Ceasefire but no relief: Why airlines will continue to face high fuel costs

FOR the aviation sector, the oil shock from the Middle East conflict which started on Feb 28 has already spread through the system.

Fuel remains the largest single cost item for airlines, typically accounting for 20 to 35 per cent of total operating expenses. Even modest price movements can materially affect margins.

In the recent escalation, jet fuel prices rose sharply within weeks, sometimes more than doubling at their peak. Supply chains were disrupted, insurance premiums increased, and operational complexity rose due to airspace restrictions.

Airlines were therefore hit on three fronts, with higher prices, reduced availability and increased consumption.

The ceasefire, due to expire on Apr 22, does little to reverse these effects in the near term.

A key dynamic lies in the divergence between crude oil and jet fuel prices.

While crude markets tend to respond quickly to geopolitical developments, refined products such as jet fuel adjust more slowly. Their pricing reflects not only crude input costs, but also refining capacity, logistics and regional supply constraints.

In the current environment, refining margins for jet fuel have widened significantly.

Limited spare capacity, coupled with elevated risk premiums on transport routes such as the Strait of Hormuz, has kept jet fuel prices high.

Airlines are facing a structural challenge: Lower oil prices do not automatically translate into lower fuel bills.

This also undermines the effectiveness of traditional hedging strategies. Many airlines hedge against crude oil benchmarks rather than jet fuel itself. When the spread between crude and jet fuel widens, these hedges offer only partial protection.

As a result, carriers may find themselves more exposed than anticipated despite having hedging programmes in place.

The impact varies significantly across the industry. European and some Asia-Pacific airlines entered 2026 with relatively high levels of fuel hedging, in some cases covering the majority of expected consumption.

By contrast, many US carriers have largely moved away from hedging over the past decade. In the current environment, these strategic choices are translating directly into financial outcomes.

Airlines with stronger balance sheets and effective hedging are better-positioned to absorb short-term shocks. Others are forced into immediate corrective action – cutting capacity, revising network plans and raising fares.

Early signs of adjustment are already visible, with several carriers reassessing growth strategies and delaying expansion.

Cascading effects

However, fuel price inflation is only part of the story. Geopolitical fragmentation is also affecting operational efficiency.

Airspace closures and security concerns have forced airlines to reroute flights, particularly on key Europe-Asia corridors. These detours can increase flight times by 10 to 15 per cent, leading to higher fuel burn and cascading operational effects.

Longer flight times reduce aircraft utilisation. Crew costs increase due to extended duty periods, and scheduling becomes more complex. Maintenance cycles are affected, and overall network reliability declines.

In aggregate, these factors result in a structural decline in productivity.

As long as airspace restrictions persist or perceived risks remain elevated, airlines must continue to operate under suboptimal conditions.

Additional cost pressures also arise from insurance and compliance. War-risk premiums for flights near conflict zones have increased materially, in some cases adding tens of thousands of dollars per flight.

While such costs may eventually normalise (should the ceasefire hold), they tend to remain elevated longer than expected due to cautious underwriting and regulatory scrutiny.

Taken together, these dynamics point to a broader shift: The aviation sector is entering a period of structurally higher operating costs.

This raises a critical question around pricing power.

In the short term, demand for air travel has remained resilient, allowing airlines to pass on some of the increased costs through higher fares and fuel surcharges. This has been supported by strong post-pandemic demand, particularly in long-haul and premium segments.

However, this ability is not unlimited. Leisure travellers are highly price-sensitive and may reduce discretionary travel as fares rise. Corporate travel, while recovering, remains below pre-pandemic levels in many markets.

Airlines therefore face a delicate balancing act: protecting margins without suppressing demand.

Capacity discipline has become a key lever. By reducing supply on marginal routes, airlines can support pricing while conserving fuel. Yet this approach carries trade-offs, including potential loss of market share and reduced connectivity.

The effects extend beyond airlines to the broader aviation ecosystem.

Airports, particularly major hubs, are highly sensitive to changes in traffic flows. Non-aeronautical revenues – from retail, dining and services – can account for up to 60 per cent of total income at large airports.

Reduced passenger volumes or shifts in transit patterns can therefore have disproportionate financial impacts.

The Middle East illustrates this complexity. While the region’s carriers and hubs benefit from geographic positioning and access to energy, geopolitical instability introduces new risks. Prolonged disruptions could encourage airlines to diversify routes, potentially bypassing traditional hubs over time.

Rethink needed

At a macro level, the crisis highlights a structural vulnerability: the aviation sector’s dependence on concentrated energy supply routes.

About one-fifth of the global oil supply passes through the Strait of Hormuz, making it a critical choke point. Any disruption – real or perceived – has immediate consequences for fuel availability and pricing.

For airlines, this underscores the need to rethink risk management. Geopolitics must now be embedded in core strategic planning. This includes diversifying fuel sourcing, enhancing scenario planning, and building greater operational flexibility.

At the same time, the current environment may accelerate longer-term structural shifts.

Investment in more fuel-efficient aircraft becomes even more compelling in a high-cost environment. New-generation models offer meaningful reductions in fuel burn per seat, directly improving unit economics.

Sustainable aviation fuel, while still limited in scale, may also gain strategic importance as a means of diversifying supply. Although cost remains a barrier, the broader objective of reducing exposure to volatile fossil-fuel markets is becoming increasingly relevant.

Industry consolidation is another likely outcome. Sustained cost pressure tends to favour larger, better-capitalised players. Airlines with weaker balance sheets or limited pricing power may struggle to absorb prolonged volatility, potentially leading to mergers, alliances or market exits.

From a policy perspective, governments may also play a more active role.

Aviation connectivity is increasingly seen as strategic infrastructure, and prolonged disruption could prompt targeted support, particularly in smaller markets.

For the aviation industry, this episode represents a shift rather than a temporary disruption.

Airlines must recalibrate expectations. A return to the relatively benign cost environment of the past decade appears unlikely in the near term. Instead, carriers must operate in a world defined by higher volatility, tighter margins and persistent uncertainty.

Those that adapt – through stronger balance sheets, greater efficiency and more resilient operating models – will be best-positioned to navigate this environment.

Those that do not may find that, even in times of peace, the economics of flight have fundamentally changed.

The writer is founder of BAA & Partners