The
price of oil approached $100 a barrel on Monday before lowering slightly to
$91.11 at the market's close on Tuesday, a reprieve based on vague (and already conflicted) assurances from the Trump administration that the military action in the Middle East, initiated by the United States and Israel at the very end of February, might be past its peak. What we know right now is that oil reserves, production facilities and refineries—as well as the routes by which oil is exported from the Middle East to the rest of the globe—have been targeted in the violence. Whether prices will level beneath the $100-mark or shoot well above that level is a guess right now. But the world is watching, and that includes airlines whose fortunes historically have been tied to crude prices. Will the travel industry see airfares spike? Is oil the only contributing factor?
The Argus U.S. Jet Fuel Index,
available on the Airlines for America's website, shows that the average
jet-fuel price for Chicago, Houston, Los Angeles and New York has increased to
$3.67 a gallon on March 10 from $2.50 a gallon on Feb. 27, the day before the
U.S.-Israel incursion into Iran.
But the industry has seen $100 a barrel oil prices before, most
recently in March 2022 after Russia invaded Ukraine. It also exceeded that
level in September 2013 thanks to tensions in Syria, in February 2012 over Iran's
nuclear program and European Union sanctions and threats to block the Strait of
Hormuz, during the Arab Spring of April 2011 coupled with Libya's civil war, and in July
2008, when oil exceeded $145 a barrel due to increasing demand from developing
countries, including China and India.
Looking at historical inflation data, U.S. airfares did
increase about 30 percent year over year in 2022, but the Ukraine invasion and subsequent
rise in oil prices coincided with the phenomenon known as "revenge
travel" following the pandemic. Demand was exceptionally high, which
likely would have increased prices even without oil spiking.
Airfares rose about 2.5 percent year over year in 2013 and
0.3 percent in 2012, so there's not much correlation between oil prices and
airfares for those periods. Average ticket prices did, however, increase about 9.3
percent in 2011 compared with 2010, and were up about 12 percent in 2008
compared with a year prior.
Still, jet fuel accounts for anywhere on average from 20
percent to 30 percent, sometimes more, of an airline's total operating
costs—second only to labor—and that percentage can go up when oil prices rise,
and down when they decline. And now some carriers have had to reconfigure
flight routes to avoid Middle East air space, which adds time and fuel costs to
each flight. The same issue has affected routes that used to fly over Russian
air space for the past four years.
The portion of airline costs attributed to jet fuel is "significant since the airlines run on quite thin margins,"
GoldSpring Consulting partner Neil Hammond told BTN. When asked if higher
airfares were around the corner as a result, he replied that "the big
question is going to be, how long does this [Iranian situation] last? It really
depends on the duration and the outcome."
One of the outcomes could be much more stability around the
Strait of Hormuz, "which would have a good impact on oil prices longer
term," Hammond said.
Fuel Surcharges
Before the stability, though, there is the risk of fuel
surcharges.
On Tuesday, Air India announced a "phased expansion of
a fuel surcharge" on tickets because of the steep rise in jet fuel prices.
As a sample, for Africa routes, the new surcharge will be $90, up from $60. For
Europe, it will be $125, up from $100. And for North America and Australia, it
will be $200, up from $150, according to the carrier.
Airline fuel surcharges are not new. They first were
implemented in 2004 to offset increased oil prices and were supposed to be
temporary, "but it never went away, did it?" Hammond said. "Some
airlines renamed it a carrier surcharge, and despite how low oil prices have
been or how stable they've been for good parts of the last two decades, they
never took that surcharge away."
Flat-fee surcharges insulate airlines from corporate percentage
discounts, Hammond said. If the fee were a percentage, the value of it would
decrease as airfares decrease, but if it's a flat fee, the corporate discount
doesn't apply to it, he said.
Where an airline is based also is a factor on surcharges as
currency exchanges come into play. Most carriers purchase their aircraft in
U.S. dollars or euros. The price of fuel is based on the U.S. dollar. But
carriers outside of the U.S. and Europe have most of their revenue in
currencies other than the dollar or euro.
