Delta's Fuel Shock Tests the Limits of Pricing Power

Grant Calloway

Welcome to the Bull Sheet. I'm Grant Calloway. Yesterday I told you today was a test of whether pricing power could survive surging energy costs. Delta Air Lines sat the exam before the bell, and the grade came back early.

Grant Calloway

Delta reported adjusted revenue of $17.58 billion, up 15.7% from a year ago. That's a shade under what the Street wanted, which per Bloomberg was somewhere around $17.7 billion. Adjusted earnings came in at $1.72 a share against $1.82 expected. Adjusted net income was $1.134 billion against $1.23 billion. Shares were down more than 4% before the open.

Grant Calloway

The culprit is fuel. Delta's fuel bill for the quarter hit $4.1 billion, up 62% from a year ago, and that was about $500 million more than the guidance it gave in July. Now it says the full year fuel bill will rise by $6 billion, and it trimmed its full year earnings per share estimate. Back in July, the company was flagging a fuel bill roughly $4 billion higher. So that number grew by half in one quarter. The backdrop, per Yahoo Finance's reporting, is the war with Iran rocking the global oil market.

Grant Calloway

Here's what I find interesting. The planes were full, and premium seating was strong. Revenue grew 15.7%. And it still wasn't enough. Picture a restaurant packed every night with the checks getting bigger, while the produce supplier keeps sending a bill that swallows the tip jar. Pricing power is real. It just isn't infinite.

Grant Calloway

Now the tape. Futures are pointing higher after a messy Thursday. As of early this morning, S&P 500 futures were up roughly 0.3% to 0.4%, Nasdaq 100 futures up 0.7% to 0.8%, and Dow futures up about 0.1%. Thursday was a split tape. The Dow eked out 0.1%, the S&P fell 0.47%, the Nasdaq fell 1.25%, and the Russell 2000 dropped 1.3%. The tech wobble came from a Financial Times report that OpenAI's annualized revenue was about $50 billion at the end of September, short of the $70 billion that had been signaled. Then Bloomberg reported this morning that OpenAI expects to reach or exceed $70 billion by year end. Futures liked that.

Grant Calloway

Oil is the swing factor. Brent is down about 1.2% to around $103 a barrel, after jumping more than 4% Thursday. WTI is near $90.69. President Trump posted that his team is having productive discussions with Iran and won't order strikes before the November third midterms. Brent has pinballed between $96 and nearly $110 over the last month, so I wouldn't call this a trend. ATFX strategist Nick Twidale put it plainly: the big question is whether Trump sticks to his word if Iranian attacks intensify.

Grant Calloway

Rates got a little relief. The ten year yield touched 5.35% Thursday and sits near 5.25% now. The thirty year fell to about 5.60% from 5.73% after a $22 billion auction cleared at a high yield under 5.62%. With the federal deficit near $2 trillion for the fiscal year that ended September thirtieth, buyers showing up counts as good news.

Grant Calloway

Overseas, Europe is firm. The DAX is up 1% near 25,045, the FTSE 100 up 0.9% near 10,539, the CAC 40 up 0.6%. Asia was softer and headed for a second straight weekly drop, with South Korea and Taiwan closed. The dollar is around 158.29 yen, and the euro is flat at about $1.12.

Grant Calloway

Movers beyond Delta. The tower REITs are up. American Tower, Crown Castle, and SBA Communications gained roughly 3% to 4.5% after SpaceX agreed to pay about $8 billion in cash to private equity firm Grain Management for a nationwide block of low band spectrum, per the Wall Street Journal. Bernstein says it keeps alive the possibility that SpaceX builds a ground network. The flip side: carriers got hit. Verizon is down around 5%, with AT&T and T Mobile also lower. And American Express is in focus after a $350 million fine tied to anti money laundering failures.

Grant Calloway

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Grant Calloway

Time for Bull versus Bear. Delta handed us the debate, so let me argue both sides and then tell you where I land.

Grant Calloway

The bull case first. Underneath the macro noise, earnings are strong. FactSet has S&P 500 companies on track for earnings growth of nearly 30% from a year earlier. That would be a third straight quarter above 25%. Enterprise AI demand looks sturdy if OpenAI's $70 billion year end target holds. Deutsche Bank's Jim Reid points out the S&P 500 has risen in 21 of the last 23 midterm cycles, measured from one month before the election to two months after. We just entered that window. Add a thirty year auction that went fine and an oil pause, and the bull says the market has room to breathe.

Grant Calloway

Now the bear, and he's got a very good exhibit. Delta. Full planes, premium pricing, revenue up nearly 16%, and earnings still missed because fuel rose 62%. If one of the best operators in the business can't pass that through, what happens to the companies with less pricing power? Add a ten year yield near 5.25%, borrowing costs that squeeze households, and a deficit near $2 trillion. The bear says nearly 30% growth is a number built before this energy bill fully arrived, and that 2027 margins carry the risk.

Grant Calloway

Where do I land? I'll concede the bear's point on Delta. It's a clean example, and the guidance cut matters. But the bull's rebuttal is that one airline is the most fuel exposed name on the board, and banks, utilities, and energy producers don't carry that same bill. I also notice that the oil pause rests on a promise about Iran that traders themselves don't fully trust. So I'm not calling it. Earnings are strong today, and the cost pressure is real. The question is which one shows up in the guidance when companies report.

Grant Calloway

On deck. At 10 a.m. Eastern, the preliminary University of Michigan consumer sentiment reading for October. The consensus is roughly 47.5 to 48, against 48.1 in September. Watch the inflation expectations too. One year was 4.6% last month and the five to ten year was 3.4%. Last month's survey director, Joanne Hsu, noted jitters over rising prices. If sentiment slips and inflation expectations climb, it adds to Delta's story. Earnings wise, Delta is the headliner and the calendar is otherwise sparse. But it clears the runway for big bank earnings next Tuesday, October thirteenth, when lending margins and dealmaking revenue get their turn. China also releases growth figures next week.

Grant Calloway

What matters most today: whether oil holds near $103 and whether the Michigan number confirms what Delta just told us about the consumer. Both of those decide whether this morning's bounce has legs.

Grant Calloway

Oil is the one cost nobody gets to negotiate, and everybody pays it eventually. I'll be back Monday morning with your Bull Sheet. This podcast is for educational purposes only and is not investment advice.