New Delta CEO Weighs Cutting Overseas Service as Fuel Costs Rise

Delta CEO: We've Been Burned by Hedging Oil Prices
  • Thin-margin routes go negative `pretty quickly,' Bastian says
  • Airline doesn't plan to hedge fuel costs in near future

Ed Bastian, Delta Air Lines Inc.’s new chief executive officer, is considering cuts to international service as rising fuel costs and weak foreign economies make some routes unprofitable.

“When you have oil prices rising, that takes a thin-margin route to a negative route pretty quickly,” Bastian said in an interview on Bloomberg TV. “You start to ask yourself the question, ‘Is that the right decision, and do you need to be doing it now?”’
Jet-fuel prices have increased 59 percent since hitting a 12-year low on Jan. 20, according to data compiled by Bloomberg.

Delta has said it may cut capacity as it seeks to reverse five straight quarters of declining passenger revenue for each seat flown a mile, a crucial yardstick for airlines. Trans-Atlantic sales fell 6 percent in the first quarter after terrorist attacks and the euro’s decline against the dollar hurt sales in Europe, Delta said last month. Its Pacific revenue dropped 5 percent.

Bastian took over as CEO on Monday after serving for eight years as the airline’s president under Richard Anderson, who retired at age 61. While Bastian, 58, plans to further Anderson’s efforts to make Delta a more global carrier, rising oil prices may slow global growth in the short term, the new CEO said in the interview, which first aired Monday in Hong Kong. Delta in recent months has said it would move some executives from the U.S. to foreign offices to be closer to overseas operations.

“We’re looking at the international economies, we’re looking at the risks that we’ve seen on the security front in Europe,” Bastian said. “Maybe some of the flying we’re doing in the fourth quarter, particularly internationally, may not have the returns that we need.”

Meanwhile, bad bets on the price of fuel mean the carrier is unlikely to resume hedging on oil prices soon.

“The reason we haven’t hedged for the last year-and-a-half is there’s just too much volatility, and we’ve been burned,” Bastian said. “We’ve lost over the last eight years about $4 billion, cumulatively, on oil hedges.” 

Airlines in the past used contracts to lock in fuel costs, one of the industry’s highest expenses. Such hedging hurt some carriers when oil prices plunged since the airlines paid more under the agreements than they would have if they bought at spot-market rates.

Shanghai Focus

Bastian said he’s committed in the long term to making Shanghai, instead of Tokyo, the center of Delta’s Asian operations. And partnerships or investments with China Eastern Airlines, Virgin Atlantic Airways, Aeromexico and Brazil’s Gol are expected to provide much of the airline’s growth. Delta also will look to expand in Canada and Central America, whether that means a partnership or some other arrangement, he said.

“You know, the U.S. industry is largely a mature industry,” Bastian said. “There’s growth in this industry but there’s not new cities, there’s not new markets, there’s not new airports really being constructed. So if you’re going to look to grow in the future it has to be outside of the U.S.”

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