Rewrites the first paragraph, adds comments from earnings call throughout, updates share price

By Rajesh Kumar Singh and Shivansh Tiwary

CHICAGO, July 10 (Reuters) - Delta Air Lines DAL.N sought to reassure investors on Friday that fare gains pushed through during this year's fuel shock can hold even as fuel costs moderate, after the carrier reaffirmed its full-year profit forecast and gave a stronger-than-expected third-quarter outlook.

The forecast from the first major U.S. carrier to report results offers an early read on travel demand beyond the summer season and it focuses on whether airlines can preserve higher fares as fuel costs ease from this year's highs.

The Atlanta-based carrier, however, warned that fuel-price volatility remained a major risk even as it expected revenue strength to continue through year-end.

Shares of Delta and other major U.S. airlines fell as investors weighed bullish demand commentary against renewed fuel-price risk.

Delta shares were down 2% in midday trade, while United Airlines UAL.O, American Airlines AAL.O and Southwest Airlines LUV.N were down between about 1% and 2%.

Savanthi Syth, a Raymond James analyst, said Delta's 2026 forecast was based on last week's fuel forward curve, before the latest escalation in the U.S.-Iran conflict pushed the Brent forward curve higher.

U.S. spot jet fuel has climbed to $3.10 a gallon, moving back above the $3 mark for the first time since mid-June amid renewed hostilities between the U.S. and Iran. Prices remain well below an early-April peak of roughly $4.88 a gallon.

Delta expects its fuel bill to be about $4 billion higher this year than last year. For the third quarter, it is assuming a fuel price of about $3.15 a gallon.

The carrier said it absorbed the highest quarterly fuel expense in its history, with total fuel expense of $4.4 billion, up nearly $2 billion from a year earlier.

Carriers raised fares this spring to offset a surge in jet fuel prices tied to the Iran war, but those increases have not fully covered the hit.

Delta's adjusted pre-tax margin fell four percentage points from a year earlier. The carrier said it recovered about 60% of the fuel-cost increase in the quarter, faster than it has historically, and expects to recover more this quarter.

Chief Executive Ed Bastian said continued fuel volatility and weak industry returns should help keep current revenue momentum sustainable even if fuel prices moderate.

Delta forecast 2026 adjusted earnings of $6.50 to $7.50 per share, above the $5.97 expected by analysts surveyed by LSEG. It forecast third-quarter adjusted earnings of $2.00 to $2.50 per share, compared with analysts' average estimate of $2.02.

Second-quarter adjusted earnings declined 26% from a year earlier to $1.56 per share, but still topped analysts' expectations of $1.48 per share.

FARE GAINS HOLD

Delta's results suggest airlines are driving revenue growth through pricing rather than capacity expansion.

The airline reported revenue growth of nearly 14% in the second quarter on only about 1% capacity growth.

Passenger revenue per available seat mile — a measure of how much revenue Delta generates for each seat-mile of capacity — rose 11% in the second quarter from a year earlier.

Company executives said the industry had "no other choice" but to hold on to pricing and revenue momentum, citing inflation in fuel and non-fuel costs. Bastian said the low-fare airlines still needed to raise fares by about 5% just to break even at current fuel prices.

POST-SUMMER TEST

Analysts say the bigger test for airlines will come after the Labor Day holiday in September, when leisure travel typically softens.

They warn that fourth-quarter capacity plans remain the biggest risk to current fare strength. If too much flying returns at once, carriers could undercut the pricing gains they secured during the fuel shock.

Chief Financial Officer Erik Snell said the airline can adjust flying close-in if demand deteriorates, as it did in the second quarter.