Delta Air Lines said Friday that airfares are likely to remain elevated despite falling jet fuel prices. During its second-quarter earnings report, the airline said strong travel demand has pushed airfares up 11% to 12%, adding that it believes current fare levels are “sustainable”.
Airfares Will Remain High
Delta CEO Ed Bastian said strong demand will keep airfares high. In an interview, Bastian said, “Airfares are a function of supply and demand.” “The demand set is really strong,” he added.
Delta’s fuel costs jumped 75% compared with the same period last year due to the conflict involving Israel and Iran. Fuel is the second-largest expense for airlines, with labor costs remaining the largest.
Delta expects fuel prices to drop by 20% in the current quarter as oil prices have stabilized near pre-war levels. Jet fuel spot prices are down 36% from their peak.
However, Bastian said current airfares remain lower than pre-pandemic levels 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,” Bastian said.
Changing Economics of the Airline Industry
Apart from jet fuel and labor costs, Bastian said airport, technology, and aircraft expenses have contributed to changes in the economics of the airline industry. Given these changes, it has become more difficult for low-cost carriers to compete on price.
“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,” according to Bastian.
Rise of Premium Customers
Bastian also said that one thing that lifted the demand for travel came from affluent passengers. Delta’s revenue from premium passengers jumped 17% in the quarter, while revenue from the main cabin increased only 8%.
Bastian described Delta’s passenger base as “financially very healthy, (with a) tremendous amount of wealth accumulation.”
