The war with Iran and the subsequent blockade in the Strait of Hormuz, a critical shipping lane, rising oil prices and sent governments in search of their reserves. How high will prices go and how bad could it get?
United Airlines CEO Scott Kirby released a memo to employees Friday evening showing that his fuel-dependent company is bracing for a very long fallout. “Our plans assume oil hits $175 a barrel and won’t go back down to $100 a barrel until the end of 2027,” he said. wrote.
Jet fuel accounts for between a quarter and a third of airline operating costs. Oil prices have doubled since the start of the war, rising from $70 four weeks ago, threatening to significantly reduce airline profitability. Kirby said his airline had a strategy: United would reduce its planned flight schedule by about 5% during the second and third quarters of this year, with reductions coming particularly in off-peak periods like red-eye and on less popular travel days: Tuesdays, Wednesdays and Saturdays.
“Honestly, I think there’s a good chance it won’t be that bad,” Kirby wrote in the memo, “but… there’s not much downside for us to prepare for this outcome.”
Analysts say United’s moves are important not only for the travel industry, but also for the global economy as a whole. If everything goes as Kirby predicts, “this would be extremely unfortunate news for everyone who doesn’t work in the oil refining industry,” says Jason Miller, a professor of supply chain management at Michigan State University’s Eli Broad College of Business.
Airlines could be a particularly notable canary in the economic coal mine, because their businesses depend even more heavily on oil prices, and particularly refined oil prices, than most others. Air transportation ranks just behind asphalt paving as the U.S. industry that devotes the largest share of its nonlabor costs to refined petroleum products, Miller calculated. Kirby’s forecast, while dire, is in line with others in the commodities market, Miller says.
“Economically, this energy shock is coming at the worst possible time,” Miller says. Add to that a sluggish labor market and a global economy reeling from the United States’ erratic tariff regime, and economists are starting to think of a recession. The war in Iran and the resulting energy crisis “lasted longer than many expected,” Miller says. Kirby’s memo acknowledges that “Hormuz may not be open for business very quickly.”
The effects of soaring fuel prices are already affecting the travel industry. Last week, American Airlines CEO Robert Isom said the company had spent An additional $400 million in fuel. Airlines reported strong demand in recent weeks, with United’s Kirby noting in his note that the last 10 weeks saw the airline take in the most booking revenue on record. But it remains to be seen whether many people are actually excited about travel, or whether travelers spooked by geopolitics and fearful of high ticket prices acted early to lock in their plans before oil prices rose. Isom noted that, if oil prices remain high, “we will certainly be nimble in terms of capacity, to ensure that supply and demand remain in balance.”
The extent of the consequences for airlines – and their passengers – depends not only on how long oil prices remain high, but also on how long companies’ questions about the crisis remain unanswered.
“If we stay in this uncertainty for a long time, it just adds to the complexity,” says Ahmed Abdelghany, who studies flight operations as a professor in the College of Business at Embry-Riddle Aeronautical University. “The longer this goes on, the more problems there are for the remaining airlines. »
