Airlines Face a Perfect Storm
Global airlines are taking steps to increase fares and reduce capacity in response to the sudden rise in oil prices. However, the industry’s ability to maintain profitability may depend on whether consumers reduce their travel as gasoline costs impact household budgets.
Before the recent U.S.-Israeli conflict with Iran, the airline industry had anticipated record profits of $41 billion for 2026. However, the doubling of jet fuel prices has placed these projections at risk, forcing carriers to reassess their networks and strategies.
Airlines such as United Airlines, Air New Zealand, and Scandinavia’s SAS have announced capacity cuts and fare hikes, while others have introduced fuel surcharges. Rigas Doganis, who previously led Greece’s former national carrier, Olympic Airways, and served as a director of Britain’s easyJet, stated that airlines face an existential challenge.
“They will need to cut fares to stimulate weakening demand while higher fuel costs will be pushing them to increase fares. A perfect storm,” said Doganis, who now chairs London-based consultancy firm Airline Management Group.
Record Passenger Traffic
Last year, the industry reported record global passenger traffic, which rebounded to about 9% above pre-pandemic levels despite persistent supply-chain challenges affecting deliveries of new planes.
The strong post-pandemic demand for travel, combined with supply-chain constraints, limited capacity growth and gave airlines significant pricing power as they filled more seats on each plane. However, the scale of increases needed to offset the jet fuel price surge is substantial at a time when consumers are under pressure from higher gasoline prices that could curb discretionary spending.
Andrew Lobbenberg, head of European transport equity research at Barclays, said, “The only way to get prices up is to reduce capacity.” He added, “That is what I would expect to see happen this time, and it’s what we saw in the previous occasions when we had other crises; people just have to start trimming capacity.”
Higher Ticket Prices
United Airlines CEO Scott Kirby told ABC News last week that fares would need to rise 20% for the airline to cover the higher fuel costs. Hong Kong’s Cathay Pacific Airways has lifted fuel surcharges twice in the last month, and from Wednesday, a return trip from Sydney to London will attract an $800 fuel surcharge. Before the Iran conflict, a normal round-trip economy-class fare on the route was roughly A$2,000 ($1,369.60).
Low-cost carriers could struggle the most given their passengers are more price-sensitive than the corporate customers and wealthy consumers who have been increasingly targeted by premium rivals like Delta Air Lines and United Airlines, analysts say.
Nathan Gee, head of Asia-Pacific transport research at Bank of America, said, “I think for the more price-sensitive travellers, even the short-haul flying trip gets downgraded, potentially to rail or to bus or other alternatives.”
Oil Shocks
The Middle East conflict is the fourth oil shock for the airline industry since the turn of the century, though the first in which carriers like Vietnam Airlines have expressed concern about securing physical supplies of fuel due to the Strait of Hormuz closure.
There was one in 2007-2008 before the global financial crisis dented demand, another after the Arab Spring around 2011, and a third after the Russia-Ukraine war broke out in 2022.
A series of mergers between 2008 and 2014, such as Delta-Northwest and American Airlines-US Airways, reduced eight major U.S. airlines to four and brought on the era of tighter capacity control, while low-cost carriers such as Ryanair and India’s IndiGo leaned on single-aircraft fleets and fast turnarounds to keep unit costs low.
Replacing older, thirstier planes with more fuel-efficient models is an obvious way for carriers to reduce costs, but a severe supply-chain shortage in the wake of the pandemic and issues with new-generation engines have delayed deliveries.
Dan Taylor, head of consulting at aviation advisory firm IBA, said the current oil shock was expected to widen the gap between financially strong and weaker airlines.
“Carriers with robust balance sheets, strong pricing power, and reliable access to capital are better positioned to absorb ongoing pressures,” he said on the firm’s website. “In contrast, airlines with low profitability and limited funding options may face increasing financial stress.”
($1 = 1.4603 Australian dollars)
(Reporting by Rushil Dutta, Sameer Manekar and Yadarisa Shabong in Bengaluru; Additional reporting by Shivansh Tiwary in Bengaluru, Joanna Plucinska in London and Julie Zhu in Hong Kong; Editing by Jamie Freed)
