The war with Iran and the ensuing blockade in the Strait of Hormuz has sent oil prices spiking, prompting airlines to prepare for a potentially long and costly fallout. United Airlines CEO Scott Kirby has published a memo to his employees, outlining the company's strategy to mitigate the effects of rising fuel costs.
Jet fuel accounts for between a quarter and a third of airlines' operating costs, and prices have doubled to $70 a barrel since the war started four weeks ago. Kirby's memo assumes oil prices will reach $175/barrel and won't return to $100/barrel until the end of 2027. In response, United will cut 5 percent of its planned flight schedule during the second and third quarters of this year.
Inside the Industry
Airlines are particularly vulnerable to oil price fluctuations, with air transportation ranking as one of the US industries that spends the greatest share of its non-labor costs on refined petroleum products. According to Jason Miller, a professor at Michigan State University's Eli Broad College of Business, the effects of the fuel price spikes are already being felt in the travel industry.
Other airlines, such as American Airlines, are also feeling the pinch, with CEO Robert Isom reporting an additional $400 million spent on fuel. The industry's ability to adapt to the crisis will depend on its ability to balance supply and demand, says Ahmed Abdelghany, a professor at Embry-Riddle Aeronautical University's College of Business.
The Economic Impact
The prolonged oil crisis could have far-reaching consequences for the global economy, which is already facing a slow job market and a troubled tariff regime. Economists warn that the energy shock could lead to a recession, with Miller noting that the crisis has played out longer than many expected.
As the situation continues to unfold, airlines and passengers alike will be closely watching the developments, wondering how bad it could get and how long the uncertainty will last. With the industry's profitability hanging in the balance, one thing is certain: the effects of the oil crisis will be felt for a long time to come.
