MIAMI — Last week, Delta Air Lines reported a $1.43 billion net pretax profit for the first quarter (Q1) of 2016, generating its 12th consecutive quarter of record financial results. This figure was up 20.9% year-over-year (YOY) despite a 1.5% YOY decline in Q1 revenue to $9.25 billion, and it was driven primarily by a 33.5% decline in fuel expenditure to $1.39 billion (mainline and regional combined).

As always, the earnings release from Delta, more specifically, the quarterly earnings call featuring newly installed CEO Ed Bastian, was highly revealing about Delta’s current strategy and the status of the business. Here’s our take on some of the major themes explored.

Delta is finally benefiting fully from low oil prices

The biggest story in the US airline industry for the last year and a half has been the sharp decline in oil, and thus fuel prices.  Delta’s inability to fully capitalize on said decline in fuel prices due to fuel hedges was almost as big of a story. Even as rivals like American and United rode the decline in fuel prices to multi-billion dollar increases in profitability, Delta left more than a billion dollars on the table in fuel hedges.

The massive hedging bet pushed Delta into a position where it was no longer the most profitable major US airline (ceding that position to American), and became a very real threat to the carrier’s industry leadership.

Thankfully, Delta appears to have turned the corner on the retention of fuel. On the earnings call, Ed Bastian noted that “[Delta] retained 50% of fuel savings in the first quarter on an ex-hedge basis, on a net hedge basis our fuel savings retention was 75%.” This is far from ideal (the goal would be to retain 100% of fuel savings), but it means that the savings from fuel prices are finally flowing to Delta’s bottom line and shareholders.

Delta has drawn down its hedge positions sharply (it has no open hedges going forward) and expects +/- 40% YOY declines in all-in fuel prices for the rest of the year despite an estimated $200 million in carry over hedge losses for each quarter this year.

Delta Air Lines globalizes at a discount

Delta’s international results for the quarter remained mixed to negative. In European markets, US point of sale strength continues to prop up an otherwise mediocre market environment. London is a point of strength as Delta continues to accrue synergies from its investment in Virgin Atlantic, while Paris revenues have recovered after the tragic terrorist attacks last November.

Latin America remains a bloodbath, with unit revenues down 9% for the quarter despite it being a peak season. Brazil is the worst of the bunch, though Delta’s capacity to South America’s largest nation is down 30% from its peak levels. Currency weakness drove 5 points of the 9% decline, and is likely to persist as long as commodity prices remain depressed.

For Delta, however, the mix of an excellent profit environment with domestic strength may actually provide an interesting opportunity. In his opening remarks, Bastian stated that “You will see us [Delta] continue on the path towards globalization, whether through initiatives like headquartering our Trans Atlantic operations in Amsterdam, or through our equity stakes in Virgin Atlantic, China, Eastern, Aeromexico and GOL we see the international market place at the source of long term profitable growth opportunities.”

The important phrase in there is “long term profitable growth opportunities.” Weakness in international markets and currencies certainly has short term negative impacts to Delta’s headline financial figures that numbers in the tens of millions of dollars. But it also creates opportunities for Delta to increase its international presence through targeted investments into companies that are undervalued relative to their long run growth prospects.

Delta is surveying an environment where it is cash rich in one of the strongest currencies on the face of the earth with a trivial debt load (expected to drop below $6 billion by year end). With that as the backdrop, it might make a ton of sense to (for example) pull Singapore Airlines over from Star Alliance, or use dollars to finally secure a joint venture with Korean Air. We expect Delta to make new airline investments in 2016.

Labor costs continue edging upwards

One of Delta’s greatest successes over the last eight years has been its ability to sustain excellent employee relations. And with all due respect to Delta’s excellent corporate culture and generation of employee loyalty, the primary driver behind that has been the continuous increases in compensation that Delta employees have received over the last six years, including the rise of profit sharing. In Q1, Delta paid out $273 million in profit sharing on top of $2.31 billion in salaries and wages. Profit sharing was up 100% YOY while labor expenses were up 10.5% YOY, and both figures are way up over 2012 or 2013 figures.

In a vacuum, there’s not a lot wrong wit that in the current fuel environment – Delta would be profitable even if its labor expenses were 25% higher than they are today. There are two issues with the steady rise in labor expenses however. First, it’s no longer clear that Delta is getting peaceful or excellent labor relations for the expenditure. The pilot group is growing increasingly recalcitrant despite its already top-tier compensation, and one can expect other labor groups to follow in their footsteps as long as the current profit environment persists.

The broader problem is that the successive raises to base salary have the pesky little side effect of raising Delta’s natural cost base. That’s fine in the current environment when profits are all but assured. But we’ve seen this story over and over again – airline employees leverage huge raises during profitability upticks, usually signing the most lucrative and ludicrous contracts near the peak of the earnings cycle. Then a downturn hits, whether driven by recession or oil prices rising, and shareholders are left holding the bag.

Delta has added billions in structural labor costs to its financials after its merger with Northwest. It might be time for the airline to seek to begin thinking about tamping down labor cost increases in advance of the earnings cycle peaking. That being said, Bastian closed the call by stating, “our pilots are the best and we want our pilots to be paid the best and that’s our commitment to them.” So at least 35% of the labor cost base can be expected to jump even further.