Delta Air Lines cut its full-year forecasts despite resilient travel demand, as higher fuel prices weighed on profitability. The airline’s third-quarter results, released October 9, fell short of market expectations. Chief Financial Officer Eric Snell said the guidance reduction was “all about fuel.”
Delta lowered its full-year earnings-per-share forecast from $6.50–$7.50 to $5.10–$5.60. It also reduced its free cash flow outlook from $3 billion–$4 billion to $2.5 billion.
Delta’s quarterly fuel bill reaches $4.1 billion
Adjusted revenue rose 15.7% year over year to $17.58 billion, below analysts’ estimate of $17.76 billion. Profit was $1.13 billion, also missing expectations.
Delta said its actual fuel spending in the third quarter was $500 million above the forecast it made in July. The quarterly fuel bill reached $4.1 billion, up 62% from a year earlier. The global oil market was less affected at that point last year by the conflict involving the United States, Israel and Iran and its wider repercussions.
Fuel costs climbed even as demand for air travel remained firm. Holiday travel demand is expected to hold up, while U.S. airfares were up 23.4% year over year as of August. Higher fares and passenger volumes, however, did not fully offset the increase in energy costs, squeezing Delta’s results.
Airlines target higher-paying travelers
In response to fuel pressure, major airlines are raising fares while adjusting routes and cabin layouts to attract travelers willing to pay more.
Some carriers are adding more lucrative long-haul international routes and cutting lower-fare services with thinner margins. They are also expanding first-class, business-class and other premium seating, aiming to use stronger premium revenue to cushion rising fuel, fleet and operating costs.
The strategy has helped Delta offset some of its higher fuel spending. Revenue from premium seats rose 18% year over year in the third quarter, contributing to the airline’s revenue growth. Whether that income can continue to absorb the fuel shock will depend on fuel prices, fares and demand from both business and leisure travelers.
Refinery provides Delta with a partial buffer
Delta is among the most profitable U.S. airlines and the only major U.S. carrier with its own refinery. The asset does not shield its airline business from higher oil prices, but it provides some cushion when fuel costs rise quickly.
Further industry results are due later this month, when United Airlines, Southwest Airlines, American Airlines, Alaska Airlines and JetBlue report. Their results will offer more evidence of whether fare increases, cuts to lower-yield routes and expanded premium seating are enough to ease fuel-cost pressure across the sector.