What happened
On Wednesday, Delta Air Lines (DAL 1.26%) sounded the alarm about rising fuel costs. Investors reacted by sending shares of the entire airline industry down, with Spirit Airlines (SAVE +0.00%) shares falling as much as 5% during the day's trading.
So what
The airline industry was hit hard by the pandemic, but has slowly made its way back in 2021 as vaccination rates climbed and more people started traveling again. On Wednesday, Delta said that it generated a profit for the third quarter. But the airline also provided a warning that the recovery will not be without turbulence.
Image source: Spirit Airlines.
Delta said it expects to pay an average of $2.40 per gallon for fuel in the current quarter, up from $1.94 per gallon in the recently completed third quarter. Fuel is the biggest non-labor cost for airlines, so the added few pennies will make a real difference. The additional cost is likely to push Delta into the red in the fourth quarter, even if COVID-19 infection rates continue to decline and demand continues to grow.
Delta is the first airline to report quarterly results, and investors are anticipating that other airlines will face the same issues it sees. Delta is still seeing reduced demand, especially for international travel. Compared to the third quarter of 2019, domestic revenue was down 28% and international was down 58%.
Now what
The good news is the airlines are seeing a recovery from the pandemic. The bad news is this is still a difficult industry. Delta's warning caused share declines at a number of carriers including American Airlines Group and United Airlines Holdings, but Spirit fell more than any of them.
Spirit is an attractive investment in part because its costs are among the lowest in the industry, meaning it can win price wars against other airlines. But fuel can be a great equalizer: Spirit's cost advantages are mostly due to labor and operational efficiencies. In an environment where fuel costs are driving fares, and not non-fuel costs, it is harder for Spirit to stand out.
For long-term minded investors, there is still a lot to like about Spirit's competitive position and growth potential. But if the last year and a half has shown anything, it is that nothing ever comes easy in the airline industry. Spirit shares reflected that reality on Wednesday.
