Higher airline fares covered fuel costs. Three carriers still lost margin

Four US airlines raised fares enough to pay for fuel in the third quarter. Margins still fell at three of them.

Fuel ate 56 to 71 cents of every extra revenue dollar in the third quarter. Delta spent 66 cents, United 70, American 71 and Southwest 56. All four raised fares enough to cover the bill, and three still earned a smaller margin.

Higher fares covered fuel costs. Other costs eroded margins at Delta and United. Revenue passed through at cost earns no margin, so margins can fall even when profit holds.

Jet fuel rose more than crude. A treasurer tracking Brent alone misses that difference.

Fares are up 22.4% from a year ago. The Bureau of Labor Statistics reported on 14 October that the September airline fare index rose that much. It also rose 2.0% on August before seasonal adjustment.

American was the exception to broadly steady seat occupancy. Its load factor, the share of seats filled, fell sharply to 83.4% from 86.0% after it added 4.2% more seats.

Everyone else held occupancy. Delta held 86%, Southwest 79.8%, and United slipped half a point to 83.9%.

Yields, the revenue earned per passenger mile, rose 14% to 23% across the four. Fares met resistance only where capacity grew.

How the four airlines compare

Delta shows the pattern. Delta added $2.39 billion of adjusted revenue and $1.58 billion of fuel cost. Adjusted costs other than fuel rose another $838 million.

That cut adjusted operating income by $26 million, and $786 million of the extra cost sat in the unit cost base. Its margin slid to 9.4% from 11.1%, while adjusted earnings per share held at $1.72 against $1.70. Delta's adjusted figures exclude refinery sales to third parties.

United is the same story. It added $2.65 billion of revenue and $1.85 billion of fuel cost. Excluding special credits, other costs rose about $895 million and operating income fell about $91 million.

Its margin slid to about 6.9% from about 8.7%. Reported earnings per share still rose to $3.14 from $2.90, helped by those credits.

American paid for its extra seats. It added $2.64 billion of revenue and $1.87 billion of fuel cost. Other costs rose about $800 million, and operating income excluding special items fell $26 million.

Its margin slid to 0.8% from 1.2%. American's own problem is the lower load factor on 4.2% more seats.

Higher unit costs explain the margin pressure at Delta and United. Costs per seat mile excluding fuel rose 7.3% at Delta and 7.8% at United, against 3.0% at American.

Southwest is the one margin gain, and part of it is a one off. Revenue rose $1.47 billion and fuel $0.82 billion. Operating income rose $344 million.

But $201 million of that is larger gains on aircraft sales and sale leasebacks. Its quarterly report books them in other operating expenses.

Without those gains, operating income rose about $143 million. The margin improved to about 2.0% from 0.3%, against the reported 4.5% from 0.5%.

Southwest also pushed hardest on price. Its average fare rose 26.9%, to $231.69 from $182.56, and its yield rose 23.3%. It is the one carrier that cut seats, down 0.4% in the third quarter, and it trimmed 2026 capacity growth to about 1.2% from about 1.5%.

Why crude prices miss part of the bill

Jet fuel rose more than twice as fast as crude. The US Energy Information Administration shows US Gulf Coast jet averaging $3.83 a gallon in the third quarter, up 81% from $2.12. Brent crude rose about 40%, to $96.30 a barrel from $69.03.

Per gallon, the four paid $3.61 to $3.92, up about 60% at Delta and United and 63% at American. Converted at 42 gallons a barrel, jet cost about $161 against $89 a year earlier.

The crack spread, the refining margin between crude and jet, widened to about $65 from about $20. Airlines buy jet, so a crude headline understates their bill.

October moved the other way. Brent averaged $125 through the 20th while jet averaged $187, so the spread narrowed to about $62.

A buyer who hedged only crude missed the third quarter's refining spike. One who hedges only the spread is exposed to crude's October run. Cover both legs, with Brent for the level and jet swaps for the spread.

Delta owns a refinery, the only partial hedge against that spread among the four. The refinery cut its third quarter fuel price by 13 cents a gallon.

Delta guides to about 40 cents in the fourth quarter, for an all in price near $4.25. Its fourth quarter earnings guide is $1.15 to $1.65 a share on that fuel price. It still expects full year pre tax profit of roughly $4.5 billion after a $6 billion rise in fuel costs.

The fourth quarter fare test

Fares need to cover higher fuel costs in the fourth quarter. Fuel guides are $4.25 at Delta, $4.55 at Southwest and $4.70 at American, against $3.61 to $3.92 in the third quarter.

Revenue guides rise with it. Delta guides about 20%, United over 20%, American 19.5% to 22.5% and Southwest unit revenue 19% to 21%.

Carriers that need today's fares to hold have little reason to discount. United led a $10 one way rise in published fares and Southwest matched it. JetBlue followed on 21 October, JP Morgan said. Southwest says its guide assumes the current fare environment stays broadly intact.

The main risk is that demand weakens. Load factors held at Delta and Southwest and slipped half a point at United while yields rose 14% to 23%.

The TSA screened 2.9% fewer people at US airports in the quarter than a year earlier, Reuters reported on 23 October. Load factors argue against a crack so far, but passenger counts are lower.

Resistance would show first where seats grow fastest. American adds 5.5% to 6.5% more seats in the fourth quarter into $4.70 fuel. That fuel costs it about $2.8 billion more than a year earlier.

It guides to an adjusted loss of $0.50 to $1.10 a share and says network growth in 2027 will slow. Delta grows seats less than 2%. Southwest adds 3% to 4% more seats into $4.55 fuel.

Six large carriers plan domestic capacity growth of 3.0% in the fourth quarter and 3.8% in the first quarter of 2027, Reuters reported.

The next test is the 10 November release of October consumer prices at 8:30 a.m. Eastern. September's unadjusted airline fare index stood at 315.9, and it has risen from September to October in each of the last nine years, by at least 1.3%.

A reading below 315.9 would mean fares gave way before fuel did, with jet at $4.46 through 20 October against $4.39 in September.