc in June to 5-10pc this month, the company said. An increase in Covid-19 cases slowed vacation travel demand, and business travel would not likely return before the US Labor Day holiday in early September, Delta chief executive Ed Bastian said.

Littler for longer

The jet fuel demand collapse challenged refiners this spring. Refineries can reduce but not fully eliminate jet fuel, and must blend the remaining unwanted production into other liquid fuels. US distillate inventories swelled as refinery jet fuel yield fell in April to a record low 4.7pc — less than half the five-year average for the month — and distillate yields soared to 38pc, a record high since the beginning of Energy Information Administration records in 1993.

Direct supply or sales and trade of gasoline and diesel from the refinery accounted for roughly 75pc of Delta's jet fuel consumption prior to the pandemic. Typical output would have roughly doubled Delta's total consumption in the second quarter. But Trainer joined US refineries in cutting throughputs as much as possible for the quarter to avoid filling stockpiles. Total diesel inventories in the New York Harbor market states including Pennsylvania, New York and New Jersey ended the second quarter at about 39.2mn bl, their highest level since February 2017.

Delta reported a $5.7bn loss for the quarter on a 91pc drop in revenue, to $1.2bn. The airline ended the quarter with $15.7bn in liquidity, including $5.4bn in federal grants and loans. Daily cash burn fell from $90mn a day at the end of March to $27mn a day at the end of June. Delta will reduce its fleet size and aircraft types, encourage early retirements and offer severance packages in a plan for a "smaller, more efficient airline" going forward.

Slashed costs meant most of its remaining gap between spending down cash and breaking even would come from higher demand. The airline needs a roughly 20pc increase in sales to achieve its breakeven target by the end of the year.

Customers that have returned find air travel more pleasant than before the pandemic, Bastian said. Business travel for relationship building would return at roughly 80pc of previous levels. Delta also expects to extend a policy of flying at lower airplane capacities, leaving middle seats vacant, through the end of the year.

"I would rather have more flights back, and more seats in the market in a safe way, than trying to maximize the number of people that you can put on an individual airplane," Bastian said.

By Elliott Blackburn