The airline industry is currently experiencing its most severe crisis since the COVID-19 pandemic, largely due to the ongoing conflict in the Middle East. The war has grounded flights, wiped over $50 billion off the valuation of major carriers, and raised concerns over potential fuel shortages. Industry executives warn that continuous escalation of oil prices has forced airlines to contemplate significant fare increases to maintain profitability.
Jet fuel, which constitutes approximately one-third of airline operating costs, has doubled in price since recent attacks by the US and Israel on Iran, and prices are still rising. While many carriers have hedging strategies against oil price volatility, the sudden surge threatens to push ticket prices higher across international routes, impacting global demand.
Market investors have reacted negatively, with the top 20 publicly listed airlines losing roughly $53 billion in market value since the conflict started. Some low-cost carriers, such as Wizz Air and easyJet, have become the most shorted stocks on the FTSE 100, reflecting investor pessimism. Despite a post-pandemic demand rebound, airlines are cautious about demanding sustained higher fares, fearing demand could decrease if prices climb too high.
Industry leaders express concern about the long-term effects of increased prices but stress that airlines have little choice but to raise fares. Lufthansa's CEO Carsten Spohr indicated that with only about €10 profit per passenger, absorbing additional fuel costs without raising prices is unfeasible. The conflict has also led airlines to implement contingency plans, including reducing services to parts of Asia due to fuel supply concerns.
The crisis remains most acute in the Gulf region, where Emirates, Etihad, and Qatar Airways have been forced to cut back schedules amid airspace closures and declining tourism. Willie Walsh, head of IATA and former BA CEO, compared the situation to post-9/11 transatlantic challenges, emphasizing the need for government support for Gulf carriers. Additionally, cargo operations are strained as disrupted shipping shifts freight to aircraft, overwhelming some airports like Geneva, where flights are full, and freight is rerouted to Paris.
Airline executives believe that once the conflict ends, market sentiment and share prices will rebound, though the industry faces ongoing uncertainty and operational challenges during this turbulent period.
