Airline fares may remain elevated despite lower fuel costs after US-Iran deal

WASHINGTON: Airlines could save billions of dollars on jet fuel after an interim peace arrangement between the United States and Iran pushed oil prices down, but travellers may not get quick relief on ticket prices as limited seat growth is giving carriers room to preserve higher fares.

The clearest example is the United States, where fare increases have not kept pace with this year’s jump in fuel costs, according to the Reuters report carried by Dawn. Domestic capacity growth also remains constrained, allowing airlines to use cheaper fuel to repair profitability instead of rolling back recent fare hikes.

US jet fuel spot prices were at $2.85 a gallon on June 17, down sharply from an early April peak of $4.88. Reuters calculated that, if such a decline is sustained, it would reduce the annual fuel bill of the US airline industry by more than $40 billion based on industry fuel consumption.

Fares still trail fuel increase

As jet fuel became more expensive, US airlines increased ticket prices and baggage charges while trimming schedules, but those measures recovered only part of the added fuel burden. Industry figures showed jet fuel prices rose more than three times faster than airfares from January to May.

Deutsche Bank estimated that US carriers would recover only about 60 cents for every extra dollar spent on fuel, with $14.4 billion in higher revenue against $24.1 billion in additional fuel costs. Alaska Air said it had recouped about one-third of the increase, while Delta Air Lines, United Airlines and American Airlines said second-quarter recovery was around 40pc to 50pc. JetBlue Airways and Frontier Group said they expected to recover less than half.

United chief executive Scott Kirby said his airline was moving closer to making up for the fuel-cost spike through pricing.

“We’re on a path to recovering 100pc by the end of the year.”

Raymond James data showed average domestic fares booked one week before travel were 34.1pc higher than a year earlier as of June 8. Melius Research analyst Conor Cunningham said the main issue now is whether airlines can maintain those fare increases as fuel prices soften.

"What remains crucial is the ability to hold price,"

He added that lower petrol prices could reduce consumer frustration over expensive air travel.

Regional impact may differ

Outside the US, any easing in fares is expected to vary by market. Lower crude prices may take time to affect jet fuel costs, and unless jet fuel retreats toward levels seen at the start of the year, airlines are likely to keep fares firm or raise them further where demand supports that, according to Dudley Shanley, head of aviation and travel research at Dublin-based Goodbody.

In Europe, long-haul ticket prices may be more likely to soften because airlines were more successful in passing through higher fuel costs on those routes, RBC analyst Ruairi Cullinane said. Short-haul fares, however, may stay stronger if the peace agreement boosts bookings and demand.

HSBC analysts said in Asia that China’s three biggest airlines face weak pricing power and lower aircraft utilisation, while Hong Kong’s Cathay Pacific is in a stronger position because higher fares, cargo revenue and premium demand may help offset fuel costs.

The Middle East appears to be the main exception because the conflict disrupted traffic flows. Aviation analyst John Strickland said some carriers could use promotions to attract passengers back, though fuel remained too costly for broad discounting. He added that airlines in the United Arab Emirates may be able to move more aggressively and may enjoy stronger government support.

Lower fuel may boost earnings before fares fall

How much airlines gain from the decline in fuel prices will depend on how long it lasts, because fuel expenses reflect purchases made over time rather than current spot prices. Even after the recent drop, jet fuel is still 54pc more expensive than a year ago, according to the International Air Transport Association.

Southwest Airlines chief operating officer Andrew Watterson captured that pressure when he was asked by Reuters when the airline could return to pre-pandemic margins.

"When’s fuel going to go down?"

That dynamic leaves airlines with little reason to reduce fares while they are trying to rebuild earnings. Jefferies estimated that every 5pc drop in its roughly $3-per-gallon 2027 fuel-cost forecast would raise projected earnings per share by 10pc to 15pc for Delta, Southwest and United, and by as much as 50pc for American Airlines.

Capacity limits reduce chance of fare war

In previous US fuel-price cycles, falling oil prices often triggered competition through capacity expansion that then pushed fares down. Those conditions are not widely present now. Delays in aircraft deliveries, limited airport capacity and weaker low-cost carriers are reducing the likelihood of a broad fare war in the domestic US market.

Industry data showed US domestic airline seats are scheduled to grow just 0.4pc year-on-year in the third quarter, down from 4.6pc expected before the latest tensions in the Middle East. JP Morgan analysts said limited aircraft deliveries and pullbacks by budget airlines lower the risk of what they called meaningful capacity creep in the US, giving airlines an unusually strong ability to hold current pricing.

For passengers, any fare relief may depend less on fuel alone and more on whether consumer demand remains resilient. Shanley said the outlook ultimately depends on travellers’ spending strength.

"This is very much subject to the strength of the consumer,"