Key facts
- A preliminary US-Iran peace deal is expected to restore oil exports from the Persian Gulf.
- Despite falling oil prices, airlines are unlikely to lower ticket prices or ancillary fees.
- Aviation experts cite strong travel demand and tight seat supply as reasons for sustained high fares.
- Jet fuel costs may remain elevated for months due to infrastructure repair and shipper hesitancy.
- US airlines have increased fares multiple times without seeing a drop in demand.
A preliminary agreement between the U.S. and Iran, which has led to a significant drop in oil prices, is unlikely to result in cheaper airline tickets or ancillary fees for travelers.
Oil prices have fallen to around $70 a barrel from highs exceeding $100. However, aviation experts suggest that strong travel demand and limited seat availability will prevent airlines from lowering fares. Jet fuel, a major operating expense for airlines, may remain expensive for several months due to the time required to repair and restart oil infrastructure and potential hesitancy from shippers to re-enter the Persian Gulf.
John Grant, chief analyst at OAG, noted that the relationship between oil prices and airfares is not a simple cause-and-effect. He explained that airlines' operational costs are often baked in for months, and a 10% drop in oil prices does not necessarily translate to a 10% decrease in ticket prices. Jet fuel typically accounts for 25% to 35% of flight costs.
While the U.S.-Iranian agreement could reopen the Strait of Hormuz, through which a significant portion of global seaborne jet fuel exports pass, it will take time to resume normal operations. The International Air Transport Association stated that oil fields and refineries require substantial repair before they can return to operation.
The global airline industry's expected earnings for the year have been revised down to $23 billion from a prewar estimate of $41 billion, with Middle Eastern carriers being the hardest hit. In contrast, U.S. airlines have raised fares multiple times since February without experiencing a decline in customer demand. Bob Jordan, CEO of Southwest Airlines, indicated that fare increases have not deterred customers, and Scott Kirby, CEO of United Airlines, suggested that such price hikes are likely to persist.
Domestic airfares in the U.S. are approximately 28% more expensive than a year ago, and international fares have risen by 18%. Airlines have also increased checked bag fees, now typically ranging from $40 to $50 per bag each way. Many European carriers were somewhat insulated from rising costs due to fuel hedging contracts, but they will face higher costs as they establish new hedges.