Delta charges more and flies fewer economy seats as its fuel bill jumps $6 billion

Delta Air Lines is flying roughly the same number of seats it flew a year ago and taking in far more money for them. The gap is the oil shock, and the airline’s latest results show who is covering it: passengers, and above all the ones in economy, where Delta is quietly removing seats while charging more for the ones that remain.

That matters well beyond Delta’s shareholders. Jet fuel is the one cost every airline buys at roughly the same global price, and Delta, among the most profitable airlines anywhere, has more room than most to set fares. When it tells investors it plans to protect margins by charging more rather than flying more, that is a forecast for what a family will pay to fly home for the holidays, and a signal other airlines are reading closely.

The fuel numbers have moved fast. Delta now expects fuel to cost about $6 billion more this year than last, up from the roughly $4 billion extra it projected in the summer. In the September quarter it paid an average of $3.61 a gallon, 60% more than a year earlier, and its adjusted fuel bill rose 62% to $4.1 billion. Earnings of $1.72 a share landed well below the $2.00 to $2.50 range Delta itself had guided to, and the full-year forecast fell to $5.10 to $5.60 a share from $6.50 to $7.50, a cut of about a quarter at the midpoint.

Revenue is where the bill is being passed on. Adjusted sales rose 16% to a record $17.6 billion for the quarter on flat capacity. Main cabin unit revenue, what Delta earns for each seat it flies a mile, rose 17% while the number of main cabin seats fell by a low single-digit percentage, and premium revenue climbed 18% on 6% more premium seats. Chief commercial officer Joe Esposito credited “healthy yield growth as we cover higher costs”, yield being the industry’s word for what a passenger pays per mile. For the final quarter of the year, Delta expects revenue to rise about 20% while seats grow less than 2%, with fewer main cabin seats than a year ago.

Other stakeholders sit on the same seesaw. Employees have accrued nearly $900 million in profit sharing so far this year, a pool that shrinks as fuel eats into profit. American Express, whose payments to Delta for its co-branded cards rose 15% in the quarter and are on course to pass $9 billion for the year, is now one of the airline’s steadiest cushions. Travellers outside the US feel it too: Delta’s unit revenue rose 22% on Latin American routes and 11% across the Atlantic, the markets where a European or Brazilian flyer meets these fares.

There are reasons to doubt the calm in Delta’s outlook. Chief executive Ed Bastian called air travel “one of the best values in the consumer economy”, a claim economy flyers paying more for fewer seats may not share. The final-quarter forecast assumes about $4.25 a gallon, based on futures prices from early October, and Brent crude has since traded above $104 a barrel. In the September quarter alone, fuel cost more than $500 million above what Delta had assumed in July. And the strategy only works for as long as travellers keep paying; Delta has said it can cut flying at short notice if they stop, which would mean even fewer seats.

The next read on whether the industry follows comes from United Airlines, which reports its third-quarter results after the market closes on October 20 and holds its call the following day. Delta guided to fourth-quarter earnings of $1.15 to $1.65 a share and plans to pay down more than $2 billion of debt this year.

The seat Delta is building fewer of is the one most people buy.

Tags: oil prices, airfares, airlines, Delta Air Lines, jet fuel, United Airlines