Airlines face fare dilemma as fuel spike threatens travel demand
By Rushil Dutta, Sameer Manekar and Yadarisa Shabong
March 30, 20266:41 AM UTCUpdated ago
Item 1 of 3 A United Airlines commercial airliner takes-off from Los Angeles International Airport in Los Angeles, California, U.S., November 6, 2025. REUTERS/Mike Blake/File Photo
[1/3]A United Airlines commercial airliner takes-off from Los Angeles International Airport in Los Angeles, California, U.S., November 6, 2025. REUTERS/Mike Blake/File Photo Purchase Licensing Rights, opens new tab
Summary
Companies
Higher oil pushes airlines to pull pricing, capacity levers
Pricing strategies may falter if demand weakens
Aircraft supply crunch limits cost cuts
March 30 (Reuters) – Global airlines have begun to hike fares and cut capacity to cope with the sudden surge in the oil price, but the industry’s ability to remain profitable may depend on whether consumers pull back on flying as gasoline costs threaten household budgets.
Before the U.S.-Israeli conflict with Iran began last month, the airline industry had forecast record profits of $41 billion in 2026, but a doubling in jet fuel prices has placed that at risk and forced carriers to rethink their networks and strategies.
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Carriers ranging from United Airlines (UAL.O), opens new tab to Air New Zealand (AIR.NZ), opens new tab and Scandinavia’s SAS have announced capacity cuts and fare hikes, while others have imposed fuel surcharges.
“Airlines face an existential challenge,” said Rigas Doganis, who once headed Greece’s former national carrier, Olympic Airways and served as a director of Britain’s easyJet (EZJ.L), opens new tab.
“They will need to cut fares to stimulate weakening demand while higher fuel costs will be pushing them to increase fares. A perfect storm,” said Doganis, who now chairs London-based consultancy firm Airline Management Group.
Oil Price vs Industry Profitability
RECORD PASSENGER TRAFFIC
Last year, the industry reported record global passenger traffic that rebounded to about 9% above pre-pandemic levels even in the face of persistent supply-chain challenges that affected deliveries of new planes.
Record post-pandemic demand for travel and persistent supply-chain challenges had constrained capacity growth and given airlines significant pricing power as they filled more seats on each plane.
But the scale of the increases needed to make up for the jet fuel price surge is huge at a time when consumers are under pressure from higher gasoline prices that could curb discretionary spending.
“The only way to get prices up is to reduce capacity,” said Barclays’ head of European transport equity research Andrew Lobbenberg. “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.”
Jet fuel vs passenger demand and yield
HIGHER TICKET PRICES
United Airlines CEO Scott Kirby told, opens new tab ABC News last week that fares would need to rise 20% for the airline to cover the higher fuel costs.
Hong Kong’s Cathay Pacific Airways (0293.HK), opens new tab has lifted fuel surcharges twice in the last month, and from Wednesday a return trip from Sydney to London will attract an $800 fuel surcharge. Before the Iran conflict, a normal round-trip economy-class fare on the route was roughly A$2,000 ($1,369.60).
Low-cost carriers could struggle the most given their passengers are more price-sensitive than the corporate customers and wealthy consumers who have been increasingly targeted by premium rivals like Delta Air Lines (DAL.N), opens new tab and United Airlines, analysts say.
“I think for the more price-sensitive travellers, even the short-haul flying trip gets downgraded, potentially to rail or to bus or other alternatives,” said Nathan Gee, Bank of America’s head of Asia-Pacific transport research.
Crude prices swing with global crises, geopolitical tensions, supply shocks, and economic cycles
OIL SHOCKS
The Middle East conflict is the fourth oil shock for the airline industry since the turn of the century, though the first in which carriers like Vietnam Airlines (HVN.HM), opens new tab have expressed concern about securing physical supplies of fuel due to the Strait of Hormuz closure.
There was one in 2007-2008 before the global financial crisis dented demand, another after the Arab Spring around 2011, and a third after the Russia-Ukraine war broke out in 2022.
A string of mergers between 2008 and 2014 like Delta-Northwest and American Airlines-US Airways (AAL.O), opens new tab reduced eight major U.S. airlines to four and brought on the era of tighter capacity control, while low-cost carriers such as Ryanair (RYA.I), opens new tab and India’s IndiGo (INGL.NS), opens new tab leaned on single-aircraft fleets and fast turnarounds to keep unit costs low.
Replacing older, thirstier planes with more fuel-efficient models is an obvious way for carriers to reduce costs, but a severe supply-chain shortage in the wake of the pandemic and issues with new-generation engines have delayed deliveries.
And while U.S. ultra-low-cost carriers have some of the newest, most fuel-efficient planes in the industry, if travel demand falters, paying for the new planes could become a barrier to profit.
Dan Taylor, head of consulting at aviation advisory firm IBA, said the current oil shock was 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 on the firm’s website. “In contrast, airlines with low profitability and limited funding options may face increasing financial stress.”
