Business
Delta Air Lines says higher fares will hold even if fuel costs drop
FOX Business correspondent Grady Trimble discusses the rising cost of jet fuel, which saw a 10% increase from Tuesday to Wednesday, raising concerns about elevated airfares for the summer travel season.
Delta Air Lines sees higher fares staying in place for consumers amid higher costs for fuel and other expenses, even if oil prices return to more moderate levels and allow jet fuel costs to decline in turn.
Delta CEO Ed Bastian said on the company’s quarterly earnings call that the dynamics of the airline industry have changed significantly as higher fuel prices, as well as increases in other categories of operational expenses, have made it more difficult for low-cost carriers to compete through lower airfares.
“Most U.S. carriers were already struggling to earn their cost of capital against a backdrop where industry airfares have meaningfully trailed inflation, costs have reset higher, and consumer preferences have evolved,” Bastian said.
“As we predicted, structural change has accelerated, enabling the industry to recapture this year’s fuel cost inflation at the fastest pace of any recent cycle,” he added.
DELTA ROLLS OUT CHEAPER FIRST-CLASS, BUSINESS FARES WITH FEWER PERKS: ‘MORE WAYS TO CHOOSE’
Delta Air Lines CEO Ed Bastian said that he thinks higher airfares will remain for consumers as the industry adjusts to cost pressures. (Nicolas Economou/NurPhoto via Getty Images)
Bastian said that Delta sees those shifts in the industry continuing to play out, which will allow airfares and the revenue outlook to remain steady even if energy prices return to their pre-Iran war levels.
“Even after recent fare increases, airfares remain 10 to 15 points below overall inflation since COVID,” Bastian said, adding that much of the industry is still earning returns below the cost of capital.
“We believe that current revenue momentum should remain sustainable even if fuel prices moderate,” Bastian said.
DELTA CEO ED BASTIAN REVEALS WHAT HE SAYS MUST HAPPEN FOR AIRLINE TICKET PRICES TO FALL
| Ticker | Security | Last | Change | Change % |
|---|---|---|---|---|
| DAL | DELTA AIR LINES INC. | 87.39 | -1.61 | -1.81% |
Airlines are facing not only higher fuel costs, but increased expenses for labor, airport infrastructure, technology and airplanes, which Bastian explained is forcing companies in the industry to build more resilience into their operational strategy.
“What that tells you is that you need to figure out a change to the business model that will enable you to build resilience in your price and durability, and that’s what we’ve done over time,” he said, noting that includes higher airfares as well as the diversification of revenue streams, such as through Delta’s partnership with American Express.
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Delta believes that airfares are unlikely to decline even after energy prices normalize. (Justin Sullivan/Getty Images)
Bastian added that “even with the improvements we’ve seen in pricing for the industry, the low end of the market still has to increase fares by another 5%, by our estimate, just to get to breakeven at today’s fuel environment.”
“There’s nothing to be gained by trying to grow in that environment. What the opportunity has to be in finding ways to secure higher revenues, not higher market share,” he added.
The most recent consumer price index (CPI) inflation data released by the Bureau of Labor Statistics showed that airline fares rose 2.7% on a monthly basis in May, and were 26.7% higher than a year ago.
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The BLS is set to release updated CPI inflation data for the month of June next week.
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What Happened in Markets Today
The chip-stock selloff deepened, dragging the tech-heavy Nasdaq down 1.4%. The S&P 500 fell 1%. Investor anxieties over the sustainability of huge AI capital expenditures were deepened by China’s Moonshot AI. The Beijing startup unveiled Kimi K3, a 2.8-trillion-parameter model that claims to outperform U.S. systems, triggering fears of escalating global competition and sending shares of Intel, Applied Materials, Corning, and AMD lower.
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Gasoline prices have risen even more than prices of crude oil since fighting choked off Persian Gulf supplies, because of lower inventories. RBOB gasoline futures ended Friday at $3.3927 a gallon in New York, their highest prices since late May.
Diesel futures added 14% this week, while national average retail prices rose back above $5 a gallon. Rising prices for the fuel that powers trucks, farm machinery and construction equipment threaten to rev up inflation.
1509 ET – Crude futures post double-digit weekly gains as the U.S. widens its military strikes against Iranian targets and Iran hits out at neighboring Gulf countries. Added to concerns about escalation is the possibility of Yemen’s Houthis taking action to block shipping through the Red Sea, where Saudi Arabia has been rerouting oil exports with the closure of the Strait of Hormuz. “Renewed escalation over the strait’s ‘red line’ with inventories at the lowest levels in recent years and a majority of SPR releases behind us poses significant upside risks to energy prices,” Amarpreet Singh of Barclays says in a note. “As things stand, we think oil markets are still too complacent about the potential fallout for inventories.” WTI settles up 4.5% at $82.49 and Brent rises 4.6% to $88.10 a barrel, with both benchmarks up 16% on the week. (anthony.harrup@wsj.com)
Oil Rises More Than 2% As U.S.-Iran Tensions Remain High
1224 GMT – Oil prices extend gains in early U.S. trade, with Brent crude up 2.1% to $86.02 a barrel and WTI futures rising 2.4% to $80.15 a barrel. Escalating tensions between the U.S. and Iran are curbing flows through the Strait of Hormuz and raising fears of a full-blown conflict as the two sides attack energy infrastructure in the Gulf region. Meanwhile, all eyes are on the Bab el-Mandeb strait, the gateway to the Red Sea that market watchers fear could become a target for Yemen’s Houthi rebels. While in February just under 3.9 million barrels a day were transported through this strait, the figure rose to about 7.2 million barrels in April, highlighting the growing importance of the shipping route, analysts at Commerzbank say. (giulia.petroni@wsj.com)
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