How the war in the Middle East could see airfares soar

Telegraph

a day ago

Never one to mince his words, the US president had a withering response to Monday night's Iranian missile assault on Qatar – 'a very weak response, which we expected, and have very effectively countered.' But while Tehran may have failed to land a punch this time around, could their actions end up having negative consequences for your next holiday?
If you were planning on a summer break in lovely Tel Aviv, you probably already know the answer to that. But the bigger question for the aviation sector is likely to be what the conflict means for fuel prices – and by extension the price of our plane tickets.
According to former British Airways boss Willie Walsh – now head of the global airline industry body, IATA – there is a 'direct correlation' between the price of oil and the cost of our flight tickets. Indeed, Mr Walsh told journalists earlier this month that falling oil costs (at least at the time) could soon see airlines reducing their prices in order to stimulate demand this summer.
Of course, that was before the events in the Middle East, when an unexpected Israeli attack on Iranian military targets saw the oil price jump some 8 per cent. Since then, markets have been rushing to process the rapidly developing situation, as the Trump administration has gone from launching its own attack on Tehran to later declaring an official ceasefire between the warring parties.
What happens next is anyone's guess. Though City forecasts have been clear that escalation will be bad news for those betting on oil prices. Analysts at Goldman Sachs say that any Iranian action to blockade the Straits of Hormuz – the narrow strip of water through which 20 per cent of oil supply flows – could send prices spiking to the levels not seen since the immediate wake of Russia's invasion of Ukraine.
'A 10 or 20 per cent rise in the jet fuel price is going to have a big impact on airlines,' says John Gradek, an aviation management expert at Montreal's McGill University. Indeed, the IATA estimates that the global aviation sector spends around one third of its entire revenues on jet fuel, making it the single biggest variable for the industry.
Bad news, then, that the jet fuel spot price is currently trading 10 per cent higher than before those first Israeli missiles ten days ago. At the same time, though, short-term energy price spikes aren't exactly unprecedented these days and most airlines will have planned for these kinds of scenarios.
Hedging your bets
One of the most common ways that airlines can prepare for price volatility is to 'hedge' their exposure to the markets by locking in a price well in advance. Given that markets can be volatile, the tactic isn't entirely risk-free – and it also requires airlines to have enough cash to spend it up front – but it can help airlines avoid paying over the odds in times of strife.
'Hedging is there to provide budget certainty for airlines,' says Chris Tarry, founder of aviation consultancy CTAIRA. He points to the example of Ryanair, which recently reported that it had taken advantage of the dip in oil prices in the spring in order to lock in much of its fuel needs for the next three years – a move that now looks very shrewd in the circumstances.
This kind of financial planning is one of the reasons why previous fuel price spikes (like the one after Russia's invasion of Ukraine) haven't resulted in the kind of system shock that we saw back in the 1970s. Back then, airlines had no way of avoiding the 400 per cent jump in oil prices, resulting in carriers having to ground their planes or absorb heavy losses.
Of course, the longer the higher prices endure, the more problems it will cause for airlines. Right now, markets seem satisfied by the Trump administration's conciliatory tone around a ceasefire – though history shows that things can change quickly. As for whether sustained price pressures would necessarily mean more expensive flights, the jury is still out.
On one hand, we know that plenty of airlines have taken that step in the past. Back in 2022, full-service carriers like Emirates, AirAsia and Japan Airlines responded to higher fuel prices post-Ukraine invasion by adding a temporary surcharge (around 10 per cent) on all passenger bookings.
Then again, the aviation market remains highly price-sensitive and analysts say that airlines have other ways of mitigating the hit that don't risk losing customers. 'There are lots of things airlines can do in that situation,' says John Gradek. 'Rather than increasing ticket prices, you might see airlines delaying the launch of new routes or reducing services.'
Airspace headaches
Then there's the other big question posed by the conflict: what happens when it is no longer too safe to fly over parts of the Middle East? Right now, we've seen flights being directed away from Iran and over Saudi Arabia – something that Lufthansa says has added one hour to its Europe-to-Asia flights – but that isn't without consequences for the industry.
'Even a slight rerouting can be an issue for the bottom line,' says Chris Tarry. The longer that planes have to spend in the sky, the more fuel they are using, without any additional revenue to make up the difference. What's more, delayed arrival times also cause issues with turnaround, the all-important process of getting planes ready to depart again.
All things considered, then, airline bosses will have even more reason to keep their eyes on how events develop in the coming weeks and whether that much-vaunted ceasefire can hold. And at least they can rest assured that they have a powerful ally on that particular front.
'Everyone, keep oil prices down. I'm watching!' posted Donald Trump on his social media platform on Monday. If you're planning on taking a long-haul flight this autumn, you might want to hope that he gets his way.