What's going on?
Delta Air Lines – America’s second-largest carrier – slashed its annual profit target by 15% on Thursday due to rising fuel costs (tweet this). Uh oh, unexpected turbulence!
What does this mean?
Delta actually delivered strong sales in its last quarter – they grew by 10%. However, the recent oil price increase is causing fuel costs to take flight – they were $654 million higher than the same time last year.
Delta expects this trend to continue and hurt its 2018 profits by adding an extra $2 billion to its jet fuel costs (Delta’s 2017 fuel bill was about $7 billion). Strong revenue growth and efficiency exercises – like cutting down on less profitable routes – isn’t enough to stop the rising cost eating into profits.
Why should I care?
For markets: A few dark and stormy days for the airline sector.
Delta’s cut to its profit target follows the world’s biggest airline carrier, American Airlines, reporting weak results on Wednesday. It’s been hit by tougher competition (which drives fares down) and higher fuel costs, causing American Airlines’ shares to fall as much as 8%, and stocks in the US airline sector to drop by 3% on average. Rising fuel costs have been a cloud for all airlines, and they’re struggling to find clear air (price increases on fares typically take six to twelve months to make an impact).
The bigger picture: There’s good news flying around, too.
Norwegian Air went against the grain by turning a profit for the first time in its last quarter (albeit a ‘mere’ $37 million), thanks to rapidly increasing sales. Its sparkling performance has attracted a lot of potential suitors, with British Airways and Lufthansa all looking to buy the low-cost challenger. Its share price has gone sky high, rising 35% since the start of March.