Hammond gave Turkish Airlines as an example. "They're
going to have some revenue based in dollars because they fly to the U.S., but
most of their revenue is going to be in Turkish lira," he said. "The Turkish lira has been weakening ... for many years, so their
revenue base goes down, but their cost base goes up. So that's impacted them.
Japan's another one. Brazil is another one. Some of those airlines have
suffered due to currency fluctuations, and this will just compound that."
Case in point, Air New Zealand has suspended its fiscal year
2026 guidance, issued just weeks ago, and announced increases to its ticket
prices, citing fluctuating jet-fuel prices, according to multiple reports. Qantas
is raising fares on international routes due to fuel spikes, and Scandinavian
Airlines also has implemented a "temporary" fuel-related price
increase.
Carrier Response
While there haven't been any reports yet of U.S. carriers
raising prices or increases fuel surcharges, United Airlines CEO Scott Kirby on
March 6 said that the recent increase in fuel prices "will have a
'meaningful' impact on the carrier's financial results this quarter," according
to CNBC, but that "demand has been resilient."
Lufthansa Group CEO and chairman Carsten Spohr during an earnings presentation last week
said prolonged airspace closures over the Middle East and Russia will
lead to longer travel distances, “which means higher prices, but the
market determines the price and this goes for fuel prices as well”.
Lufthansa
financial chief Till Streichert added that the group’s “solid” fuel
hedging strategy will “give us a competitive advantage in an environment
of rising oil prices”. The airline group’s hedging ratio for 2026 and
into 2027 is 81 percent.
“What’s decisive at the end of the day
is how we compare to our competitors,” Streichert said. “Even if we’re
in for a higher fuel bill, I believe we are in a good position.”
European
rival IAG, which owns British Airways, also has a fuel hedging policy,
which operates on a three-year rolling basis. According to its latest
earnings report, published on Feb. 27, the group has hedged 62 percent of its expected fuel costs for 2026.
Some U.S. carriers used to engage in fuel hedges, but Southwest
Airlines was the last major U.S. carrier to do so, and it announced in 2025
that it had discontinued that practice. On a July 24, 2025, earnings call,
Southwest CFO Tom Doxey said that "we recently terminated our remaining
hedge portfolio for cash proceeds of $40 million, which reduced our future
premium expense through 2027." As of June 30, 2025, "the company had
no fuel hedging contracts outstanding," according to the carrier.
Delta Air Lines, though, owns a refinery, located in
Pennsylvania, which works like a hedge for the carrier. The facility can refine
about 200,000 barrels of crude oil per day, "or approximately 75 percent
of our consumption, for use in our airline operations through the production of
jet fuel and through exchanges and sales of gasoline and diesel fuel produced
by the refinery," according to a Feb. 11, 2026, Securities and Exchange
Commission filing.
Still, it remains to be seen whether the Middle East
situation and oil price increases will lead to higher airfares. The increased
costs likely will negatively affect airlines' bottom lines for the first
quarter, and possibly the second quarter if the war in Iran persists.
TD Cowen lowered its estimates for the largest six U.S.
carriers and for Air Canada "as we mark our fuel estimates to
market," according to a March 9 industry update. "It's possible the
airlines will use a sell-side conference next week to revise 1Q guidance and/or
pull FY guidance, though we can also envision punting to April to have a better
outlook for where fuel prices are settling in and how bookings are responding."
But there isn't anything a travel manager can do at the
moment. "It's really out of their hands," Hammond said. "For the
most part, they don't control the travel budget. That's local managers and
cost-center owners. So, if there's a spike in prices and people take trips
during this time, then what's going to probably happen is that instead of some
department having 10 travel trips planned before the end of the year, they're
only going to do nine. They'll have to spread [the budget] out over fewer
trips."
And if there is an increase in airfares?
"I think anything we see is going to be very, very
short term," Hammond said. "Ultimately, [the airlines] can raise
prices, but it has to be on the supply and demand model. If they start just
raising prices on a cost-plus basis and the demand isn't there, then they're
just going to end up with a bunch of unsold seats."
____________________________
- Article updated Mar. 11 at 11:25am ET; additional reporting from Lauren Arena