Jet fuel could crash your holiday party

Good thing Santa’s sleigh doesn’t run on jet fuel. The stuff has been getting expensive again, and airlines—not to mention passengers—are feeling the cost.

Delta Air Lines cut its full-year profit forecast after reporting earnings today, citing a surge in fuel prices that added roughly $6 billion to its expected costs this year. Its Q3 fuel bill jumped 62% from a year ago to $4.1 billion, overwhelming still-strong travel demand and higher fares that would have otherwise carried the airline through.

Fuel can account for nearly a third of airlines’ operating costs, according to IATA, and the swings have been big enough to repeatedly blow up carriers’ earnings forecasts. Delta stock dropped today before closing flat.

Delta CEO Ed Bastian told the Wall Street Journal that the company had expected fuel prices to come down by now. “Obviously that didn’t come to pass,” he said.

Fuel bills are taking off

While US carriers have already pushed fares substantially higher this year, those increases have recovered only part of the fuel shock. Earlier this summer, Deutsche Bank estimated that airlines were recouping roughly 60 cents of every extra dollar spent on fuel through higher revenue.

Delta has more protection than most. It owns a refinery expected to generate about $700 million in profit this year, has aggressively trimmed tight-margin routes, and has spent years building a premium customer base that’s less sensitive to higher fares.

But that strategy is also starting to expose a divide among travelers. Bastian says lower-income customers are showing the most resistance to higher fares, while premium travelers are still spending. Delta has already cut back on budget options, offering fewer cheap tickets and dumping routes with lower profits.

That split matters because carriers with wealthier customers and stronger pricing power can pass more of the bill along. Airlines competing mainly on cheap fares have much less room to maneuver. And travelers are already seeing some of that bill.

Holiday travel’s fuel problem

Thanks in part to fuel costs, data from Hopper finds Thanksgiving round-trip domestic fares are averaging $402, up 31% from last year, and Christmas fares are averaging $452, up 23%—putting both at 10-year highs.

So far, demand hasn’t cracked. Delta expects Q4 revenue to grow about 20%, and Bastian said holiday bookings are strong.

Travelers are still price-conscious: Nearly half of Americans surveyed by The Points Guy and YouGov said price is the most important factor when booking holiday flights, and roughly seven in 10 said cost matters more than sticking with a preferred airline or hotel.

But airlines have enough demand to charge more, and they’re pulling back from price-sensitive travelers. So when you try to book a holiday flight and wonder where all the cheap options went, don’t just blame the rush. Fuel costs have given carriers a reason to offer fewer bargain seats.—HC