Airlines face fare dilemma as fuel spike threatens travel demand

Global airlines are confronting rising operational pressures as a surge in oil prices forces carriers to hike fares and cut capacity, sparking concerns about the industry’s ability to sustain profitability if consumer demand weakens. The current crisis comes in the wake of the U.S.-Israeli conflict with Iran, which has caused jet fuel prices to double since last month.

Before the conflict, the airline industry had projected record profits of $41 billion in 2026. However, the steep rise in fuel costs has thrown those forecasts into uncertainty, compelling carriers to reconsider their flight networks, pricing strategies, and capacity planning. Airlines such as United Airlines, Air New Zealand, and SAS have already announced capacity reductions and fare increases, while some have imposed additional fuel surcharges.

“Airlines face an existential challenge,” said Rigas Doganis, former head of Greece’s Olympic Airways and former director at Britain’s easyJet. “They will need to cut fares to stimulate weakening demand, while higher fuel costs push them to increase fares. A perfect storm.” Doganis now chairs the London-based consultancy firm Airline Management Group.

Record Passenger Traffic and Pricing Power

Despite recent challenges, the global airline industry reported record passenger traffic last year, reaching about 9% above pre-pandemic levels. This rebound came even as airlines faced persistent supply-chain issues that delayed deliveries of new aircraft. The combination of strong post-pandemic travel demand and constrained capacity has historically provided airlines with significant pricing power, allowing them to maximize revenue by filling more seats on each plane.

However, the scale of fare increases required to offset the current surge in jet fuel prices is unprecedented, particularly at a time when households are already grappling with higher gasoline prices. Barclays’ head of European transport equity research, Andrew Lobbenberg, explained: “The only way to get prices up is to reduce capacity. That is what we saw in previous crises, and it is what I would expect now—airlines start trimming capacity to maintain profitability.”

United Airlines CEO Scott Kirby told ABC News that fares would need to rise by about 20% to cover the increased fuel costs. Similarly, Hong Kong-based Cathay Pacific Airways has raised fuel surcharges twice in the past month, with the Sydney-to-London return trip now attracting an $800 fuel surcharge on top of the usual A$2,000 ($1,370) economy fare.

Low-cost carriers face the most significant pressure, as their customers tend to be highly price-sensitive. Analysts suggest that some travelers may downgrade to alternative modes of transport, such as rail or bus, if fares rise sharply. Nathan Gee, head of Asia-Pacific transport research at Bank of America, said: “For more price-sensitive travelers, even short-haul trips could be shifted to rail, bus, or other alternatives.”

Oil Shocks and Industry Resilience

The current Middle East conflict represents the fourth major oil shock for the airline industry since 2000. Previous shocks occurred in 2007-2008 before the global financial crisis, around the Arab Spring in 2011, and after Russia’s invasion of Ukraine in 2022. Airlines now must navigate not only rising fuel costs but, in some cases, disruptions to fuel supply due to geopolitical risks such as potential closures of the Strait of Hormuz.

Structural changes in the airline industry over the past decade, including mergers like Delta-Northwest and American Airlines-US Airways, have reduced the number of major U.S. carriers and reinforced tighter capacity control. Low-cost carriers such as Ryanair and India’s IndiGo have relied on single-aircraft fleets and rapid turnarounds to keep unit costs low.

Replacing older, fuel-thirsty planes with newer, more efficient models could reduce operating costs, but pandemic-related supply-chain disruptions and issues with new-generation engines have delayed aircraft deliveries. Even U.S. ultra-low-cost carriers, which operate some of the most fuel-efficient planes, face challenges if travel demand softens, as paying for new aircraft could become a barrier to profitability.

Dan Taylor, head of consulting at aviation advisory firm IBA, highlighted the disparity among airlines in coping with the current oil shock: “Carriers with robust balance sheets, strong pricing power, and reliable access to capital are better positioned to absorb ongoing pressures. In contrast, airlines with low profitability and limited funding options may face increasing financial stress.”

The current environment underscores a broader structural challenge for the global airline industry: balancing rising operational costs with consumer sensitivity to fares, all while maintaining capacity and service standards amid global uncertainty.