Delta Air Lines Mulls How to Increase Revenues as Fuel Costs Rise

Delta Air Lines continues to face a “very challenging revenue environment” with more last-minute business travelers buying unusually cheap fares, but the carrier’s top finance executive said Wednesday that Delta will still announce an “impressive” second quarter operating margin next month.

“Airfares on close in bookings, or walkups, are substantially lower than they were a year ago,” Delta CFO Paul Jacobson said. “The encouraging sign is that we are able to produce the types of margins that we are in this environment.”

Speaking at the Deutsche Bank 7th Annual Global Industrials & Materials Summit in Chicago, Delta CFO Paul Jacobson predicted the airline will report second quarter margin of roughly 21 percent, at the low end of pervious estimates. However, he said passenger revenue per available seat mile (PRASM) – a key industry metric that essentially measures how much money an airline makes for each passenger, may decrease by 4.5 percent or more on a year-over-year basis. Jacobson said this decline might be slightly worse than the airline recently forecasted.

Still, Delta is expected to fare better than United Airlines, which said late Wednesday that its second quarter PRASM likely will decrease between 6.5 percent and 8.5 percent, also on a year-over-year basis. United said passenger demand is not growing at the same pace as industry capacity, and reported it has been forced to drop fares to compete with other airlines.

A key problem for all major carriers is that advanced-purchase and last-minute airfares remain relatively low, while the price of oil has increased considerably in the past six months. Delta, like most airlines, wants to develop a strategy to pass its increased costs to consumers, but raising airfares is not easy, given the competitive nature of the business.

Major airlines had lowered last-minute prices in part to thwart ultra low-cost airlines like Frontier Airlines and Spirit Airlines. But those cheap fares may not be sustainable forever, and earlier this week, the nation’s largest airlines raised many domestic fares an average of $3 each way, according to JP Morgan analyst Jamie Baker. JetBlue Airways led the increase, with other carriers matching.

“We have to be able to pass through the increased cost of our service to our customers,” Jacobson said. “We are at a point where oil has moved off pretty persistently off the lows.”

Delta remains confident in its financial strategy, noting that it continues to report higher revenues than its main competitors, American Airlines and United. Delta CEO Ed Bastian has said Delta earns an average of 10 percent more on each ticket than its competitors. The airline believes it provides a superior product, and it argues it can charge more than United and American.

“The airline experience and the flight experience isn’t necessarily a commodity product,” Jacobson said.

While business fares have taken a hit, Jacobson said the leisure segment is holding up well.

“The leisure fares and the leisure customer and demand is there, especially as we are going in the summer travel season,” Jacobson said, adding that European demand is strong, albeit not as vibrant as it might have been if not for the recent terrorist attacks in Brussels and Paris.

Also on Wednesday, Delta said it would resume flying between Atlanta and Brussels in March 2017. Delta suspended the route in April after a terrorist attack at the airport. Delta continues to fly year-round to Brussels from New York-JFK.