Bad for ↓
US producer prices rose 1.3% in September, the most since March 2022, largely because energy got more expensive. Fuel is a major cost for airlines. The same energy surge is likely to keep squeezing the profit margins of Delta and United, which both depend on fares to recover it.
Source: Investing.com ↗
When energy is what makes prices jump, the companies that burn the most fuel to do their jobs feel the cost first, before they can raise their own prices.
Producer prices, which track what businesses charge each other, rose 1.3% in September and 6.3% from a year earlier, according to data released October 15. That made a Fed rate hike in December look more likely, and financial markets expect the next hike in December. Energy producers such as Exxon Mobil gain from the higher prices behind the jump. Fuel is a large share of airline costs. In the September quarter, Delta Air Lines (DAL) had an adjusted fuel bill of $4.1 billion, up 62% from a year earlier, about a quarter of its $15.9 billion in adjusted operating costs. On October 9, Delta said it absorbed more than $500 million in fuel costs above its July guidance. Its December-quarter outlook assumes about $4.25 a gallon. United Airlines (UAL) said in July it expected to recover 100% of higher fuel costs through fares by the fourth quarter.
Delta fell 6.9% and United 7.0% over the five trading days to October 15, after Delta's October 9 results showed it absorbing more than $500 million in fuel costs above its July guidance.
Why that may be wrong
Two dates will show how deep the squeeze goes. Delta's December-quarter guidance assumed fuel at about $4.25 a gallon, based on the October 2 forward curve, which is the market's price for fuel delivered later. If fuel stays above that, the guidance is at risk. United reports third-quarter results on October 20 and must show progress on its plan to recover 80% to 90% of the fuel increase in the third quarter and all of it by the fourth. Delta's own refinery partly cushions it, with a benefit of 13 cents a gallon in the third quarter and about 40 cents expected in the fourth.
The link weakens if the oil spike fades. Watch the weekly US diesel price in the weeks after October 12. A clear fall from $6.18 by early November would ease the cost pressure. Another warning sign would be United's October 20 results showing it already recovered most of the fuel increase through fares.
The fuel squeeze on airlines may already be reflected in prices, since both carriers fell about 7% in the five trading days to October 15. Retail sales rose 0.8% in September against 0.3% expected, though most of the gain came from gasoline; excluding gas stations, sales rose 0.2%. United's stated plan is to recover the full fuel increase through fares by the fourth quarter, which could repair its margins if it works.
The last time producer prices rose this fast was March 2022, when energy prices jumped after Russia invaded Ukraine. The Fed began raising rates that month. Rate-sensitive growth stocks fell through 2022, while energy stocks did better.
The producer price report measures costs that have already risen. It does not cause them. Energy made up over 80% of the 2.6% rise in prices of goods sold to final buyers, and jet fuel and diesel were among the products that got more expensive. So the hot number is mostly a fuel story.
Some companies cannot run a single day without burning fuel. Planes need jet fuel, so when it gets pricier, their bills rise right away. Their ticket prices do not automatically rise with them, because fares take time to change.
That's why Delta and United face higher costs on every flight until fares catch up. Delta also owns a refinery, which softens the blow a little, and United says it plans to win the money back through fares. Think of a taxi driver whose gas bill jumps before the meter rates change, which means profits shrink in between.
Earlier connections in the same sector that share a theme with this one.
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