Jet fuel costs have plunged. Here’s why Delta says cheaper flights aren’t on the way

Economist Pedro Antunes discusses the fluctuation in oil prices and when it is expected to stabilize.

Air fares aren’t coming down, Delta Air Lines said Friday, even though the cost of jet fuel has fallen sharply.

In its second-quarter earnings report, the airline said its various measures of fares are up 11 per cent-12 per cent due to strong demand for travel, and that it sees “sustainability” in those fares. Delta CEO Ed Bastian said the strong demand for travel will keep fares high.

“Airfares are a function of supply and demand,” Bastian told CNBC in an interview Friday. “The demand set is really strong.”

Fuel prices paid by Delta increased 75 per cent compared to a year ago throughout the quarter as the US-Israeli war with Iran led to a spike in oil prices. Fuel is the second largest cost for airlines, behind only labor. It raised Delta’s adjusted fuel expense in the quarter by US$1.9 billion. But the strong fares lifted revenue from passengers by $1.7 billion, as overall revenue rose $3.1 billion.

Delta is projecting fuel costs in the current quarter will be down 20 per cent from the adjusted fuel price it paid in the second quarter, as oil prices have retreated to near the levels they were before the war. Jet fuel spot prices are down 36 per cent from their peak.

Bastian said that fares across the industry are still lower than they were pre-pandemic, when adjusted for inflation.

“If people are having concerns with respect to air fares, they have much higher concerns with respect to other products, which maybe is a reason why the demand continues to stay strong for us,” he said. While the Consumer Price Index shows airfares up 27 per cent in May compared to a year earlier, they are up only 17 per cent compared to May of 2019. Meanwhile, overall inflation as measured by the CPI is up 31 per cent since May 2019.

Bastian said one thing lifting fares is demand for travel from more affluent passengers. Delta’s premium passenger revenue was up 17 per cent in the quarter, while main cabin revenue was up only eight per cent.

“Our consumer is financially very healthy, (with a) tremendous amount of wealth accumulation,” he said of Delta’s core passenger base. Travel is a top priority for those consumers, according to Delta’s surveys.

The fuel price spike did cut into Delta’s second-quarter earnings, as adjusted income fell $358 million, or 26 per cent. But that was better than Wall Street had forecast. The airline said strong fares should allow it to still hit the full-year earnings target it set in January, before the war sent fuel prices higher.

Chris Isidore, CNN