Airline stocks soared Thursday after Delta Air Lines said the sharp drop in oil prices would translate into a $1.7 billion savings in fuel costs next year.
Delta said at an investor conference in New York that its Trainer refinery in Delaware County would produce a $75 million profit in the current quarter, helping to offset losses on the airline's fuel-hedge contracts.
Delta buys some of its fuel in advance, to hedge against higher costs. But when fuel prices dramatically decline, the airline is locked in and takes a hedge loss.
"Roughly half the hedge loss that we experienced this quarter is going to be offset by a profit at the Trainer refinery, as product cracks have held very strong, also attributable to the rapid decline in the crude input cost," chief executive officer Richard Anderson said.
"So we are looking at a hedge loss in the fourth quarter of $150 million, but we will generate a profit of about $75 million at the refinery," Anderson said.
Delta bought the former ConocoPhillips refinery in 2012 for $150 million as a source of discounted jet fuel.
The refinery, operated by Delta subsidiary Monroe Energy L.L.C., posted a $19 million third-quarter profit, a $13 million profit in the second quarter, and a $41 million loss in the first quarter this year.
Delta said it expected to end 2014 with $4.5 billion in pretax income, and looking to 2015, it expects pretax income to rise to $5 billion, due to higher revenue and fuel savings.
Despite a 40 percent drop in oil prices since June, there was no mention of cutting airfares.
"We are not a commodity. This is a really difficult business. This is not soybeans, wheat, and corn," Anderson said. "It's really hard to do this well . . . and we don't want to be priced at commodity levels."
Delta said it would return $1.5 billion to shareholders next year, spend $1 billion on employee profit sharing, pay down debt, and invest $2 billion to $3 billion on new airplanes, facilities, and passenger amenities.
Jet fuel represents about one-third of an airline's operating costs.
Delta, the nation's third-largest carrier, said it would increase system capacity 3 percent on domestic routes, mostly by flying larger aircraft, but would keep capacity - seats and flights - on international routes relatively flat.
Delta, whose stock has risen 70 percent this year, spends $11 billion annually on fuel.
"In terms of long-range planning at the airline, we use high fuel assumptions," Anderson told investors. "What we've learned is, you are always better off using a high cost per gallon assumption in the business plan," because it forces the company to keep a damper on capacity and drive down nonfuel costs.
"Look, it's wonderful that fuel has run down. We love it," Anderson said. "There's a $2 billion opportunity out there, if we hold fare levels constant. But over the very long-term horizon, it's just more conservative and prudent to use a high fuel assumption when you are buying airplanes or making other investments. Then, when it comes in lower, hang on to all of it. That's kind of our philosophy."
Delta shares rose 4.52 percent to $48.31.