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’
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. | 87.46 | -1.52 | -1.71% |
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.
DELTA, SOUTHWEST HIKE CHECKED BAG FEES AS AIRLINES FACE SURGING FUEL COSTS
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.
The BLS is set to release updated CPI inflation data for the month of June next week.
Read the full article here