Why flights are becoming more expensive after a hike in jet fuel

The surge in fuel prices since the attack on Iran by the United States and Israel almost two weeks ago is already driving up airfares. Consumer appetite for travel this year will determine just how much.

Cathay Pacific announced on Thursday that it would roughly double fuel surcharges on tickets from March 18.

Earlier this week, Australian company Qantas said it In raising fares to help cover its costs, Scandinavia Airlines said the “unusually rapid and substantial increase” in fuel had prompted it to raise prices, and Air New Zealand withdrew its financial outlook “until fuel markets and operating conditions stabilize”, adding that it had made “initial fare adjustments”.

“If the dispute results in continued increases in jet fuel costs, the airline may need to take additional pricing action and adjust its network and schedules if necessary,” Air New Zealand said.

CEOs and other executives of U.S. airlines will brief investors Tuesday at the JP Morgan Industrials conference in Washington, DC.

Analysts expect profits at least in the first quarter, if not the first half, although the impact will depend on how long the fuel price hike lasts.

“We believe that at this stage, an impact on first-quarter EPS appears almost certain,” UBS airline analysts Atul Maheswari and Thomas Wadewitz wrote in a note last week.

United Airlines CEO Scott Kirby said last week on the sidelines of an event at Harvard University that higher rates were likely coming because of soaring fuel prices.

Kirby said travel demand, however, remained strong. Two other senior U.S. airline executives, speaking on condition of anonymity because they were not authorized to speak to the media, also said travel demand had held up. If these trends persist, airlines could benefit from greater pricing power, but this will depend on how long the war lasts.

“Airlines have never priced higher than they wanted to,” said Scott Keyes, founder of flight sales company Going, formerly known as Scott’s Cheap Flights.

So what should consumers do?

Keyes said travelers can’t lose out by booking early, as long as they don’t buy restrictive basic economy tickets. This way, customers can try to exchange or cancel their tickets and buy cheaper ones if airfares eventually drop.

“If you book a $500 summer flight today and in two weeks the price drops to $350, you can call the airline and get the $150 difference back as a credit. Heads, you win, tails, the airlines lose,” he said.

Jet fuel represents airlines’ largest cost after labor, accounting for about a fifth or more of expenses, depending on the airline.

United alone spent $11.4 billion last year on fuel, at an average price of $2.44 per gallon, according to a securities filing. As of Wednesday, U.S. jet fuel was $3.78 per gallon, according to Platts.

Sheila Kahyaoglu, an analyst at Jefferies, said in a note Thursday that she expects “the most acute financial impact for airlines from rising oil prices to occur in the next 30 to 90 days, as airlines have booked yields for closely spaced flights assuming much lower fuel prices and carriers cannot increase fares retroactively.”

She said Delta Airlines and United, which generate most of U.S. airline profits, are better positioned than other carriers because of their premium demand. Risks to demand, particularly for the most price-sensitive customers, include the recent rise in gasoline prices.

Jet fuel has more than doubled in some areas since the first US-Israeli attacks on Iran on February 28.

Oil prices reached highs about four years after the first strikes. Energy prices have fluctuated wildly since then, as traders assess how long the war – and all the logistical problems – might last.

U.S. jet fuel prices rose more than 60% from before the attacks to peak last week, according to price data assessed by Platts. Jet fuel may rise to a greater extent than crude because it includes the price of processing and increasingly difficult and expensive transportation from oil fields to refineries and aircraft fuel tanks.

On February 27, the day before the attacks, the cost of filling the fuel tanks of a Boeing 737-800 would have cost around $17,000, based on average prices in New York, Houston, Chicago and Los Angeles, as compiled by Argus. Less than a week later, on March 5, it would have cost more than $27,000, based on Argus prices. On Tuesday, after oil prices plummeted following President Donald Trump’s comments that the war in Iran could end “very soon,” oil reportedly cost around $23,000.

After fuel prices soared, airlines started charging customers for baggage – or charging them more. Even seemingly minor weight changes can save airlines hundreds of thousands or even millions of dollars per year on fuel. United opted for lighter paper for its in-flight magazine in 2018. In 2014, American airlines said it would move to digital handbooks for flight attendants, following changes for pilots. The company said at the time it would save $650,000 in fuel costs per year.

High fuel prices don’t automatically mean higher fares. Continued strong demand for travel is a key factor, as is capacity or the number of flights operated by carriers.

If airlines raise fares and passengers balk, capacity will likely decline in the form of fewer frequencies on a route or deeper discounts, in more severe cases.

“Airlines love to say fuel is expensive, so you have to pay more. What they do is set expectations,” said Courtney Miller, founder of Visual Approach Analytics, a consulting firm for the airline industry. “They set prices to avoid empty seats.”

If fuel prices go down, “they’re not going to suddenly say, ‘We’re making too much money,'” Miller added. “But they will probably add another flight.”

Capacity, particularly to and from the Middle East, is limited due to airspace closures and other flights with stopovers. More than 46,000 flights have been canceled to and from the region since the attacks began on February 28, aviation data company Cirium said.

Those constraints are driving up fares as well as demand, as United’s Kirby said, in areas where customers are looking for alternative routes.

Airspace closures are also forcing airlines to take longer, more fuel-intensive routes, but many also have high demand.

Qantas, for example, told CNBC that its flight from Perth, Australia, to London is temporarily stopping in Singapore to refuel, allowing it to support an additional 60 customers, and that its Perth-London and Perth-Paris routes are more than 90% full this month, 15 percentage points higher than normal for this time of year.

Finnair said increased demand for travel to Asia from Helsinki had pushed its prices up by 15% on average.

“The impact of rising fuel prices will be reflected with some delay in market rates, as airlines generally hedge at least part of their fuel purchases,” he said.

Airlines have been grappling with airspace closures for years, including due to intermittent conflicts in the Middle East and since Russia’s invasion of Ukraine in 2022, which have left much of the airspace out of use for many carriers.

Most U.S. airlines no longer hedge fuel costs or set prices using futures and other securities. Southwest Airlines was one of the last holdouts, and he gave up last year. A spokesperson for the Dallas-based airline told CNBC that Southwest currently has “no plans” to resume coverage.

This makes U.S. carriers more vulnerable to price fluctuations.

Kirby said there would likely be an impact on United’s first-quarter and second-quarter results if the war – and the blockage of the Strait of Hormuz, a key shipping channel – persists. However, he said demand was growing sharply in regions that have been hit by thousands of flight cancellations and airspace closures in the Middle East.

Due to airlines’ optimistic demand outlook for the start of the year, “the environment is ripe for fare hikes to pass through. Additionally, if jet fuel were to remain elevated for longer, this should help drive down off-peak capacity,” thereby supporting unit revenues, UBS analysts said.

Rick Joswick, head of short-term oil research and analysis at S&P Global Energy, told CNBC that “jet fuel demand is inelastic.

“You can’t dry out an airport,” he said.