Delta Air Lines has indicated that higher airfares are likely to continue despite a recent decline in oil prices, as the company reported strong travel demand and record revenue in its second-quarter results on Friday.
Record fuel expense and profit
The airline posted a $1.4bn profit even though it faced its highest quarterly fuel expense in history. Delta's CEO, Ed Bastian, told CNBC that the company has been able to pass along 60% of its extra fuel costs to consumers due to robust demand, with plans to eventually pass on all elevated costs.
“The demand for air travel is really strong, and as a result of that, we posted a $1.4bn profit,” Bastian said.
Impact of Middle East conflict on airlines
Airlines globally have had to either raise fares or cut routes this year as the war in the Middle East drove oil prices higher. While some Americans have adjusted their travel plans due to increased costs, many continue to prioritize travel. AAA estimated a record number of Americans traveled by car or plane for Independence Day despite high gas prices.
Bastian noted that Delta holds 20% of the market share but estimated it would account for 60% of the airline industry's profits this quarter. Delta is the first major carrier to report second-quarter results; United Airlines and American Airlines are scheduled to report later this month.
Premium travel demand surges
Delta's customers are at the “top end” of the K-shaped economy, according to Bastian, who described them as “financially very healthy” with “tremendous amount of wealth accumulation.” The company's premium revenue grew 17% year-over-year, while main cabin sales increased by only 8%. Delta recently expanded its premium offerings with a “basic business” option that excludes expedited check-in and lounge access.
“When you ask our consumers what is their main purpose and use of discretionary funds, they’ll say we want to participate in the experience economy, with air travel being the number one,” Bastian said. “We want to go places. We want to see things.”
Airfares still a bargain despite increases
Although airfares are up 12 to 15% compared to last year, Bastian argued that they “continue to be a tremendous bargain” given overall inflationary pressures. He attributed continued spending to the “post-Covid effect.”
Global oil prices dropped sharply last month after the US announced a peace deal with Iran, but oil and gas prices are rising again amid uncertainty over the ceasefire. The current national average for a gallon of gas is $3.88, cheaper than last month but still $0.71 higher than a year ago.
