Will airlines be able to hold price gains as fuel costs ease?

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Airlines may be able to hold recent fare gains, but passenger relief is unlikely to be immediate
Airlines are positioned to keep fares well above pre-war levels even after an interim US-Iran peace deal pushed oil and US jet fuel prices lower, because capacity remains tight and fare increases have not fully caught down to fuel cost increases. In the US, jet fuel spot prices fell to US$2.85 per gallon on June 17 from an early April high of US$4.88, yet average domestic fares booked one week before travel were still up 34.1 per cent year-on-year as of June 8. The key issue is whether carriers can “hold price” as jet fuel eases, since fuel pass-through has been slower than the rise in fuel costs.
US airlines are recovering fuel-cost spikes only partially, leaving room to maintain higher fares
From January through May, jet fuel prices rose more than three times as fast as airfares, and US airlines’ actions such as raising ticket prices and bag fees offset only part of the fuel increase. Deutsche Bank estimated US carriers would recover about 60 cents of every extra US$1 of fuel spending, translating into US$14.4 billion in higher revenue against US$24.1 billion in higher fuel costs. Delta, United and American were targeting second-quarter recapture of about 40 per cent to 50 per cent, while Alaska Air said it was recovering about one-third and JetBlue and Frontier expected less than half.
The ability to “hold price” is central, and demand strength matters more than fuel timing
Analyst Conor Cunningham of Melius Research said the crucial factor is whether airlines can hold price, adding that lower gasoline prices could ease consumer pressure over high airfares. Even if the latest jet fuel decline continues, fuel bills depend on purchases over time rather than instant spot prices, and jet fuel still cost 54 per cent more than a year ago according to the International Air Transport Association. Southwest COO Andrew Watterson captured the pressure with the question, “When’s fuel going to go down?”, reflecting that carriers have limited incentive to cut fares while they try to rebuild earnings.
Fuel relief will be uneven across regions, affecting how firmly airlines can keep fares
Outside the US, lower crude prices take time to feed into jet fuel, and unless jet fuel falls back toward start-of-year levels, airlines are likely to keep fares firm or push them higher where demand allows. Europe could split between long-haul routes, which may see more easing if fuel costs were passed on more successfully, and short-haul routes, which may remain firmer if bookings and demand are supported by the peace agreement. In Asia, HSBC said China’s big three face weak pricing power and falling aircraft utilisation, while Cathay Pacific has more ability to offset fuel costs through higher fares, cargo revenue and premium demand.
A “broad fare war” is less likely because capacity growth is constrained
In past cycles, falling oil prices often triggered a capacity race that pushed fares lower, but conditions for a broad fare war are not broadly in place now. Aircraft delivery delays, tight airport capacity and weaker low-cost carriers reduce the risk, with US domestic seats scheduled to grow just 0.4 per cent year-on-year in the third quarter versus 4.6 per cent expected before the latest Middle East tensions. J.P. Morgan also pointed to limited aircraft deliveries and budget-carrier pullbacks lowering the risk of “meaningful capacity creep,” which gives airlines more ability than usual to hold current pricing.

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Will airlines be able to hold price gains as fuel costs ease?

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