As airline ticket prices skyrocket in UK, Delta profits rise in US
As a result of declining gas and oil prices, Delta Air Lines is seeing larger profit margins. Across the Atlantic Ocean, UK ticket prices continue to increase.
The Delta Airlines Charter carrying the University of Notre Dame Fighting Irish NCAA college football team, Jan. 19, 2016. Delta Airlines has seen profit margins nearly double because of falling gas prices.
Jeff Haynes/Reuters/File
As gas prices fall dramatically, below $1 per gallon in some states, the profit margins of large airlines are skyrocketing.
On Tuesday, Delta Air Lines said its profit margin would more than double in the first quarter of 2016. The airline earned $980 million and an adjusted profit of $926 million in the last quarter of 2015, up 51 percent from December 2014.
The decline in fuel prices has led Delta to predict its first quarter operating margin will be between 18 percent and 20 percent, according to a company press release. In the first quarter of last year, operating margins for the airline were 8.8 percent.
Delta, the largest publicly-traded airline in the US, has given investors pause with news that pricing power will decline through the first three months of 2016. The news could convince some investors that airlines are adding too many flights while fuel is cheap, which could push fares lower, according to The Associated Press.
In contrast to US investor concerns, some fliers have experienced an increase in ticket prices.
Passengers in Britain experienced the largest monthly increase in ticket prices since 2002, according to a new study from the Office of National Statistics in the UK.
"The fact that airlines can rise prices to this extent demonstrates robust underlying pricing power and strong consumer demand," market analyst Alan Clarke told CNN Money.
Airline ticket prices traditionally increase around the holidays. The price increase between November and December 2015, however, was near historic with a 46 percent jump. The price change was “considerably higher” than the increase in 2014, which rose 19 percent, the ONS said in the study.
The price increase also contrasts with the falling price in gas. Crude oil prices fell from November to the end of the year, starting at $45.47 and ending below $41, according to CNN Money.
Ticket prices in the United States, where Delta Air Lines operates, fared better. According to the AP, passengers flew more, but paid about 2 percent less per mile in 2015. The airline predicts average fares will fall between 2.5 percent and 4.5 percent in the first quarter of 2016.
The US experienced the year's first industry-wide fare hike in early January. American Airlines Group, United Continental Holdings, Delta Air Lines, Southwest Airlines Co, and JetBlue Airways Corp each told Reuters they had raised the price $3 for a one-way US domestic flight on Jan. 5.
Delta is also gambling that the prices of oil and gas will stay low. The airline was under contracts for fuel hedges, a financial instrument which protected against increased oil prices, but require payouts when oil prices are low. Chief Financial Officer Paul Jacobson told investors that Delta had exited the contracts early at a cost of $100 million to $200 million per quarter, according to Reuters.
“With over $3 billion in potential savings from lower fuel prices and numerous commercial, operational and cost initiatives already in place, we expect to again perform in the top tier of the S&P Industrials on earnings growth, margins, and cash flows this year despite global economic challenges," Richard Anderson, Delta's chief executive officer, said in the press release.