What’s News in Earnings: Airlines Feel the Pain of an Oil Shock

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0:18Alison Sider:Hey listeners, it's Thursday, April 30th. I'm Jacob Passy for The Wall Street Journal. And this is What's News in Earnings, our look at some of the biggest themes standing out this earnings season. It's been a turbulent quarter for airlines. The war with Iran has caused jet fuel prices to soar, and that's putting a damper on airlines' profits. While demand for travel is holding up, airlines are driving fares and fees higher and higher. And that's raising concerns that Americans may change their travel plans for this summer. JetBlue CEO Joanna Garrity told Wall Street analysts this week that it was the most difficult period in years.

0:54Jacob Passy:Given the sharp increase in the price of fuel and the expectation for elevated prices throughout this year, we are suspending our prior full year guidance as we aggressively adjust to the evolving macro backdrop.

1:07Alison Sider:And some airlines are having an even more difficult time than JetBlue. And they're asking the Trump administration for help.

1:19Alison Sider:We're joined now by Wall Street Journal airline reporter Allison Sider, who's been monitoring the state of play. Allison, higher oil prices are weighing on airlines. How big a deal is that for the bottom line? And what are airlines trying to do to offset those costs?

1:34Jacob Passy:It's turning out to be a pretty big deal. Jet fuel prices have basically doubled since the start of the war in Iran. And it's adding a lot of expense. Delta expects its fuel expense for this quarter to be$2 billion more than a year ago. American is saying it's going to pay an extra$4 billion in fuel this year. So it's really going to squeeze their profit margins for the rest of the year. In terms of what they're doing about it, you already probably have started seeing it in fares. They're going to be a lot higher. And we're starting to see airlines change their schedules and cut back on flying.

2:05Jacob Passy:We're especially seeing that airlines are cutting back on flights that maybe would have been profitable with jet fuel prices of$2 per gallon, but now are not going to make money with jet fuel prices around$4 per gallon. So that is probably going to most impact Tuesdays and Wednesdays, Saturday afternoons, times when flights already kind of fly a little bit emptier. And the other thing we're seeing airlines do is increase fees. We've already seen bag prices increase by around$10. It's been pretty uniform across all the airlines. Now a first check bag is going to cost you probably around$45. And bag fees really rarely come down.

2:43Jacob Passy:And if and when fuel prices get back to more normal levels, probably shouldn't expect to see those bag prices come down.

2:50Alison Sider:How are consumers responding to the fare increases we've already seen? Do they still want to travel?

2:55Jacob Passy:It seems like consumers are still clamoring for travel and they're still booking trips. Airlines are saying demand is holding up really well. So, so far, all the airlines seem almost pleasantly surprised that they're able to charge so much more without scaring customers away. And at United, Chief Commercial Officer Andrew Nacella said on United's earning call that the airline is kind of waiting for that inflection point.

3:19Alison Sider:There should be some level of demand reduction related to a 20 percent bear increase. We haven't seen it yet. And if we don't, you know, it's a really great outcome. But we're planning for that. If it doesn't turn out to be the case, we'll appropriately adjust our plans. So we have mainstream carriers like Delta and United, and then there are the budget carriers like Spirit. How are budget carriers doing compared with their mainstream competitors?

3:44Jacob Passy:This is turning out to be a bigger problem for some of the budget carriers. Your average fare was, you know,$100 and$120, and you have to tack on$30,$40,$50 for fuel. That's really noticeable. But if your customer is buying a$6 ,000 business class ticket, the extra that they might be paying in fuel is something that they may not even notice or they're just willing to put up with it. So the budget carriers seem to be the ones that are in the most trouble. We're seeing that most acutely with Spirit. The sudden run-up in fuel prices really threatened its plan to emerge from Chapter 11, which it was hoping to do in the next couple of months.

4:21Jacob Passy:And now it's on the precipice of liquidation. And it's in negotiations with the Trump administration for a loan of around$500 million. In exchange, it would give the Trump administration warrants to buy a really significant stake in the company. And it's really kind of day by day at this point, whether they're going to get that worked out before they run out of cash. But the other budget carriers are struggling as well. And we've seen in the last couple of days that they've also gone to the Trump administration to ask for$2.5 billion. And that's a group of carriers that includes Frontier and Avello.

4:59Jacob Passy:They would also have to give up warrants to the administration if they ended up taking the money. So I guess we will see what happens. it would be sort of unusual to have the government intervene in the market in this way.

5:12Alison Sider:That was Wall Street Journal airline reporter Alison Sider. Thanks for joining us. Thanks for having me. And that was What's News and Earnings. Today's show was produced by Danny Lewis with supervising producer Tali Arbel. Additional sound courtesy of S &P Global Market Intelligence. Later today, we'll have the PM edition of What's News out for you as usual. And we'll be back later this earnings season diving into another industry. Until then, I'm Jacob Passi. Have a great day.

6:05Alison Sider:today's most compelling newsmakers for two days of conversations on what's ahead. Listeners of this podcast can access exclusive discounted rates by visiting wsj.com slash future. That's wsj.com slash future.