FOX Business Correspondent Grady Trimble discusses the rise in jet fuel costs, which saw a 10% increase from Tuesday to Wednesday, raising concerns about higher airfares for the summer travel season.
Delta Air Lines sees higher fares sitting in a consumer zone amid higher fuel and other costs, even as oil prices return to 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 dramatically as higher fuel prices, along with increases in other operating costs, have made it difficult for low-cost carriers to compete with low-cost aircraft.
“The majority of US corporates were already struggling to meet their cost of capital against an environment where industrial aviation costs have followed inflation reasonably well, costs have risen again, and consumer preferences have changed,” Bastian said.
“As we predicted, structural reforms have accelerated, enabling the industry to rein in fuel inflation this year at a faster pace than in any recent cycle,” he added.
DELTA LAUNCHES HOT FIRST CLASS, BUSINESS FUNDS WITH FEW BENEFITS: ‘MORE WAYS TO CHOOSE’
Delta Air Lines CEO Ed Bastian said he thinks higher airfares will remain with consumers as the industry adjusts to cost pressures. (Nicolas Economou/NurPhoto via Getty Images)
Bastian said Delta sees those changes in the industry continuing to play out, which will allow airline costs and revenue outlook to remain stable even if energy prices return to their pre-Iran war levels.
“Even after the recent fare increase, airfares remain 10 to 15 points below inflation since COVID,” Bastian said, adding that much of the industry is still making profits below the cost of capital.
“We believe that revenue momentum should remain stable even with moderate fuel prices,” Bastian said.
DELTA CEO ED BASTIAN OUTLINES WHAT NEEDS TO HAPPEN FOR AIRLINE TICKET PRICES TO COME DOWN.
| A ticker | Security | Finally | Change | Change % |
|---|---|---|---|---|
| DAL | Company DELTA AIR LINES INC. | 87.59 | -1.39 |
-1.56% |
Airlines are not only facing higher fuel costs, but increased costs of labor, aircraft infrastructure, technology and aircraft, Bastian explained, forcing companies in the industry to build resilience into their operational strategy.
“What it tells you is that you need to find a change in the business model that will allow you to build strength in your price and stability, and that’s what we have done over time,” he said, noting that it includes higher airfares and diversification of revenue sources, such as Delta’s partnership with American Express.
DELTA, SOUTHWEST HIKE COSTS OF THE SKIRT AS ROUTE REFERENCES BASED ON FUEL COSTS.
Delta believes that airfares are unlikely to drop even after gas prices normalize. (Justin Sullivan/Getty Images)
Bastian added that “even with the improvement we’ve seen in industry prices, the lower end of the market still has to increase fares by another 5%, in our estimation, just to get a break in today’s fuel situation.”
“There is nothing to be gained by trying to grow in that area. The opportunity should be in finding ways to get a higher income, not a higher market share,” he added.
The most recent consumer price index (CPI) data released by the Bureau of Labor Statistics showed that airline fares rose 2.7% monthly in May, and were 26.7% higher than a year ago.
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The BLS will release updated CPI inflation data for the month of June next week.
