Global Airlines Face Challenges Amid Rising Fuel Costs
Global airlines are taking steps to manage the sharp increase in fuel prices by raising ticket fares and reducing capacity. However, their ability to maintain profitability could be tested if consumers reduce their travel due to rising gasoline costs affecting household budgets.
Before the recent U.S.-Israeli conflict with Iran, the airline industry had anticipated record profits of $41 billion in 2026. However, a doubling in jet fuel prices has put these projections at risk, forcing carriers to reevaluate their networks and strategies.
Major airlines such as United Airlines, Air New Zealand, and Scandinavia’s SAS have announced capacity cuts and fare increases, while others have introduced fuel surcharges. This shift is a response to the growing financial pressure caused by soaring fuel costs.
A Perfect Storm for Airlines
Rigas Doganis, who previously led Greece’s former national carrier, Olympic Airways, and served as a director of Britain’s easyJet, highlighted the challenges facing the industry. “Airlines face an existential challenge,” he said. “They will need to cut fares to stimulate weakening demand while higher fuel costs will be pushing them to increase fares. A perfect storm.”
Doganis, now chair of London-based consultancy firm Airline Management Group, emphasized that the situation requires careful balancing of pricing and capacity adjustments.
Record Passenger Traffic and Supply Chain Issues
Last year, the industry reported record global passenger traffic, which rebounded to about 9% above pre-pandemic levels despite persistent supply-chain challenges that affected plane deliveries. The strong post-pandemic demand for travel, combined with supply-chain constraints, allowed airlines to maintain significant pricing power by filling more seats on each flight.
However, the scale of the price increases needed to offset the surge in jet fuel costs is substantial, especially as consumers face pressure from higher gasoline prices that could limit discretionary spending.
Andrew Lobbenberg, head of European transport equity research at Barclays, noted, “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.”
Impact of Higher Ticket Prices
United Airlines CEO Scott Kirby recently told ABC News that fares would need to rise by 20% to cover the increased fuel costs. Hong Kong’s Cathay Pacific Airways has raised fuel surcharges twice in the last month, with a return trip from Sydney to London now attracting an $800 fuel surcharge. Before the Iran conflict, a similar round-trip economy-class fare on the route was approximately A$2,000 ($1,369.60).
Low-cost carriers may face the greatest challenges, as their passengers are more sensitive to price changes compared to corporate customers and wealthy travelers targeted by premium airlines like Delta Air Lines and United Airlines.
Nathan Gee, head of Asia-Pacific transport research at Bank of America, said, “For the more price-sensitive travellers, even the short-haul flying trip gets downgraded, potentially to rail or to bus or other alternatives.”
Historical Context: Oil Shocks and Industry Adjustments
The Middle East conflict represents the fourth oil shock for the airline industry since the turn of the century, though it is the first in which carriers like Vietnam Airlines have expressed concerns about securing physical supplies of fuel due to the closure of the Strait of Hormuz.
Previous oil shocks occurred in 2007-2008 before the global financial crisis, after the Arab Spring around 2011, and following the Russia-Ukraine war in 2022. These events prompted airlines to make strategic adjustments, including mergers between 2008 and 2014, such as Delta-Northwest and American Airlines-US Airways, which reduced the number of major U.S. airlines from eight to four.
Low-cost carriers like Ryanair and India’s IndiGo have also adapted by using single-aircraft fleets and fast turnarounds to keep unit costs low. Replacing older, less efficient planes with more fuel-efficient models is another strategy to reduce costs, but delays in plane deliveries due to supply chain issues and problems with new-generation engines have hindered progress.
Dan Taylor, head of consulting at aviation advisory firm IBA, noted that the current oil shock is 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. “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)
