Business 4 min read By Callum Montgomery
Delta CEO says higher airfares could stay even if fuel prices fall
Delta chief executive Ed Bastian says elevated ticket prices may persist as long as travellers keep buying, after a 60% jump in jet fuel costs failed to dent profits.
Higher airfares could outlast the fuel price surge that triggered them, according to Delta Air Lines chief executive Ed Bastian, who said demand has remained strong enough to sustain the current pricing environment even if oil costs eventually retreat.
In an interview with CNBC, Bastian said he was surprised by the resilience of the carrier's profits after a 60% increase in jet fuel costs in the third quarter, which added about $1.6 billion to its expenses. «To not dent those profits, to me is incredible,» he said. «In past cycles, past shocks, if we saw a 60% increase in fuel prices, we'd be flat on our back.»
Delta reported $17.6 billion in adjusted revenue for the third quarter, a 16% rise on the same period a year earlier but just below analysts' estimate of $17.67 billion. Revenue per seat mile, a key measure of how much an airline earns for each seat flown one mile, rose 15%, reflecting both higher fares and firm demand. Adjusted jet fuel spending was 62% higher than a year earlier.
Bastian told CNBC in July that Delta was passing about 60% of its higher fuel costs on to consumers and expected that share to approach 100% in the third quarter. On the company's earnings call, he credited passengers for absorbing the increases, saying the market had accepted the new price points and that airfare remained reasonably affordable. «Fuel has been the impetus for the industry to move quickly to adjust the pricing environment,» he said. «I think we're going to be fine as you look forward. Hopefully, we will see fuel recede into the next year at some point, and that's when I think you'll see the real earnings power of this franchise be amplified.»
The rise in ticket prices has been driven in part by higher oil prices linked to the war in Iran, which has disrupted transit through the Strait of Hormuz, a route that carried about 20% of the world's oil before the conflict. Brent crude stood at $108 on Monday, more than 70% higher than a year earlier. Jet fuel prices have risen even more sharply, up more than 100% year on year according to the International Air Transport Association, with US Gulf Coast jet fuel costing $4.34 a gallon on Thursday against $2.19 a year earlier.
Fuel is airlines' largest expense after labour, accounting for about 21% of operating costs earlier this year, according to Airlines for America. Because US carriers, unlike many European rivals, generally do not hedge against rising oil prices, increases are often passed directly to customers. Delta has some protection through an oil refinery bought more than a decade ago by a subsidiary, which helps offset fuel costs.
Consumer demand has held up across the sector. Southwest Airlines chief executive Bob Jordan said in July that the carrier was seeing «really strong demand» despite high fuel and high prices. American Airlines chief executive Robert Isom said consumer spending remained resilient, supported by a healthy labour market and a sustained preference for travel over other discretionary categories. Average domestic trip prices reached $445.26 in the second quarter, according to the Bureau of Transportation Statistics, while the US Travel Association reported a roughly 23% year-on-year increase in ticket prices.
Higher fares have not fully shielded Delta from the fuel surge. The airline last week cut its full-year profit outlook to between $5.10 and $5.60 per share, down from a previous forecast of $6.50 to $7.50, and missed Wall Street's earnings estimate for the first time in two years. Delta was the first major US carrier to report third-quarter results.
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