Airlines expect heavier drag on profit growth from rising fuel costs

NEW YORK (AP) — Major airlines expect fuel costs to keep rising through the end of the year, putting a dent in profits for an industry that has seen earnings growth in 2023.

United Airlines, Delta and American have all seen fuel costs rise since the beginning of the year along with commodity prices for oil. Strong demand has so far helped profits grow each quarter. But all three airlines are forecasting yet another increase in costs during the current quarter and warning that it could hurt their bottom lines.

The higher fuel costs could potentially lead to pricier fares for travelers at a time when high inflation is still squeezing consumers. Airlines are also worried about travel demand slumping because of global conflicts, particularly the war in Gaza. The U.S. has issued a global advisory for citizens overseas because of rising tensions and the potential for violence.

Fuel prices and the war’s impact on travel to Israel both factored into United Airlines disappointing financial update. The company expects profit of $1.50-$1.80 a share, depending on when travel resumes to Tel Aviv. That would mark a sharp drop in profit from a year ago after two quarters of solid gains.

American Airlines and Delta Air Lines also trimmed profit forecasts for the year and Wall Street expects smaller profits from a year ago in the fourth quarter.

Higher fuel prices have been pressuring margins, said Delta Air Lines CEO Ed Bastian, in a conference call with investors.

“However, I fully expect the market will adjust to higher costs as it has historically and re-establish equilibrium,” he said.

Overall, the sector has been reporting earnings growth throughout 2023 while the broader S&P 500 contracted. Now, Wall Street expects the airline industry to lag with shrinking earnings in the fourth quarter, while the broader S&P 500 notches a quarter of growth.

Crude oil prices are at their highest levels in a year, now hovering around $90 a barrel. The Energy Department expects OPEC production cuts to keep putting upward pressure on oil prices and is forecasting Brent crude, the international standard, to average $94 in 2024. That forecast coincides with expectations that U.S. jet fuel consumption will increase by 6% because consumer demand has returned to pre-pandemic levels.

Higher costs for oil can trickle down to many other areas of the economy, making goods and services more expensive overall. That, coupled with the potential for higher airfare prices, could eventually sap travel demand as consumers shift spending to necessities.