US Airlines Cut 5% of Flights as Jet Fuel Costs Jump 70%

U.S. airlines are cutting summer capacity and raising fares to offset a nearly 70% surge in jet fuel prices since the start of the Iran war, a move that threatens to ground parts of the travel industry and saddle consumers with permanently higher costs.

"The tightness in the jet fuel market is not likely to abate any time soon," said George Shaw, senior middle distillates analyst at data provider Kpler. "These costs will be passed on to the consumer."

Average jet fuel prices for delivery into major U.S. hubs have climbed to $4.23 a gallon from around $2.50 before the conflict, according to Argus price data. In response, United Airlines is cutting 5% of its planned flights, while American Airlines said its fuel bill could increase by $4 billion this year.

The crisis is forcing a structural repricing of air travel, with airline executives openly stating that strong consumer demand allows them to make fare hikes stick. With five industry-wide fare increases already this year, passengers are now paying 20% more per mile than a year ago, a trend that could persist for at least eight months after the conflict ends, according to a UK government minister.

Airlines Embrace Higher Fares

Despite the surge in costs, airline leaders are confident that travelers will absorb the price increases. Strong post-pandemic demand has created an environment where carriers can pass on higher costs without seeing a significant drop in bookings.

"The longer consumers pay these prices and airlines get used to this revenue stream, the more likely it is (to hold)," United CEO Scott Kirby said on a recent earnings call. American Airlines CEO Robert Isom echoed the sentiment, stating he is "bullish on what that means for our business" as customers have shown a willingness to pay more.

The strategy is not without its critics. U.S. Representative Ritchie Torres, a Democrat from New York, sent a letter to United's Kirby, writing that "Everyday Americans, many of whom are already being priced out of air travel, deserve better than this level of corporate greed."

Global Supply Chains Under Pressure

The conflict's disruption to the Strait of Hormuz, a chokepoint for a fifth of global oil and gas, has sent ripples across the globe. The International Energy Agency warned that Europe may have only about six weeks of jet fuel supply before facing shortages, as the region typically relies on the Middle East for up to 75% of its net imports.

European carriers are already reacting. Germany's Deutsche Lufthansa announced it would cut 20,000 short-haul flights through October, and Dutch airline KLM has canceled 160 flights for May.

The U.S., a net exporter of jet fuel, has increased overseas shipments to help mitigate the shortfall. Exports reached 442,000 barrels a day in early April, up from 278,000 barrels a day a year earlier, according to the U.S. Energy Information Administration. However, analysts caution that this can only partially fill the gap left by Middle East disruptions.

This article is for informational purposes only and does not constitute investment advice.