Will High Air Fares Sour Demand?

Delta Air Lines (NYSE:DAL) and US Airways (NYSE:LCC) both said they expect demand to soar this summer in spite of higher fares as they reported first-quarter results on Wednesday.

Both airlines — the first of the legacy carriers to report quarterly profits – said that demand is strong heading into the summer travel season, which should mean full planes and higher ticket prices. Delta, the second-largest airline in the U.S., said passenger revenue per mile on its main jet operations climbed 15 percent for the quarter, and US Airways reported a gain of 7.1 percent on the same basis.

Both carriers capitalized on continued demand by raising fares after the winter holidays. Delta said it plans to cut flights by as much as 3 percent in the second quarter in hopes that a dearth of available seats will prompt passengers to pay more for tickets.

“The next two quarters are going to be gangbusters,” said Ray Neidl, an analyst for Maxim Group LLC in New York. ”Demand remains strong. Unless something happens to really drive up oil prices, you’re going to see margins continue to move up because you’ll see more fare increases.”

Delta’s revenue was up 8.6 percent for the quarter to $8.41 billion, compared with an $8.36 billion average estimate from analysts. Fuel surpassed labor to become the company’s biggest expense for the quarter, with a fuel bill of $2.23 billion, a 3 percent jump from the previous year.

Revenue for the Tempe, Arizona-based US Airways was up 10 percent for the quarter to $3.3 billion. Fuel costs and related taxes rose 17 percent for the company, the Dallas Business Journal reported. Delta earned $124 million for the quarter, while US Airways earned $48 million.