Delta expects higher fares and strong demand through the holiday season

By Chris Isidore, CNN

(CNN) — Delta Air Lines reported a huge jump in fuel costs, but said passengers are continuing to book flights despite the significantly higher airfares.

That’s why Delta is betting travelers will keep paying more to fly this holiday season.

The airline, the first major carrier to report financial results, said its jet fuel costs jumped 60% in the third quarter, a $1.6 billion increase compared to a year ago.

Fuel is the second largest cost for airlines, behind only labor.

But passengers also paid about 15% more to fly, Delta said, offsetting the higher cost fuel to report a slight increase in net income.

“To not to dent those profits, to me is incredible,” said CEO Ed Bastian in an interview on CNBC early Friday after reporting third-quarter results. “In past cycles, past shocks, if we saw a 60% increase in fuel prices, we’d be flat on our back.”

But Bastian said the demand to fly remains strong, despite the sharply higher fares. He expects both to continue through the rest of this year and into the next.

Experts in the field agree. Passengers are booking holiday travel earlier this year than in past years, said Hayley Berg, lead economist at travel site Hopper. And they’re paying more to do so.

“Thanksgiving already averaging $400 a ticket, up 31% year over year,” she told CNN ahead of the Delta report. “Christmas, which is always about $50 more expensive than Thanksgiving, about $450, up 23% year over year.”

Bastian told investors on a call Friday that even if jet fuel prices retreat, he doesn’t expect fares to decline.

“Fuel has been the impetus for the industry to move quickly to adjust the pricing environment,” he said. “But given the fact that the market has accepted these price points… I think where we’re at is very sustainable.”

Earlier this year, Delta and other airlines did not lower their fares even when the price of jet fuel retreated following a spike in the Spring due to the war in Iran. Fuel has started to climb back up since then, and Bastian said he expects higher fuel costs to remain high through the fourth quarter.

Airlines can’t just pass on higher costs in the form of higher fares when its costs rise unless there remains customer demand to travel. But higher fuel prices do lead airlines to cut their planned schedules, eliminating flights that were barely profitable even before the spike in fuel costs.

For Delta, much of the increase in fares and revenue comes from passengers who are willing to pay for premium seats on planes. The revenue from premium seating rose 18%. Bastian said the households in the top 40% in terms of income “are basically our customers.”

Despite the strong demand, the available seats on Delta during the just completed summer travel quarter was essentially unchanged from a year ago. And that limited number of seats, in the face of strong demand, led to 86% of available seats being full throughout the quarter, and upward pressure on fares.

Delta’s earnings were slightly below Wall Street forecasts and it lowered its guidance for the rest of the year. Shares of Delta (DAL) and almost all other US airlines fell slightly in morning trading.

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