Delta Air Lines sees rapid travel demand recovery as borders reopen

Delta Air Lines expects travel recovery to climb further in the second quarter of 2022 from strong March levels as international borders reopen and both business and leisure travelers take to the sky.

"For the quarter, capacity was 83% restored versus 2019 and at the low end of our initial guide and below the industry," CEO Paul Bastian said during Delta's Q1 results call April 13.

Calling Q1 a "tale of two halves," Bastian said that, while the omicron variant of the coronavirus depressed travel demand in January and early February, the company "saw an unparalleled demand recovery from Presidents' Day on," with revenue recovery rising from 70% of 2019 levels in January to 85% in March.

"As COVID shifts from a pandemic to a manageable seasonal virus, there are clear signs of pent-up demand for travel and experiences as consumers' spending shifts from goods to services and experiences, travel restrictions lift business travelers continue to return to the skies," he said.

Rising fuel costs and refinery hedges

"Demand for long-haul international is growing as travel restrictions lift, led by the Transatlantic," Bastian said. "To date, we have not seen an impact to travel demand from the conflict in Ukraine but we, of course, are monitoring this closely." Bastian added that virtually every European country has reopened its borders following coronavirus lockdowns.

However, market impacts from the Russian-Ukraine conflict have increased the price of oil, making jet fuel more expensive. Delta's ownership of the 190,000 b/d Trainer, Pennsylvania, refinery has provided some hedge to higher fuel costs.

Delta forecasted Q2 fuel expenses to range between $3.20/gal-$3.35/gal, reflecting the rising cost of jet fuel. This was based on a $102/b Brent price, with the refinery contributing 20 cents/gal, which includes $1.27/RIN expense. RINs are credits bought to comply with the Environmental Protection Agency's Renewable Fuel Standard.

Q1 fuel expense was $2.79/gal, with 7 cents/gal of refinery contribution.

"Our Monroe refinery provides a unique benefit, acting as a partial hedge to elevated cracks," Daniel Janki, Delta's chief financial officer said during the call. "This is especially true with New York Harbor jet cracks, where our production 100% offset."

About 20% of output from the refinery, owned by Delta's subsidiary, Monroe Energy, is jet fuel, according to Janki.

"That jet fuel goes directly to our New York operations," Janki said. "So, it is a direct hedge, as it relates to the spreads associated with that. So it's really 100% hedged, as it relates to how we run our operations and what it provides," he added.

The remaining 80% of gasoline and diesel provide a partial hedge, depending on the correlation between the price spreads between jet and that of the other two fuels.

"And so, by and large, the refinery, when you think of it in aggregate as it relates to spreads with the remaining diesel and gasoline providing a partial hedge, it's about a 40% to 50% hedge as it relates to fuel costs," Janki said.

Sources familiar with refinery operations said the plant recently was producing about 38,000 b/d of jet and 57,000 b/d of ULSD while running at a rate of about 180,000 b/d.

Record NYH cracks in early April

Q1 New York Harbor jet cracks averaged about $25/b, according to S&P Global Commodity Insights data. Q2-to-date New York Harbor jet cracks have averaged $178/b after exceeding $200/b in early April as oil prices rose dramatically, pressured as many global refiners moved away from Russian crude and looked to buy crude oil from non-Russian sources following the late February invasion of Ukraine by Russia.

Despite the price rise, global oil demand is expected to grow by 2.9 million b/d in 2022, a number which was revised down by 1.2 million b/d from previous estimates after factoring in slowing economies and the impact of higher oil costs resulting from the Russian-Ukraine conflict, according to S&P Global.

"Asian demand growth this year will be driven by transportation fuels, especially jet from a low base with pent-up demand as countries reopen their borders to boost the tourism sector," S&P Global said in its April 12 Asia oil market forecast. "However, China's continued closure of borders remains a hurdle for quick regional recovery."