Travelers hoping for cheaper plane tickets following a drop in oil prices tied to a U.S.-Iran interim peace deal may be disappointed — airlines are more likely to pocket the fuel savings than pass them along to passengers.
The reason comes down to simple supply and demand. With limited seats available and airlines still trying to recover from steep fuel cost increases earlier this year, carriers have little motivation to slash fares.
U.S. jet fuel spot prices dropped to $2.85 per gallon as of June 17, a significant fall from a peak of $4.88 per gallon in early April. If that lower price level holds, it could reduce the U.S. airline industry’s annual fuel spending by more than $40 billion, based on a Reuters calculation using industry consumption figures.
Even so, airlines have not fully made up for what they lost when fuel prices spiked. Industry figures show jet fuel costs rose more than three times faster than airfares between January and May. Deutsche Bank estimated that U.S. carriers would recover only about 60 cents for every extra dollar spent on fuel — roughly $14.4 billion in added revenue compared to $24.1 billion in higher fuel expenses.
Alaska Air reported recovering about one-third of its increased fuel costs, while Delta Air Lines, United Airlines, and American Airlines said they recaptured roughly 40% to 50% during the second quarter. JetBlue Airways and Frontier Group expect to recover less than half.
United’s chief executive told Reuters that his airline is making progress toward full recovery: “We’re on a path to recovering 100% by the end of the year.”
Data from Raymond James show that average domestic fares booked one week before travel were 34.1% higher than the same period a year ago, as of June 8.
The bigger question now is whether airlines can hold those higher fares even as fuel costs ease. A Melius Research analyst noted, “What remains crucial is the ability to hold price,” adding that lower gasoline prices at the pump could reduce some of the public pressure airlines face over high airfares.
Outside the United States, the picture is mixed. An aviation and travel research head at a Dublin-based firm said lower crude oil prices take time to filter through to jet fuel costs, and unless jet fuel falls back to where it started the year, airlines are likely to keep fares steady or push them higher where travel demand allows.
In Europe, long-haul fares may soften somewhat because airlines were more successful at passing on fuel costs on those routes. Short-haul fares, however, could stay firm if the peace agreement boosts travel bookings. In Asia, analysts noted that China’s major carriers face weak pricing power and declining aircraft usage, while Hong Kong’s Cathay Pacific is better positioned thanks to stronger fares, cargo income, and premium travel demand. In the Middle East, some airlines may use promotional deals to rebuild traffic lost during the conflict, though fuel costs remain too high for widespread discounts. Carriers from the United Arab Emirates could be more aggressive, with stronger government support behind them.
Even with fuel prices falling, airlines still face a steep climb. Jet fuel currently costs 54% more than it did a year ago, according to the International Air Transport Association. Southwest Airlines’ chief operating officer captured the industry’s frustration when asked about returning to pre-pandemic profit margins, responding simply: “When’s fuel going to go down?”
Financial analysts at Jefferies estimated that every 5% drop from a roughly $3-per-gallon fuel cost forecast for 2027 would boost projected earnings per share by 10% to 15% for Delta, Southwest, and United — and by as much as 50% for American Airlines.
In past cycles when oil prices fell, airlines often added capacity quickly, which drove fares down. That scenario is unlikely this time around. Aircraft delivery delays, constrained airport capacity, and financially weaker budget carriers are all working against a broad fare war. U.S. domestic seat capacity is expected to grow just 0.4% year-over-year in the third quarter — a sharp drop from the 4.6% growth that had been projected before Middle East tensions escalated.
Analysts at J.P. Morgan said limited new aircraft deliveries and pullbacks by budget carriers reduce the risk of significant capacity increases in the U.S., giving major airlines an unusually strong ability to maintain current pricing.
Ultimately, whether travelers see any relief may hinge more on consumer spending trends than on fuel prices. As one aviation analyst put it, “This is very much subject to the strength of the consumer.”
