By Shivansh Tiwary
Oct 22 (Reuters) - US airlines are entering the final quarter of the year with a central problem: resilient passenger traffic and sharply higher fares have not been enough to fully offset soaring fuel costs.
Third-quarter results from most of the US carriers revealed that the steady demand for air travel has allowed airlines to raise ticket prices and generate record revenue, but the surge in jet fuel expenses has pressured margins and prompted these companies to take a more cautious
view on profit and capacity growth.
The S&P Passenger Airlines index is down nearly 3% this year, sharply underperforming the benchmark S&P 500's gain of more than 13%.
"The fourth quarter is shaping up to be an operationally tough quarter with jet fuel prices expected to remain elevated, diminished capacity plans, but durable revenue trends from consumers," Third Bridge analyst Liam Dorsey said.
"The big question that remains is how long consumer resiliency lasts."
As the war in Iranstretches into its eighth month, US carriers must also determine how much more of the fuel cost surge they can pass on to customers without weakening travel demand.
US air fares rose an average of nearly 23% year-on-year in the seven months through September, according to Labor Department data.
HIGH TICKET PRICES NOT ENOUGH TO SHIELD PROFITS
Among the Big Four, Delta Air Lines, Southwest Airlines and American Airlines lowered their 2026 earnings forecasts, with airfares yet to fully catch up to the sharp spike in fuel costs.
Airlines now expect to pay between $4.25 and $4.85 a gallon, up from well below $4.00 a gallon in the third quarter.
United Airlines, which does not provide a full-year forecast, projected fourth-quarter profit well below Wall Street expectations. It only recaptured 72% of additional fuel costs through revenue gains in the third quarter.
Meanwhile, all four airlines reported record third-quarter revenues, reflecting the impact of higher ticket prices.
Alaska Air, a smaller rival, forecast a bigger fourth-quarter loss than expected. JetBlue Airways and Frontier Airlines are set to report their third-quarter results next week.
MORE PRICE HIKES, CAPACITY CUTS COMING
Earlier this year, airlines expressed confidence that higher fares, ancillary revenue and loyalty-program income would allow them to recover most of the increase in fuel bills. That confidence has since faded as fuel costs rose faster than expected.
The results show the growing gap between what airlines can charge and what they are paying for fuel.
With scope to raise fares constrained by the risk of dampening demand, carriers are turning to tighter capacity plans to preserve pricing power and limit the hit to margins.
Delta CEO Ed Bastiansaid earlier this month that airlines may need to curb flight growth further next year to sustain higher fares and protect profitability. American said it expects network growth to slow in 2027 compared with this year.
Across the Atlantic, Ryanair chief Michael O'Leary struck an even more cautious tone, saying European airfares could see their "biggest increase in history" next year.
United CEO Scott Kirby on Wednesday warned that the industry could undergo further structural change by the end of next year.
Earlier this year, ultra-low-cost carrier Spirit Airlines shut down, becoming the aviation industry's first casualty linked to the war, while JetBlue has also faced financial strain from high fuel costs.
"United's amped-up rhetoric on accelerating structural change at the industry level conforms with our prevailing thinking that something has to give, should fuel prices remain in the $5/gallon range," J.P.Morgan analysts wrote in a note.
"Whether that manifests in regime change at American, further industry consolidation, a JetBlue restructuring (as the market is increasingly implying), or something we haven’t yet considered, we remain of the view that Delta and United eventually emerge as the presumptive victors."
(Reporting by Shivansh Tiwary in Bengaluru; Editing by Devika Syamnath and Arpan Varghese)
