Can carriers rebuild margins instead of cutting prices?

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Airlines can rebuild margins using lower jet-fuel costs without immediately cutting fares, but passenger relief is likely delayed

Carriers can use falling jet-fuel prices to rebuild margins rather than reverse recent fare increases, especially in the US market. US jet fuel spot prices fell to US$2.85 a gallon on June 17 from an early April high of US$4.88, and a Reuters calculation said sustaining a decline of that size would cut the US airline industry’s annual fuel bill by more than US$40 billion. However, fares have lagged fuel costs, with average domestic fares booked one week before travel up 34.1% year-on-year as of June 8, and tight capacity limits the immediate incentive to drop prices.
US fares have lagged fuel increases while capacity stays tight
As jet fuel surged earlier in the year, US airlines raised ticket prices and bag fees and cut schedules, but those steps offset only part of the fuel-cost increase. Industry data also show jet fuel prices rose more than three times as fast as airfares from January through May, leaving airlines room to rebuild margins as fuel eases. At the same time, US domestic seat growth is scheduled at only 0.4% year-on-year in the third quarter, down from 4.6% expected before the latest Middle East tensions, which supports the case for keeping fares elevated.
Fuel-cost recovery is partial, so airlines focus on holding price
Deutsche Bank estimated US carriers would recover only about 60 cents of every additional dollar spent on fuel, citing US$14.4 billion in higher revenue versus US$24.1 billion in higher fuel costs. Alaska Air said it was recovering about one-third of the fuel-cost increase, while Delta, United and American Airlines estimated second-quarter recapture at about 40% to 50%, with JetBlue and Frontier expecting less than half. United CEO Scott Kirby said the airline is on track to recover 100% of the fuel-cost spike through pricing by the end of the year, reflecting a strategy of rebuilding margin via fare and ancillary pricing rather than immediate discounts.
Outside the US, fare relief is expected to be uneven
Fare relief is likely to be uneven internationally because lower crude prices take time to feed through to jet fuel, and airlines may keep fares firm or raise them where demand allows. Europe could split, with long-haul fares more likely to ease because airlines passed on higher fuel costs more successfully on those routes, while short-haul fares may remain firmer if bookings and demand hold up. In Asia, China’s big three airlines are described as having weak pricing power, while Cathay Pacific is positioned better due to higher fares, cargo revenue and premium demand, and the Middle East stands out as fuel remains too expensive for widespread discounting even if some airlines use promotions.
Lower fuel helps earnings only if prices can be held for long enough
Airlines’ fuel bills reflect purchases over time rather than spot prices, and jet fuel still costs 54% more than a year ago even after the latest declines, according to the International Air Transport Association. Jefferies estimated that a 5% drop in fuel-cost forecasts could lift projected earnings per share by 10% to 15% for Delta, Southwest and United, and by as much as 50% for American Airlines, reinforcing the focus on financial recovery while fares remain supported. For passengers, the extent of relief depends more on whether demand holds than on fuel prices alone, since airlines can keep fares above pre-war levels when capacity is constrained.

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Can carriers rebuild margins instead of cutting prices?

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