Why airfares may not fall after the US-Iran deal

The preliminary US-Iran deal could lower fuel prices, but do not expect cheaper flights anytime soon.

The conflict caused jet fuel prices to nearly double, forcing airlines to operate fewer flights and raise fares. The framework deal US and Iranian officials are expected to sign on June 19 would restore oil exports from the Middle East, but airlines may not see their fuel bills drop for months.

Even when fuel does become cheaper, airlines may not reduce fares for a long time because they want to recover the money they spent and have figured out that travellers are willing to pay more for tickets anyway, aviation experts said.

“The costs of operations are baked in now for the next three or four months for most airlines, with little room to be able to manoeuvre,” said John Grant, chief analyst at OAG, an aviation data provider.

He added: “It’s not a simple cause-and-effect relationship. Oil coming down by 10 per cent doesn’t mean prices come down by 10 per cent.”

Jet fuel is one of the biggest expenses for airlines, generally accounting for 25 per cent to 35 per cent of the cost of flights. When fuel prices soared after the war, airlines absorbed some of that cost and covered the rest by raising fares. But many carriers have little incentive to cut prices now, because customers have been willing to pay higher prices.

The US-Iranian agreement would unclog the Persian Gulf by reopening the Strait of Hormuz, through which about 20 per cent of global seaborne jet fuel exports pass, said Amaar Khan, European head of jet fuel pricing for Argus Media.

But after months of fighting, shippers may be hesitant to send vessels and workers back into the Persian Gulf.

While some ships have stayed close to the Gulf, others are now far away. It will also take time to repair and turn on wells, refineries and other infrastructure that was shut down.

“Oil fields cannot simply restart overnight,” the International Air Transport Association, an airline industry group, said last week. “Refineries that have been idled or damaged require time and significant repair before they can return to operation.”

Airlines also have a big hole to fill. The association now expects the global industry to earn about US$23 billion (S$29.6 billion) in 2026, it said, down from a prewar estimate of US$41 billion. Middle Eastern carriers have been hardest hit, while those in North America have fared much better.

US airlines have raised prices seven times since the start of February, but that has hardly scared away customers, Bob Jordan, chief executive of Southwest Airlines, said at a conference in May.

“That’s the most that I could remember in my 38 years in the industry, but with fares up that much, there’s been no drop-off in demand at all,” he said.

Flights within the US are about 28 per cent more expensive than they were a year ago, while prices for international flights are up 18 per cent, according to Kayak.

Such fare increases tend to be sticky.

“The longer this lasts, the higher the probability goes that the pricing increases hold,” Scott Kirby, CEO of United Airlines, said on a call with analysts and reporters in April.

Many airlines in Europe and elsewhere were at least somewhat protected from rising costs because they locked in fuel prices through futures contracts and other hedging techniques, practices that US carriers abandoned years ago. As a result, they faced less pressure to raise prices, though many did.

Those carriers will have to pay more for fuel, however, as they establish new hedges for the months to come, experts said.

In addition to raising fares, airlines in the US and elsewhere cut flights that were less profitable or popular.

Higher fuel costs also deepened a divide between large, successful US companies like Delta Air Lines and United and struggling budget carriers. Spirit Airlines, which had already lost billions of dollars in recent years, shut down in May partly because of the added burden of more expensive fuel.

Because travel demand remains high, airlines might not even consider cutting fares until autumn or winter, when demand weakens, analysts said. And if customers start buying fewer tickets, carriers may run fewer flights rather than reduce prices.

That is not to say travellers will not be able to find deals. Airlines in the US and Europe might cut prices on some popular routes to attract customers, while others may lower fares to make up for lost demand.

Airlines in the Middle East have been hammered by the war and are expected to lose a collective US$4.3 billion in 2026, according to the International Air Transport Association. Before the war, the association expected those airlines to earn US$6.8 billion. To sell more tickets, those airlines may have to reduce fares.

And while many carriers in the US, Europe and elsewhere will resist lowering fares, they could be forced to do so to remain competitive, said Saj Ahmad, chief analyst at StrategicAero Research, a consulting firm.

“All it takes is one airline to drop fares, and others will follow suit,” he said. NYTIMES