Airfare has shot up this year partly because of the war in Iran. But even if oil prices ease, higher ticket prices may be here to stay because travelers keep buying, said Delta CEO Ed Bastian.
The CEO of one of America’s biggest airlines said in an interview with CNBC Friday that he was surprised the airline’s profits held up despite a 60% jump in fuel prices, as demand for tickets stayed resilient. In July, after the airline’s second-quarter results, Bastian told CNBC that Delta was passing along 60% of its higher fuel costs to consumers, and expected that to reach close to 100% in the third quarter.
“To not dent those profits, to me is incredible,” said CEO Ed Bastian in an interview with CNBC. He added that the 60% increase in its jet fuel costs in the third quarter was a $1.6 billion increase. “In past cycles, past shocks, if we saw a 60% increase in fuel prices, we’d be flat on our back.”
The company last week reported $17.6 billion in adjusted revenue for the third quarter, a 16% year-over-year rise but just short of analysts’ $17.67 billion estimate. While the company spent an adjusted 62% more than the same time last year in jet fuel, its revenue per seat mile—the measure of how much money an airline earns for each seat it flies one mile—went up 15%, reflecting higher fares and strong demand.
On the company’s third-quarter earnings call, Bastian credited consumers for helping the company maintain its profits, despite these price increases.
“Fuel has been the impetus for the industry to move quickly to adjust the pricing environment. But given the fact that the market has accepted these price points,” and given that the company still views airfare as reasonably affordable, Delta’s position is very sustainable, 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,” he said on the earnings call.
The continued strength in the airline sector comes as the average price for domestic trips hit $445.26 in the second quarter, according to the Bureau of Transportation Statistics. Airline ticket prices increased about 23% year-over-year, according to the U.S. Travel Association.
Skyrocketing oil prices
Higher oil prices are partly to blame for the increase in airfare. Oil surged this year due to the war in Iran, which has crippled transit through the Strait of Hormuz, through which 20% of the world’s oil flowed before the war. The price of Brent crude oil on Monday stood at $108, up more than 70% from a year ago.
Airlines are particularly susceptible to increases in oil prices. After labor, fuel costs are airline companies’ biggest expense, making up about 21% of their operating costs as of earlier this year, according to Airlines for America, a trade association and lobbying group.
Because jet fuel prices generally move with oil prices, they rise in tandem, and as such, jet fuel prices are already up more than 100% compared to a year ago, according to the International Air Transport Association. U.S. Gulf Coast jet fuel cost $4.34 a gallon on Thursday, almost double the $2.19 of a year earlier, according to CNBC.
Unlike their European counterparts, U.S.-based airlines also don’t hedge against rising oil prices, meaning increases often get passed on to the customer. Delta, for its part, bought an oil refinery more than 10 years ago through a subsidiary, which helps offset fuel costs.
Delta is the first major U.S. airlines to report third-quarter earnings, but other CEOs have also noted airlines’ sales resilience in the face of rising fuel costs. Southwest Airlines CEO Bob Jordan told CNBC in July that “Despite high fuel and high prices, we’re seeing really strong demand.”
In prepared remarks during American Airlines’ second-quarter earnings call, CEO Robert Isom said, “Consumer spending remains resilient, underpinned by a healthy labor market and a sustained preference for travel relative to other discretionary categories.”
Higher fares haven’t fully protected Delta from rising fuel costs. The airline last week cut its full-year profit outlook to between $5.10 and $5.60 per share, down from its previous forecast of $6.50 to $7.50. It also missed Wall Street’s earnings estimate for the first time in two years.
This story was originally featured on Fortune.com
