The tentative agreement between the US and Iran could reduce fuel prices, but cheaper flights are not expected any time soon.
The conflict caused fuel prices to almost double, forcing airlines to operate fewer flights and increase fares. The framework agreement that American and Iranian officials are expected to sign on Friday would restore oil exports from the Middle East, but airlines’ fuel bills may not fall for months.
Even if fuel gets cheaper, airlines may not lower their fares for a long time because they want to recoup the money they spent and have found that travelers are willing to pay more for tickets anyway, aviation experts say.
“Operating costs are now priced in for the next three to four months for most airlines and there is little room for maneuver,” said John Grant, principal analyst at OAG, an aviation data provider. He added: “It is not a simple cause-and-effect relationship. A 10 percent fall in oil prices does not mean that prices will fall by 10 percent.”
Kerosene is one of the largest expenses for airlines, typically accounting for 25 to 35 percent of flight costs. When fuel prices soared after the war, airlines absorbed some of these costs and covered the rest by raising fares. But many airlines currently have little incentive to lower prices because customers were willing to pay higher prices.
The U.S.-Iranian deal would unclog the Persian Gulf by reopening the Strait of Hormuz, through which about 20 percent of global jet fuel exports pass by sea, said Amaar Khan, European head of jet fuel pricing at Argus Media. But after months of fighting, shipowners may be reluctant to send ships and workers back to the Persian Gulf.
While some ships have remained close to the Gulf, others are now far away. It will also take time to repair and bring idle wells, refineries and other infrastructure back into operation.
“Oil fields cannot simply restart overnight,” the International Air Transport Association, an aviation industry trade group, said last week. “Idle or damaged refineries require time and extensive repairs before they can be put back into operation.”
The airlines also have a big hole to fill. The association now expects the global industry to earn about $23 billion this year, compared with a prewar estimate of $41 billion. Middle Eastern airlines were hit the hardest, while North American airlines fared significantly better.
U.S. airlines have raised prices seven times since early February, but that has done little to deter customers, Southwest Airlines Chief Executive Bob Jordan said at a conference last month.
“This is the most I can remember in my 38 years in the industry, but since prices have increased so much, demand has not decreased at all,” he said.
According to Kayak, flights within the U.S. are about 28 percent more expensive than a year ago, while prices for international flights are up 18 percent.
Such fare increases tend to be persistent. “The longer this continues, the higher the likelihood that price increases will continue,” United Airlines Chief Executive Scott Kirby said on a call with analysts and reporters in April.
Many airlines in Europe and elsewhere had at least some protection from rising costs because they set fuel prices through futures contracts and other hedging techniques, practices that U.S. airlines had abandoned years ago. This meant they were under less pressure to raise prices, although many did. But these airlines will have to pay more for fuel as they take out new hedges for the coming months, experts say.
Airlines in the United States and elsewhere not only raised fares but also canceled flights that were less profitable or popular. Higher fuel costs also widened the divide between large, successful U.S. companies like Delta Air Lines and United and struggling low-cost airlines. Spirit Airlines, which had already lost billions of dollars in recent years, was forced to close last month, in part because of the added burden of more expensive fuel.
As demand for travel remains high, airlines may not think about lowering their prices until the fall or winter when demand slows, analysts say. And if customers start buying fewer tickets, airlines may operate fewer flights instead of lowering prices.
That doesn’t mean travelers won’t find deals. Airlines in the United States and Europe may cut prices on some popular routes to attract customers, while others may reduce fares to offset the drop in demand.
According to the International Air Transport Association, airlines in the Middle East have been hit hard by the war and are expected to lose a total of $4.3 billion this year. Before the war, the association expected these airlines to earn $6.8 billion. To sell more tickets, these airlines may need to lower fares.
And while many airlines in the United States, Europe and elsewhere will resist cutting fares, they may be forced to do so to remain competitive, said Saj Ahmad, chief analyst at StrategicAero Research, a consulting firm. “All it takes is for one airline to lower its fares and others will follow suit,” he said.