Item 1 of 3 A United Airlines commercial jet takes off from Los Angeles International Airport, Los Angeles, California, US, November 6, 2025. REUTERS/Mike Blake/File Photo
[1/3]A United Airlines commercial jet takes off from Los Angeles International Airport, California, US, November 6, 2025. REUTERS/Mike Blake/File Photo Purchase Licensing Rightsopens a new tab
High oil pushes airlines to pull prices, capacity levers
Pricing strategies can be weak if demand is weak
Reduction in aircraft supply costs
March 30 (Reuters) – Airlines around the world have begun raising fares and reducing capacity to cope with a sudden rise in oil prices, but the industry’s ability to remain profitable may depend on whether customers return to flying as fuel costs threaten household finances.
Before the US-Israel conflict with Iran began last month, the airline industry had a record profit of $41 billion by 2026, but the doubling of jet fuel prices has put that at risk and forced carriers to rethink their networks and strategies.
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Cars from United Airlines (UAL.O)opens a new tab to Air New Zealand (AIR.NZ)opens a new tab and Scandinavian SAS has announced headcount reductions and fare increases, while others have imposed fuel surcharges.
“Airlines are facing an existential challenge,” said Rigas Doganis, who previously headed Greece’s national airline Olympic Airways and served as director of Britain’s EasyJet ( EZJ.L )opens a new tab.
“They will need to cut fares to stimulate lower demand while higher fuel costs will force them to increase fares. The perfect storm,” said Doganis, who is now chairman of the London-based consulting firm Airline Management Group.
Oil price vs industry profit
PASSENGER TRAVEL REPORTS
Last year, the industry reported a record passenger traffic worldwide that increased up to 9% over pre-crisis levels and in the face of supply chain problems affecting the delivery of new aircraft.
Record post-crisis travel demand and persistent supply constraints had hampered capacity growth and given airlines significant pricing power as they filled more seats on each flight.
But the scale of the increase needed for the jet fuel price hike is huge at a time when consumers are under pressure from high gasoline prices that can restrict discretionary spending.
“The only way to raise prices is to reduce capacity,” said Barclays head of European transport equity, Andrew Lobbenberg. “That’s what I expected to see happen this time, and that’s what we’ve seen in the past when we’ve had other disasters; people have to start reducing capacity.”
Jet fuel compared to passenger demand and products
HIGH PRICES
United Airlines CEO Scott Kirby saidopens a new tab ABC News last week that fares would need to rise by 20% for the airline to cover higher fuel costs.
Hong Kong’s Cathay Pacific Airways (0293.HK)opens a new tab has raised fuel prices twice in the past month, and from Wednesday a return trip from Sydney to London will attract an $800 fuel surcharge. Before the war in Iran, the average round-trip fare on the route was about A$2,000 ($1,369.60).
Low-cost carriers could be hit harder if their passengers don’t have more fares than corporate and affluent customers who are increasingly being targeted by early rivals such as Delta Air Lines ( DAL.N )opens a new tab and United Airlines, analysts say.
“I think for travelers who are not price conscious, even a short flight is discounted, maybe going by train or going by bus or other means,” said Nathan Gee, head of Asia-Pacific transport research at Bank of America.
Unplanned prices are rising due to global problems, political tensions, supply tensions and economic conditions.
MAOLE MATSOANE
The Middle East conflict is the fourth oil shock for the airline industry since the turn of the century, although it is the first in which carriers such as Vietnam Airlines (HVN.HM)opens a new tab expressed concerns about access to fuel resources due to the closure of the Strait of Hormuz.
There was one in 2007-2008 before the global financial crisis necessitated it, another after the Arab Spring around 2011, and a third after the Russia-Ukraine war broke out in 2022.
Multiple mergers between 2008 and 2014 such as Delta-Northwest and American Airlines-US Airways (AAL.O)opens a new tab reduced eight major US airlines to four and ushered in a period of tighter capacity control, while low-cost carriers such as Ryanair ( RYA.I )opens a new tab and India’s IndiGo (INGL.NS)opens a new tab it relies on single-plane flights and quick turnarounds to keep unit costs low.
Replacing older, thirsty planes with fuel-efficient models is an obvious way for carriers to cut costs, but severe supply shortages due to the pandemic and problems with new-generation engines have delayed deliveries.
And while the US’s lowest-cost carriers have some of the newest, most fuel-efficient planes in the industry, if demand for travel declines, paying for new planes could be a drag on profits.
Dan Taylor, head of consulting at aviation consulting firm IBA, said the current oil scare is expected to widen the gap between strong and weak airlines.
“Carriers with strong balance sheets, strong pricing power, and access to reliable capital are well-positioned to absorb continued pressures,” he said on the firm’s website. “On the other hand, airlines with low profitability and limited financing options may face increasing financial pressure.”
Airlines are turning to a conventional playbook to survive the long-term oil crisis
($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; Edited by Jamie Freed
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