American Airlines has significantly revised its earnings forecast downwards, citing a substantial increase in its projected fuel bill by almost $1.6 billion. This reversal comes after the airline initially prepared to raise its 2026 earnings outlook earlier in the month, a shift attributed to the rapid surge in jet fuel spot prices, which jumped nearly 30% between July 2 and July 22. The company's CFO, Devon May, noted that if they had issued their guidance on the same day as Delta (July 10), they would have been forecasting an increase, but instead, they lowered their full-year earnings forecast to a range from a loss to a profit, with breakeven at the midpoint.
The airline business faces a fundamental challenge: fuel markets can fluctuate sharply in days, while fare increases take weeks or months to implement. Despite record quarterly revenue and strong unit revenue growth forecasts for the second half of the year, American's thinner margins compared to competitors like Delta and United leave it with less capacity to absorb higher fuel costs. May highlighted that every one-cent increase in American's average fuel price adds about $46 million to its annual expense, with a 10-cent increase costing roughly $460 million.
Other airlines have also been affected, albeit with varied responses depending on when their forecasts were issued. Delta maintained its annual earnings outlook, while United raised the lower end of its forecast last week. However, Southwest Airlines lowered its outlook, and Alaska Air declined to restore full-year guidance. United's CEO, Scott Kirby, noted a similar last-minute shift, stating that a $575 million increase in its expected third-quarter fuel bill since July 1 forced a change in guidance policy to use the latest fuel prices. Alaska Air's finance VP, Ryan St. John, emphasized the difficulty in predicting fuel prices, noting that a 25-cent change in average fuel cost could shift quarterly earnings by about 50 cents per share.
While airlines have been able to recover some of the increased fuel costs through higher fares—American offset nearly half of a $2.2 billion year-over-year increase in Q2 fuel expense, Delta recovered about 60%, and United about 50%—the renewed surge in prices is testing the speed of this recovery. The airline industry generally sees fuel accounting for 25% to 30% of overall costs. The pressure on margins means that airlines, particularly American, might need to trim less profitable flying, slow debt reduction, and constrain investment if fuel prices remain elevated. United's CEO, Scott Kirby, mentioned plans to recover 100% of fuel costs and achieve double-digit margins by 2027, but acknowledged that achieving 100% recovery in the current year is unrealistic.
