Delta Air Lines announced on Wednesday that it anticipates weaker profits for the second quarter, prompting the airline to halt all planned capacity increases starting in June. This decision comes amid rising jet fuel prices, largely driven by the ongoing conflict in Iran, which has impacted profit margins.
As a result, the reduction in supply is expected to be about 3.5 percentage points compared to previous plans.
The Atlanta-based airline indicated that its growth prospects currently have a “downward bias” until there’s an improvement in fuel costs.
Delta mentioned that it is still too soon to revise its full-year outlook given the uncertainty of fuel prices.
The challenges faced by U.S. airlines are evident as soaring fuel costs follow the unrest in the Middle East, significantly affecting energy markets.
Jet fuel prices have nearly doubled since late February, presenting the industry with its first major challenge since the pandemic, alongside rising costs, disrupted schedules, and increased expenses for travelers.
However, a sense of relief emerged after President Trump announced a two-week ceasefire with Iran on Tuesday.
Following this news, Delta’s stock rose in early trading, gaining around 10%. Shares of competing airlines also increased, with United Airlines at 14%, American Airlines at 11%, and Southwest Airlines at 13%, aided by hopes of improved profitability for Delta.
Fuel generally represents about 25% of an airline’s operating expenses, significantly impacting profitability when ticket prices often lag behind rising fuel costs.
For the June quarter, Delta expects to pay about $4.30 per gallon for jet fuel, which translates to more than $2 billion in increased costs compared to the same time last year.
In January, Delta projected full-year adjusted earnings to range from $6.50 to $7.50 per share. While the company did not retract its outlook, CEO Ed Bastian opted not to update it due to the unpredictability of fuel price increases.
Analysts currently estimate earnings at around $5.40 per share based on data compiled by LSEG.
Until now, airlines have depended on robust travel demand to offset rising fuel costs, leveraging fare hikes, baggage fees, and other additional charges.
Delta also foresees refinery profits hitting $300 million in the second quarter, a notable rise from around $60 million in March, as refining margins expand.
This situation raises the potential for industry consolidation, with stronger airlines likely to invest and gain market share while weaker ones might cut flights, increase debt, or face further losses.
Bastian stated that Delta aims to recover about 40% to 50% of the increased fuel costs in the second quarter through fare hikes, though he acknowledged it would take time to fully address these escalated expenses.
Bastian cautioned that rising fuel prices could drive significant changes within the airline industry.
“We’re seeing a distinction between stronger and weaker players; those lacking resilience must make considerable adjustments or face repercussions,” he explained.
TD Cowen’s Tom Fitzgerald noted that Delta’s second-quarter performance illustrates the strength of its business model, bolstered by robust non-main cabin revenues.
Airlines have begun to trim flight schedules, particularly on routes with lower profit margins, to conserve fuel and safeguard profit margins. Since March 13, U.S. airlines have reduced their forecasted domestic capacity increases by more than half a percentage point.
Delta also revealed plans to raise checked baggage fees, following similar announcements from United Airlines and JetBlue Airways.
Bastian hinted that additional fee increases could be on the horizon, stating, “At the current level of fuel prices, it’s difficult to consider this just a temporary situation.”
Yet, he dismissed worries that rising fares and fees might adversely affect demand. He noted that ticket sales have surged by double digits compared to last year over the past month and that this trend is continuing into the second quarter.
High-income travelers seem undeterred, and Delta has yet to notice any decline in demand.
In the last reported quarter, Delta achieved adjusted earnings of 64 cents per share, exceeding analysts’ predictions of 57 cents.
