After the interim US-Iran peace agreement lowered oil prices, airlines stand to save billions of dollars on jet fuel. However, passengers are unlikely to get immediate relief because carriers may be able to maintain fares well above pre-war levels due to limited capacity.
The most obvious example is the US market. Domestic seat expansion remains constrained, and fare increases continue to lag behind this year's surge in fuel prices. Instead of reversing recent price hikes, this allows airlines to leverage lower fuel costs to recover margins, as per a report by Reuters.
On June 17, US jet fuel spot prices were $2.85 per gallon, a significant decrease from an early April peak of $4.88. According to a Reuters calculation based on industry fuel use, a drop of that magnitude would reduce the yearly fuel expenditure for the US airline sector by more than $40 billion if sustained.
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Jet fuel prices increased more than three times faster than airfares between January and May, according to industry data. According to Deutsche Bank, US carriers would only be able to recoup roughly 60 cents of each additional dollar spent on fuel, resulting in $14.4 billion in increased revenue compared to $24.1 billion in increased fuel expenses.
Alaska Air said it was recovering about one-third of the increase, while Delta Air Lines, United Airlines and American Airlines put second-quarter recapture at about 40% to 50%. JetBlue Airways and Frontier Group expect to recover less than half.
Raymond James data show average domestic fares booked one week before travel were up 34.1% from a year earlier as of June 8.
In fuel cycles in the United States, declining oil prices frequently set off a capacity race that resulted in cheaper fares. These circumstances are no longer widely prevalent.
The likelihood of a widespread domestic fare war is being reduced by aircraft supply delays, limited airport capacity, and weaker low-cost carriers. According to industry data, US domestic airline seats are forecast to increase by just 0.4% year over year in the third quarter, compared to 4.6% predicted before the most recent Middle East tensions.
According to JP Morgan analysts, airlines have a better-than-usual ability to maintain current pricing since fewer aircraft deliveries and budget-carrier pullbacks lower the possibility of "meaningful capacity creep" in the US.
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