The rising cost of fuel could weigh on Delta Air Lines’ bottom line this quarter, the air carrier said on Wednesday, despite reporting strong travel demand.
In a regulatory filing, Delta forecast it would earn between $1.65 and $1.75 per share, downwardly revised from its previous estimate of $1.80 to $2 a share.
Fuel expenses have been a thorn in the side for airlines over the course of the past year, including Delta, which said prices are up about 50% over the past 12 months.
The International Air Transport Association, an industry trade association of 278 of the world’s airlines, revised its profit forecast for 2018 on Monday to $33.8 billion from the $38.4 billion it predicted in December, citing the rising costs of fuel and labor as two driving forces behind the downward revision. This compares to the record $38 billion airlines earned last year, which the association said is “severely distorted” due to one-off tax credits.
IATA expects oil prices to rise nearly 30% in 2018, forecasting the average cost of Brent crude to be $70 a barrel. Currently, Brent is trading around $75 per barrel, up nearly 50% year-over-year – something that caused American Airlines CEO Doug Parker to warn of higher prices during the IATA’s annual meeting of airline executives in Sydney.
“At some point there has to be some kind of response – either higher fares or lower capacity because they have to find a way to make up for this shortfall in earnings,” CFRA analyst Jim Corridore told FOX Business. “They’re lucky this year they’re getting a windfall from tax reform. A lot of them are paying lower statutory tax rates. On the earnings line they’re not being effected as much … in terms of cash, they’re being eaten away by higher oil prices and they have to have a response.”
Shares of Delta were down more than 1%, around $54 during midday trade on Wednesday. American Airlines shares were flat, while United Airlines shares were more than 1.5% higher.