Why did flights become more expensive after the rise in jet fuel?

The rise in fuel prices since the US and Israel attacked Iran nearly two weeks ago has already pushed up airline ticket prices. Consumers’ appetite for travel this year will determine how much they want to travel.

Cathay Pacific said on Thursday it would nearly double fuel surcharges on tickets from March 18.

Earlier this week, Australia’s Qantas said it was Scandinavian Airlines, which raised prices to help cover its costs, said an “unusually rapid and large increase” in fuel had prompted it to raise prices, and Air New Zealand withdrew its financial forecasts “until fuel markets and operating conditions stabilize”, adding it had made “initial price adjustments”.

“If the conflict results in aircraft fuel costs continuing to rise, the airline may need to take further pricing action and adjust its network and schedule as required,” Air New Zealand said.

U.S. airline CEOs and other executives will brief investors Tuesday at a JPMorgan industry conference in Washington, D.C

Analysts expect profits at least in the first quarter if not the first half of the year, although the impact will depend on how long fuel prices continue to rise.

“We believe reaching first-quarter earnings looks all but certain at this point,” Atul Maheswari and Thomas Wadowitz, airline analysts at UBS, wrote in a note last week.

United Airlines CEO Scott Kirby said last week on the sidelines of an event at Harvard University that higher prices are likely on the way due to a rise in fuel prices.

Kirby said travel demand remains strong. Two other senior US airline executives, who spoke on condition of anonymity because they were not authorized to speak to the media, said demand for travel had stalled. If these trends continue, this could give airlines more pricing power, but that will depend on the duration of the war.

“Airlines have never achieved higher prices that they didn’t want,” said Scott Keyes, founder of flight deals company Going, formerly known as Scott’s Cheap Flights.

So what should consumers do?

Keyes said travelers can’t lose out by booking early, as long as they don’t buy restricted basic economy tickets. This way, customers can try to exchange or cancel their tickets and buy cheaper tickets if airfare prices drop.

“If you book a $500 summer flight today, and two weeks from now the price drops to $350, you can call the airline and get the $150 difference back as a credit,” he said. “Tips win and airlines lose tails.”

Jet fuel is airlines’ largest cost after labor, accounting for about a fifth of expenses or more, depending on the airline.

United alone spent $11.4 billion last year on fuel, at an average price of $2.44 a gallon, according to its annual securities filing report. The price of US jet fuel on Wednesday was $3.78 per gallon, according to Platts.

Sheila Kahyoglu, a Jefferies aviation analyst, said in a note Thursday that she expects the most severe financial impact on airlines from higher oil prices will be over the next 30 to 90 days, as airlines book revenues for nearby flights assuming a significant decline in fuel prices and the inability of airlines to raise prices retroactively.

She said Delta Airlines United, which generates most of the profits of US airlines, is in a better position than other airlines because of its high demand. Risks to demand, especially for more price-sensitive customers, include the recent jump in gasoline prices.

Jet fuel has doubled in some areas since the first US-Israeli attacks on Iran on February 28.

Oil prices rose to their highest levels in nearly four years after the initial attacks. Since then, energy prices have swung wildly, as traders assess how long the war – and all the logistical problems – could last.

U.S. jet fuel prices rose more than 60% from before the attacks, reaching a peak last week, according to pricing data evaluated by Platts. Jet fuel can cost more than crude oil because it includes the price of more difficult and expensive processing and transportation from oil fields to refineries to aircraft fuel tanks.

On February 27, the day before the attacks, the cost of filling fuel tanks for Boeing The 737-800 would have been priced at about $17,000 based on average prices in New York, Houston, Chicago and Los Angeles, compiled by Argus. Less than a week later, on March 5, it would have cost more than $27,000, based on Argos prices. On Tuesday, after oil prices fell following President Donald Trump’s comment that the Iran war could end “very soon,” the cost would have been about $23,000.

After previous fuel price hikes, airlines have begun forcing customers to pay for bags — or charging them higher fees. Even small changes in weight can save airlines hundreds of thousands, if not millions, of dollars in fuel annually. United changed in 2018 to a lighter paper stock for its in-flight magazine. In 2014, American Airlines She said she would switch to digital guides for flight attendants, after the changes that occurred for pilots. It said at the time that it would save $650,000 in fuel annually.

Higher fuel prices do not automatically mean higher prices. Continued strong demand for travel is a key factor as is the capacity or amount that airlines fly.

If airlines raise prices and turn away passengers, capacity is likely to decline in the form of lower frequencies on the route or, in more severe cases, wider reductions.

“Airlines like to say fuel is expensive, so you have to pay more,” said Courtney Miller, founder of Visual Approach Analytics, an aviation industry consulting firm. “What they do is they set expectations.” “They price to prevent empty seats.”

Miller added that if fuel prices go down, “they don’t suddenly say, ‘We’re making a lot of money.'” “But they will likely add another flight.”

Capacity, especially to and from the Middle East, is constrained by airspace closures and other stop-and-go flights. Aviation data company Cirium said more than 46,000 flights to and from the region have been canceled since the attacks began on February 28.

These restrictions are driving up prices as well as demand, United’s Kirby said, from areas where customers are looking for alternative routes.

The airspace closure also requires airlines to take longer, more fuel-intensive routes, but many have strong demand as well.

For example, Qantas told CNBC that its flight from Perth, Australia, to London is making a temporary stop in Singapore to refuel, allowing it to take on another 60 customers, and that its Perth-London and Perth-Paris routes are more than 90% full this month, 15 percentage points higher than usual for this time of year.

Finnair said increased demand for travel to Asia from Helsinki, Finland, led to its prices rising by 15% on average.

She added: “The impact of rising fuel prices will be reflected in market prices with a delay, as airlines usually hedge at least part of their fuel purchases.”

Airlines have been struggling with airspace closures for years, including due to intermittent conflict in the Middle East and since the 2022 Russian invasion of Ukraine, which has left a large swath of airspace out of use for many airlines.

Most US airlines no longer hedge fuel costs, or set prices using futures contracts and other securities. Southwest Airlines She was one of the last to hold out, withdrawing last year. A spokesperson for the Dallas-based airline told CNBC that Southwest currently has “no plans” to resume hedging.

This leaves US airlines more vulnerable to price fluctuations.

Kirby said there would likely be an impact on United’s first-quarter and second-quarter results if the war — and the closure of the Strait of Hormuz, a major shipping channel — continues. But he said demand was increasing sharply from areas affected by the cancellation of thousands of flights and the closure of airspace in the Middle East.

Given airlines’ upbeat outlook on demand heading into the year, “the environment is conducive to passing on fare increases. Moreover, if jet fuel remains elevated for longer, it should help push off-peak capacity lower,” supporting unit revenues, UBS analysts said.

“The demand for jet fuel is inelastic. You can’t shortcut an airport. If the cost of jet fuel goes up, the plane won’t choose not to fly that day,” Rick Goswick, who heads near-term oil research and analysis at S&P Global Energy, told CNBC.

“You can’t dry out an airport,” he said.