Delta says it's already feeling the pain of rising oil prices

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Delta Air Lines fell as much as 3.5% Wednesday after the carrier cut its second-quarter earnings forecast due to higher fuel costs.

Presenting at Deutsche Bank’s Global Industrials and Materials Summit on Wednesday, the airline said its fuel costs for the second quarter are up 50% year-over-year and 12% since the beginning of the quarter. Delta said it’s now paying in the range of $US2.20 to $US2.25 per gallon of jet fuel, where it had paid $US2.07 to $US2.12 last quarter.

That rise in fuel costs mirrors a jump in oil prices in recent months from $US60 a barrel at the start of 2018 to as high as $US72 at the end of May.

Delta now expects a earnings per share (EPS) of between $US1.65 and $US1.75 for the quarter, while saying “revenue and demand remain strong across all entities in both leisure and business segments.” It previously forecast earnings of $US1.80 to $US2 per share.

As fuel costs rise for all airlines, investors are increasingly focused on where carriers can make capacity cuts to shore up margins. In May, Morgan Stanley said that fresh margin pressure – about 1-2 percentage points for every $US10 of oil price increases – from expensive oil will force carriers to “instill pricing and capacity disciple.”

“There has been a level of debate amongst investors around the implications of higher oil on Airline shares, and in our opinion, higher is a good thing,” the bank’s airline analyst Rajeev Lalwani told clients.

Other major airlines, including American and United, also fell slightly in trading Wednesday following Delta’s announcement. Delta is down about 7% since the start of 2018.

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