Jet fuel prices plunge, yet airfares expected to remain high

• Airlines poised to save billions due to interim US-Iran peace deal; capacity constraints, strong pricing power limit fare relief
• Carriers slow to pass on higher costs earlier, now prioritising recovery over price cuts
• Global impact uneven, with Europe, Asia, Middle East seeing mixed pressure and limited discounting potential

CHICAGO: Airlines stand to save billions of dollars on jet fuel after an interim US-Iran peace deal sent oil prices lower, but passengers are unlikely to see immediate relief as tight capacity may allow carriers to keep fares well above pre-war levels.

The US market offers the clearest example. Fare increases lag this year’s fuel cost run-up, and domestic seat growth remains limited. This gives airlines leeway to use lower fuel bills to rebuild margins instead of reversing recent price hikes.

US jet fuel spot prices stood at $2.85 a gallon on June 17, down sharply from an early April high of $4.88. Sustaining this decline would cut the industry’s annual fuel bill by more than $40 billion, according to Reuters calculations.

Fares still lag fuel

As jet fuel prices surged, US airlines raised ticket prices, increased bag fees and cut schedules, but those steps offset only part of rising costs. Industry data show jet fuel prices rose more than three times as fast as airfares from January through May.

Deutsche Bank estimated US carriers would recover only about 60 cents of every additional dollar spent on fuel, generating $14.4bn in higher revenue against $24.1bn in higher costs.

Alaska Air reported recovering about one-third of the increase. Delta Air Lines, United and American Airlines put second-quarter recapture at 40pc to 50pc, while JetBlue Airways and Frontier Group expect to recover less than half.

United CEO Scott Kirby told Reuters his airline is close to recouping the spike through pricing.

Raymond James data show average domestic fares booked one week before travel were up 34.1pc year-on-year on June 8. The key question is whether airlines can maintain fare increases as fuel prices ease.

“What remains crucial is the ability to hold price,” Melius Research analyst Conor Cunningham said, noting that lower gasoline prices could ease consumer pressure over airfares.

Unequal pass-through

Outside the US, fare relief is likely uneven. Lower crude prices take time to impact jet fuel. Unless prices fall back toward start-of-year levels, airlines will likely keep fares firm or push them higher where demand allows, said Dudley Shanley, Goodbody’s head of aviation and travel research.

Europe may see a split. Long-haul fares are more likely to ease because airlines successfully passed on higher costs on those routes, RBC analyst Ruairi Cullinane said. Short-haul fares may prove firmer if the peace agreement supports demand.

In Asia, HSBC analysts said China’s big three airlines face weak pricing power. Meanwhile, Hong Kong’s Cathay Pacific is better placed as higher fares, cargo revenue and premium demand could offset costs.

The Middle East is the clearest exception after war disrupted traffic. Some airlines may use promotions to win back traffic, aviation analyst John Strickland said, but fuel remains too expensive for widespread discounting. UAE carriers could be more aggressive with government backing, he added.

Earnings before discounts

Airline benefits depend on how long prices stay down. Fuel bills reflect long-term purchases, not spot prices. Even after recent declines, jet fuel costs 5pc more than a year ago, the International Air Transport Association reported.

Southwest Airlines COO Andrew Watterson summarised the pressure. Asked when Southwest could return to pre-pandemic margins, he told Reuters, “When’s fuel going to go down?” This leaves little incentive to cut fares as airlines rebuild earnings.

Jefferies estimated each 5pc drop in its roughly $3-per-gallon 2027 forecast would lift projected earnings per share by 10pc to 15pc for Delta, Southwest and United, and up to 50pc for American Airlines.

No broad fare war

Past US fuel cycles often triggered capacity races pushing fares lower. Those conditions are absent now. Aircraft delivery delays, tight airport capacity and weaker low-cost carriers limit the risk of a broad domestic fare war.

US domestic seats will grow just 0.4pc year-on-year in the third quarter, down from 4.6pc expected before recent Middle East tensions. JPMorgan analysts said limited aircraft deliveries and budget-carrier pullbacks reduce the risk of “meaningful capacity creep,” allowing airlines to hold pricing.

Ultimately, fare relief may depend on consumer strength.

Published in Dawn, June 23rd, 2026