Rising fuel prices are starting to affect the bottom lines of many U.S. companies whose demand for fuel represents large portions of expenditures.
Delta Air Lines Inc. announced it will cut plans to add new flights in 2016 and will delay plane purchases, reported by CNNMoney on Tuesday morning.
Amid expectations of rising fuel prices throughout the summer of 2016 and beyond, Delta has decided to focus on its long-term goals to address its currently stagnant revenue projections.
Fuel prices are up more than 60 percent from the lowest points experienced earlier this year. Oil has finally rebounded thanks to production cuts throughout the United States. The previously cheap fuel prices persuaded many airlines to expand production levels in order to profit from low costs.
One thing that resulted from the increased expansions among airline companies is that airfares lowered throughout the winter months. When fuel prices were cheapest, the increased number of choices for passengers led to the lower prices.
Fuel prices are still much cheaper than those experienced even a year ago, but the future for fuel prices is trending upwards amidst increased expenses for summer blends and lower levels of oil production.
The moves that are being made by Delta show hints of a responsible management team that isn’t simply taking advantage of lower fuel prices by adding an abundance of seats.
Paul Lamber, an analyst at Tocqueville Asset Management in New York, hinted that Delta Air Lines could be displaying a strategy that will become common in future months.
“For an established airline like them, they should not be growing capacity faster than world GDP. I would expect other airlines to do the same.”
In a report by the Salt Lake Tribune, Delta has said it expects to pay $1.48 to $1.53 a gallon through the current quarter, which is up from $1.33 that was present in the first quarter of 2016.
Passengers shouldn’t expect too much of an increase in airfares this summer. While fuel prices are on the rise, prices are still lower than they were just a year ago.
Delta is currently the only airline to respond to rising fuel prices. Delta explained to CNNMoney that one of its goals is to stop airfares from falling. Passengers might see slight increases in Delta airfares this summer, but any drastic changes should not be expected.
Delta Chief Financial Officer Paul Jacobson talked about the reasons behind slowing growth at an investor meeting on Tuesday morning.
“Trimming capacity growth will help the airline achieve those higher airfares. We are trimming planned capacity growth to below two percent in the second half of this year.”
Another expense of the airline industry is the actual purchase of aircraft. The second cut that Delta will be rolling out in order to address rising fuel prices is the delay of planned aircraft purchases.
Delta had originally planned to receive Airbus SE A350 wide-body aircraft in 2018. However, due the new strategy amid concerns of fuel prices, Delta will be delaying delivery of its new aircraft until 2019 or 2020.
It’s likely many more businesses in the U.S. will begin to alter strategies to address the rising fuel prices throughout the world. Consumers may begin to start seeing subtle price rises this summer.
Americans experienced some of the lowest fuel prices throughout the winter months of 2015 and 2016. Now, oil production is reacting to its devastating revenue losses and prices are expected to reach previous levels in the not-too-distant future.
Expect slight changes to airfares in the coming months; fuel prices are on the rise, and before long, airfares will follow.
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