Airlines could see a substantial reduction in fuel expenses following the decline in oil prices triggered by the interim peace agreement between the United States and Iran. However, passengers should not expect ticket prices to fall immediately, as constrained capacity may allow carriers to retain much of the recent fare increases.
The situation is particularly evident in the United States, where ticket prices have not fully kept pace with the surge in fuel costs experienced earlier this year. With limited growth in domestic seat capacity, airlines have room to use lower fuel expenses to strengthen profitability rather than reduce fares.
Fuel Prices Retreat Sharply
U.S. spot jet fuel prices stood at $2.85 per gallon on June 17, a significant drop from the early-April peak of $4.88 per gallon.
If maintained, such a decline could reduce the annual fuel bill for the U.S. airline industry by more than $40 billion, based on Reuters calculations using industry fuel consumption data.
The reduction offers carriers a meaningful opportunity to improve earnings after a period of sharply rising operating costs.
Airlines Have Not Fully Recovered Higher Fuel Costs
Although airlines responded to rising fuel prices by increasing fares, charging higher baggage fees and trimming flight schedules, those measures only partially offset the additional expense.
Industry figures show jet fuel costs increased more than three times faster than airfare prices between January and May.
According to Deutsche Bank, U.S. airlines are expected to recover only around 60 cents of every extra dollar spent on fuel, translating into approximately $14.4 billion of additional revenue against $24.1 billion in higher fuel costs.
Alaska Air (NYSE:ALK) said it had recovered roughly one-third of the increase. Delta Air Lines (NYSE:DAL), United Airlines (NASDAQ:UAL) and American Airlines (NASDAQ:AAL) estimated second-quarter recovery rates of between 40% and 50%, while JetBlue Airways (NASDAQ:JBLU) and Frontier Group (NASDAQ:ULCC) expect to recapture less than half of the additional costs.
United Airlines chief executive Scott Kirby said his company is steadily closing the gap through pricing measures.
“We’re on a path to recovering 100% by the end of the year,” Kirby told Reuters.
Fare Levels Remain the Key Issue
Data from Raymond James showed average domestic fares booked one week before departure were 34.1% higher than a year earlier as of June 8.
The critical question for the industry is whether airlines can maintain those higher fares even as fuel costs decline.
“What remains crucial is the ability to hold price,” said Melius Research analyst Conor Cunningham, adding that lower gasoline prices could reduce consumer sensitivity to elevated airfare levels.
International Markets May See Different Outcomes
Outside the United States, the impact of lower fuel prices is expected to vary by region.
Dudley Shanley, head of aviation and travel research at Goodbody, said crude oil declines take time to filter through to jet fuel markets. Unless fuel prices return to levels seen at the beginning of the year, airlines are likely to keep fares stable or increase them where demand remains strong.
In Europe, analysts expect long-haul ticket prices to face greater downward pressure because carriers have been more successful at passing on higher fuel costs on those routes. Short-haul fares may prove more resilient if the peace agreement stimulates demand and travel bookings.
HSBC analysts noted that China’s largest airlines continue to face weak pricing power and lower aircraft utilisation rates, while Cathay Pacific could be better positioned thanks to stronger premium travel demand and cargo revenue.
Middle East Airlines Face a Different Challenge
The Middle East remains an exception after months of conflict disrupted air traffic patterns across the region.
Aviation analyst John Strickland said some airlines may introduce promotional offers to encourage passengers to return, although fuel costs remain too high to support widespread discounting.
He added that carriers in the United Arab Emirates may be able to pursue more aggressive pricing strategies with support from government-backed initiatives.
Lower Fuel Costs Could Deliver a Major Earnings Boost
Airlines’ financial gains will depend largely on how long lower fuel prices persist.
Fuel purchasing is typically spread over time, meaning carriers do not immediately benefit from movements in spot markets. Moreover, despite recent declines, jet fuel prices remain 54% higher than a year ago, according to the International Air Transport Association.
Southwest Airlines (NYSE:LUV) chief operating officer Andrew Watterson highlighted the importance of fuel costs when discussing profitability.
“When’s fuel going to go down?” Watterson told Reuters when asked about the timing of a return to pre-pandemic margins.
Jefferies estimates that every 5% reduction in its projected 2027 fuel-price forecast of roughly $3 per gallon would increase earnings per share by between 10% and 15% for Delta, Southwest and United, while American Airlines could see earnings rise by as much as 50%.
Capacity Constraints Reduce the Risk of a Fare War
Historically, falling oil prices often triggered aggressive capacity growth among U.S. airlines, leading to lower ticket prices.
This time, however, conditions appear different.
Aircraft delivery delays, airport capacity limitations and a weaker low-cost carrier segment are restricting supply growth. Industry data show U.S. domestic seat capacity is expected to increase just 0.4% year-on-year in the third quarter, down sharply from the 4.6% growth projected before the latest Middle East tensions emerged.
Analysts at J.P. Morgan said reduced aircraft deliveries and cutbacks by budget airlines lower the risk of “meaningful capacity creep” in the U.S. market, giving carriers an unusually strong ability to maintain pricing discipline.
Ultimately, the outlook for ticket prices may depend less on fuel and more on consumer demand.
“This is very much subject to the strength of the consumer,” Shanley said.