Airlines are slashing capacity and raising fares after a doubling in jet fuel prices since the outbreak of the Iran conflict upended an industry that had been on course for record profits, with analysts warning that financially weaker carriers face the steepest climb ahead.
The industry had forecast profits of $41 billion for 2026 before hostilities began last month. That outlook is now under pressure, with carriers from United Airlines to Air New Zealand and Scandinavia’s SAS announcing capacity reductions, fare increases or fuel surcharges.
United Airlines CEO Scott Kirby said last week that fares would need to rise 20% to cover the higher fuel costs. Cathay Pacific has lifted its fuel surcharges twice in the past month; a return fare from Sydney to London now carries an $800 surcharge on top of a round-trip economy ticket that previously cost roughly A$2,000.
“Airlines face an existential challenge,” said Rigas Doganis, former head of Olympic Airways and a former easyJet director, who now chairs London-based Airline Management Group. “They will need to cut fares to stimulate weakening demand while higher fuel costs will be pushing them to increase fares. A perfect storm.”
Low-cost carriers most exposed
Budget airlines are considered most vulnerable, given their reliance on price-sensitive passengers at a time when rising petrol costs are already squeezing household budgets.
“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,” said Nathan Gee, Bank of America’s head of Asia-Pacific transport research.
Barclays’ head of European transport equity research, Andrew Lobbenberg, said capacity cuts were the industry’s primary lever. “The only way to get prices up is to reduce capacity,” he said. “That is what I would expect to see happen this time.”
Fourth oil shock since 2000
The disruption marks the fourth oil shock for aviation this century — following crises in 2007-08, around 2011 and after Russia’s invasion of Ukraine in 2022 — though it is the first in which some carriers have raised concerns about securing physical fuel supplies following the closure of the Strait of Hormuz.
Airlines have few quick fixes. Replacing older, less fuel-efficient aircraft is the obvious long-term solution, but pandemic-era supply chain disruptions and engine problems have delayed deliveries. New planes have arrived too slowly even for carriers that invested heavily in fleet renewal.
Dan Taylor, head of consulting at aviation advisory firm IBA, said the shock would widen the gap between strong and weak operators. “Carriers with robust balance sheets, strong pricing power, and reliable access to capital are better positioned to absorb ongoing pressures,” he said. “Airlines with low profitability and limited funding options may face increasing financial stress.”
(Reuters)
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