ANALYSIS: Airline ticket prices may stay high as carriers bank fuel relief from Iran deal

CHICAGO/LONDON — Airlines stand to save billions of dollars on jet fuel after an interim U.S.-Iran peace deal pushed oil prices lower, but passengers are unlikely to see immediate relief as tight capacity allows carriers to keep fares well above pre-conflict levels.

In the United States, where the market offers the clearest benchmark, fare increases have lagged the earlier surge in fuel costs while domestic seat growth remains limited. This gives airlines room to use lower fuel expenses to rebuild margins rather than reverse recent ticket price increases.

U.S. jet fuel spot prices stood at $2.85 per gallon on June 17, down sharply from an early April high of $4.88. If sustained, that decline would reduce the U.S. airline industry's annual fuel bill by more than $40 billion, according to Reuters calculations based on industry consumption data.

FARES STILL LAG FUEL

As jet fuel prices climbed earlier this year, U.S. airlines responded by raising ticket prices and baggage fees and trimming flight schedules. However, those measures have only partially offset higher fuel costs.

Industry data show jet fuel prices rose more than three times faster than airfares from January through May. Deutsche Bank estimated that U.S. carriers are recovering only about 60 cents of every additional dollar spent on fuel, equivalent to $14.4 billion in higher revenue versus $24.1 billion in increased fuel costs.

Alaska Air said it has recovered about one-third of the increase, while Delta Air Lines, United Airlines and American Airlines estimate second-quarter recovery at roughly 40% to 50%. JetBlue Airways and Frontier Group expect to recover less than half.

United Airlines CEO Scott Kirby told Reuters the carrier is moving closer to fully recouping the fuel-cost spike through pricing. “We’re on a path to recovering 100% by the end of the year,” he said.

Raymond James data show average domestic fares booked one week before departure were up 34.1% year over year as of June 8.

The key question is whether airlines can maintain higher fares as fuel prices ease. “What remains crucial is the ability to hold price,” said Melius Research analyst Conor Cunningham, noting that lower gasoline prices could ease consumer pressure from higher airfares.

UNEVEN PASS-THROUGH

Outside the United States, fare relief is expected to vary widely. Lower crude oil prices typically take time to flow through to jet fuel, and unless prices fall closer to early-year levels, airlines are likely to keep fares firm or raise them further where demand allows, said Dudley Shanley, head of aviation and travel research at Goodbody.

Europe is expected to see mixed effects. Long-haul fares are more likely to ease because airlines were more successful in passing on higher fuel costs on those routes, said RBC analyst Ruairi Cullinane. Short-haul fares, however, may remain firm if improved demand supports pricing power.

In Asia, HSBC analysts said China’s major airlines face weak pricing power and declining aircraft utilization, while Hong Kong’s Cathay Pacific is better positioned, with premium demand, cargo revenue, and higher fares helping offset fuel costs.

The Middle East remains a key exception after the conflict disrupted regional traffic flows. Some airlines may use promotions to rebuild demand, said aviation analyst John Strickland, but fuel costs remain too high for widespread discounting. Gulf carriers could take a more aggressive stance, supported by stronger government backing, he added.

EARNINGS BEFORE DISCOUNTS

The extent to which airlines benefit from lower fuel prices will depend on how long the decline lasts. Fuel costs are based on purchases over time rather than spot prices, and even after recent drops, jet fuel remains about 54% higher than a year ago, according to the International Air Transport Association.

Southwest Airlines Chief Operating Officer Andrew Watterson summed up the pressure when asked about a return to pre-pandemic margins: “When’s fuel going to go down?”

That dynamic leaves airlines with little incentive to reduce fares as they focus on restoring profitability.

Jefferies estimated that every 5% drop in its roughly $3-per-gallon 2027 fuel forecast could lift earnings per share by 10% to 15% for Delta Air Lines, Southwest Airlines and United Airlines, and by as much as 50% for American Airlines.

NO BROAD FARE WAR

In previous fuel cycles, falling oil prices often triggered capacity expansion that led to lower fares. Those conditions are not broadly present this time.

Aircraft delivery delays, constrained airport capacity, and the retreat of some low-cost carriers are limiting the risk of a widespread fare war. U.S. domestic seat capacity is projected to grow just 0.4% year over year in the third quarter, down sharply from a 4.6% increase expected before recent geopolitical tensions, industry data show.

J.P. Morgan analysts said limited aircraft deliveries and reduced budget-carrier expansion lower the risk of “meaningful capacity creep” in the United States, giving airlines stronger-than-usual pricing power.

For passengers, any meaningful fare relief will depend less on fuel prices and more on demand strength. “This is very much subject to the strength of the consumer,” Shanley said. -Reporting by Rajesh Kumar Singh in Chicago, Alessandro Parodi in Gdansk and Joanna Plucinska in London; Additional reporting by Julie Zhu in Hong Kong; Editing by Jamie Freed/Reuters