Airlines

Delta's CEO finds silver lining in higher fuel prices

Key Points
  • Delta Air Lines is the second-biggest U.S. carrier.
  • Low oil prices caused "dysfunctional" behavior by airlines, Delta's CEO said.
  • It could take up to 12 months for the impact of higher fuel to show up in capacity cuts, fares.
A Delta Airlines plane
John Greim | LightRocket | Getty Images

Oil prices at $70 and even as high as $90 a barrel are a "sweet spot" for the industry because "it causes people to think" before flooding the market with more seats, Delta Air Lines CEO Ed Bastian said at a conference on Wednesday.

Like its competitors, the second-largest U.S. airline is paying more to fuel its planes during the busiest season of the year, when cutting back on flying is out of the question.

Airlines have increased capacity between the U.S. and abroad 4.3 percent in the May-July period from a year earlier, according to Planestats.com, a site of consulting firm Oliver Wyman.

Jet-fuel prices in the U.S. rose about 60 percent over the past 12 months to late May, according to S&P Global Platts.

When oil prices fell to $30 a barrel two years ago "it created a lot of dysfunctional behavior," Bastian said, even though airlines were making money.

U.S. airlines' net income peaked at more than $26 billion in 2015, the year after oil prices started to crater. Last year, in comparison, they brought in nearly $17 billion, according to the Department of Transportation.

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Delta and its large competitors are battling low-cost, long-haul airlines like Norwegian Air Shuttle, WOW Air and others that have expanded in recent years as costs to fuel planes plunged. Fuel generally represents the biggest expense for low-cost airlines.

Bastian pointed to a nearly 15 percent uptick in its trans-Atlantic revenue in the first quarter and said it doesn't expect the business to be hurt by the new entrants.

"Customers that travel on those ultra-low cost carriers are people that otherwise would not be flying," he said.

Delta and American, as well as their partners in Europe, are trying their hand at a similar low-cost model, however, offering no-frills basic economy tickets this year, which charge passengers around $60 to check a bag.

Bastian said it could take up to 12 months for higher fuel prices to show up in the airline's capacity or fares.

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