Airline Stocks Are Facing a Fuel Crisis. Premium Carriers Have the Upper Hand

Airlines are paying a lot more to keep their planes flying, but not everyone is feeling the pressure equally. Fuel costs have climbed roughly 60% from a year ago, and the latest earnings show a growing divide between carriers that can charge more for premium seats and those relying on budget-conscious travelers.

Revenue is outrunning capacity

United AirlinesUAL reported record third-quarter revenue of $17.9B, up 17.4% despite increasing capacity by just 1.3%. Its average fuel price jumped 60.3% to $3.90 per gallon, but the airline still delivered an adjusted pre-tax margin of 6.2%.

Delta Air LinesDAL showed similar resilience. Its adjusted revenue rose 16% to $17.6B with capacity unchanged, and the company expects roughly $4.5B in full-year pre-tax profit despite absorbing an additional $6B in fuel expenses.

Both airlines are generating substantially more revenue without adding many seats. That matters when fuel is expensive, because increasing fares and selling higher-value tickets can help protect margins without taking on the cost of operating significantly more flights.

Premium seats are paying off

The biggest difference is who's buying those tickets. Delta's premium revenue climbed 18% to $6.8B in the third quarter, matching its main cabin revenue. Loyalty revenue also increased 18%, while payments from its American Express partnership grew 15%.

Delta expects those card payments to exceed $9B this year, giving it another source of revenue beyond ticket sales.

United is seeing similar demand. Premium revenue rose 17%, while contracted business travel revenue jumped 26%. Both airlines also expect fourth-quarter revenue growth of roughly 20% or more, even as they keep capacity growth limited.

The advantage is becoming clearer. Travelers willing to pay for upgraded cabins and business trips are helping these airlines offset higher fuel costs, while their loyalty programs provide additional revenue.

Budget airlines feel the squeeze

The picture is less encouraging for carriers competing primarily on low fares. JetBlue AirwaysJBLU raised its fuel cost assumption to $3.96 per gallon from $3.49 in September, while reducing its planned capacity growth to between 1.5% and 3.5%.

Its outlook for unit costs excluding fuel also worsened, with the airline expecting an increase of 6% to 8%, compared with its previous forecast of 2.5% to 4.5%. That leaves JetBlue facing higher expenses even before accounting for the latest fuel increase.

The pressure has already claimed one major competitor. Spirit Airlines ceased operations on May 2 after surging oil prices added to its financial difficulties, removing a major ultra-low-cost carrier from the US market.

Who to own through the fuel shock

For investors, Delta and United offer the stronger case for an overweight position. Their premium cabins, corporate travel businesses, and loyalty programs provide more ways to generate revenue as fuel costs climb. JetBlue and American AirlinesAAL look more vulnerable to the pressure on price-sensitive travelers.

But there's a limit to how much airlines can charge. TSA screened 204.2M passengers between June 21 and Sept. 7, down 2.7% from a year earlier, while August traffic fell 4.4%, according to checkpoint data.

That raises the possibility that higher fares are already discouraging some travelers, which could eventually weigh on even the strongest carriers.

For now, the airlines selling more premium seats have a clear advantage. As long as fuel remains expensive, their ability to charge more without adding capacity should give them more room to protect profits.