If things were looking too good in the airline industry, friends, don’t worry. The government is here to help change that. In light of what’s been happening in the Middle East, oil prices are soaring, and that means airline costs are going to do the same. This is going to have to mean lower capacity and higher fares, and that’s a best-case scenario. How many times do we have to keep watching this same movie before we decide we don’t actually like it?
As we all know by now, the US and Israel have invaded Iran, and Iran has fought back by firing missiles at and targeting drones in just about any country within reach. Iran can’t reach the US directly, so instead it is largely looking at US targets in the region — plus Israel, of course — but it is also seemingly just shooting for chaos. Case-in-point: the attacks on Dubai’s airport.
With the US and Israel seemingly wanting regime change and requiring “unconditional surrender,” it was up to Iran’s leaders to either roll over or get wild. Iran is very weak after years of sanctions and the last round of nuclear infrastructure targeting by the US and Israel, so if it didn’t roll over, it was going to have to find a way to fight differently. To the surprise of absolutely nobody outside the government, Iran has chosen the “scrappy and desperate” plan. To prove its path, it has named hard-liner (and son of the last hard-liner) Mojtaba Khameini as the new supreme leader.
It seems like all of this hit home this weekend when oil prices started to skyrocket. That is, of course, a huge concern for the airline industry. Fuel costs are shooting through the roof as well.
Iran has effectively closed the Strait of Hormuz which happens to be an annoyingly important transit route for oil. Let’s map it.
Remember the Gulf War in 1990/1991? That was at least partially over an oil drilling dispute that ended with Iraq invading Kuwait at the top of the Persian (or Arabian, depending upon who you ask) Gulf. This is a very oil-rich region, and tankers are a key way to get oil and gas out of there and around the world, especially into Asia. About a quarter of all tankered oil goes through the Strait of Hormuz and a fifth of all liquified natural gas does too.
The strait is circled in red on the map. It just happens to be a very narrow point where the tippy top of Oman (yes, that’s an exclave of Oman and not part of the United Arab Emirates), sits a mere 24 miles away from Iran at its narrowest point. There isn’t much room to spare, having only one shipping lane in each direction. Each are two miles wide. Closing the Strait causes major global oil problems. But why would Iran want to hurt the entire globe? Ah…
Remember that whole “scrappy and desperate” thing I mentioned? Well, when you can’t fight fire with fire, you get desperate to play to any strengths you have. And for Iran, one enormous strength is the ability to close off the Strait of Hormuz. None of this is a surprise. Every time Iran got mad at the US over the years, it would threaten to close the strait. This time, it actually did it.
Most of this oil doesn’t come to the US, but that doesn’t matter. Oil is a global market, and even the threat of reduced supply will spike prices everywhere. With the realization this past weekend that this situation wasn’t going to end quickly, the markets responded and prices shot through the roof.
Despite some frenzied overreaction that saw oil rise to over $110 a barrel over the weekend, it has settled back down to a still painfully-expensive $85 a barrel range as of the time of writing. I imagine this will continue to be volatile for some time.
The bigger issue for the airlines, however, is that jet fuel is proving to be spiking even more than barrels of oil alone. Take a look:
Yesterday, jet fuel was averaging $3.67 a gallon in the US, and it’s going higher. So what does that mean in practice? Let’s use Southwest as an example since it very publicly decided to stop hedging fuel at the worst possible time.
Southwest in 2025 averaged $2.41 per gallon for a total of $5.24 billion in total fuel expense. That was 19 percent of the airline’s operating costs. In Q1 of this year, it guided to an expected $2.40 per gallon price.
At $3.67 per gallon, just as a thought exercise, this would be another $2.7 billion fuel cost annually based on 2025 usage. This is more than a 10 percent increase in operating expense right off the bat.
If this were truly a short-term spike, it can be easily weathered, but the whole point of this post is to show that it doesn’t look like it’s going to be short term. The Iranian regime has every incentive to do everything in its power to prevent the stated goals of the US and Israel from happening, and we know it doesn’t care about what it may have to do to the people of Iran to achieve those goals. There will be ups and downs and twists and turns as this conflict drags on, but it’s hard to see how it doesn’t… drag on.
Of course, it’s possible oil prices could come down quickly, but that’s actually a worst case scenario. That would indicate that demand for oil has plummeted which would in turn mean we are all in for tough economic times ahead.
If you’re an airline what do you do? You cut capacity. (Ok, maybe not to India since that traffic isn’t going through the Middle East right now as it usually does.) I imagine they’ll probably wait a little to ensure that this isn’t truly a one week spike in oil, but even with some decline in demand for tickets, there (hopefully) isn’t going to be enough let-up to allow oil to settle back down to where it was. The only lever airlines have to deal with that cost spike is to cut capacity and raise fares.
For an airline like Southwest or Delta, this is a relatively straightforward effort. But it could be the death knell for an airline in a more precarious position, maybe one based on Fort Lauderdale? Smaller shocks have pushed airlines to the brink before.
