Key figures: Brent crude: ~$109/barrel · Jet fuel: ~$195/barrel · Crack spread: ~$70/barrel · US domestic summer fares: up ~10% · United Airlines capacity cut: 5%

In late February 2026, Brent crude was trading at roughly $65 per barrel. Five weeks later, it sits above $109. Jet fuel has moved even faster, nearly doubling from around $99 to $195 per barrel.1 The cause is the conflict involving Iran and the effective closure of the Strait of Hormuz, the largest disruption to global oil flows in decades.

For airlines, the arithmetic is brutal. Fuel accounts for 20 to 30 percent of operating costs. When that input doubles in weeks, the entire cost structure shifts. But the interesting question is not the scale of the shock. It is why airlines cannot do the obvious thing: simply raise ticket prices to match.

The Cost Shock

Airlines do not pay for crude oil directly. They pay for kerosene, a refined product whose price reflects both the cost of crude and the "crack spread", the refining margin between raw crude and finished fuel. Normally the crack spread sits at $10 to $25 per barrel. In the week of March 20, North American jet fuel averaged $179 while Brent hovered near $110, implying a spread of roughly $70.2

Crack spread: The difference between the price of crude oil and the refined products derived from it, such as jet fuel. A widening crack spread means airlines pay more above and beyond the cost of raw crude.

Brent crude oil daily close price ($/barrel), 25th February to 2nd April 2026. Source: Yahoo Finance.

This matters because even when crude stabilises, the crack spread can widen independently. The pain is compounding: crude is expensive, and turning it into usable fuel has become expensive too. The EIA forecast in March that Brent would stay above $95 over the following two months before easing below $80 in the third quarter.3 United Airlines CEO Scott Kirby is less optimistic. His planning assumption is that oil reaches $175 per barrel and does not return to $100 until late 2027.4

Elasticity Meets Reality

The textbook response to a cost shock is simple: raise output prices. But the airline industry does not behave like a textbook.

Air travel demand is not as inelastic as one might assume. IATA research suggests route-level fare elasticities typically range from -0.8 to -2.0, meaning a one percent fare increase reduces passenger numbers by 0.8 to 2.0 percent depending on the route and class of travel.5 Business travellers are less price-sensitive than leisure travellers, and long-haul routes are less elastic than short-haul ones where passengers can take a train instead.

This creates a bind. United has indicated fares would need to rise roughly 20 percent to cover the fuel increase.4 Skift Research estimates ticket prices across the US industry would need to rise at least 11 percent to absorb an estimated $24 billion in additional annual costs.6 But a 20 percent fare increase, using a mid-range elasticity of -1.2, would reduce passenger volumes by approximately 24 percent. Airlines would be flying emptier planes while fixed costs, leases, gates, debt service, stay the same.

"Airlines face an existential challenge. They will need to cut fares to stimulate weakening demand while higher fuel costs will be pushing them to increase fares. A perfect storm."

Rigas Doganis, former head of Olympic Airways.7

What Airlines Are Actually Doing

Rather than uniform fare hikes, carriers are pulling several levers at once.

Cutting capacity is the primary response. United has announced a 5 percent reduction to its schedule over the next six months, including the summer peak.8 The logic is straightforward supply management: fewer seats supports load factors and pricing power on the flights that remain. The US industry is an oligopoly, with four carriers controlling roughly 80 percent of domestic capacity. When all four face the same cost shock, all can cut capacity in parallel and fares rise without any single airline bearing disproportionate competitive risk. Capacity discipline, not price leadership, is the coordination mechanism.

"The only way to get prices up is to reduce capacity. That is what I would expect to see happen this time, and it's what we saw on previous occasions when we had other crises."

Andrew Lobbenberg, Barclays.7

Raising ancillary fees is the second lever. American Airlines increased checked baggage fees by $10 per bag from April 3, and JetBlue followed suit.8 For budget carriers whose models depend on low headline fares, this is preferable to raising the ticket price itself. Ancillary charges are less visible at the point of booking, which means they trigger a weaker demand response than an equivalent increase to the base fare.

Fuel surcharges are reappearing on long-haul routes. By framing the cost as temporary and external, airlines reduce the reputational damage of what might otherwise look like permanent fare increases.

The Hedging Divide

The most revealing feature of this crisis may be the divergence between airlines that hedged their fuel exposure and those that did not.

No major US airline currently hedges fuel costs with financial derivatives, leaving the domestic industry fully exposed to the spot market.6 In Europe, Lufthansa is roughly 77 percent hedged for the year and easyJet at 84 percent for the first half, meaning most of their fuel was locked in at pre-crisis prices. But hedging is not permanent protection. Coverage decays as contracts expire, and for airlines that did hedge, the clock is ticking. IAG, parent of British Airways, illustrates the problem: 75 percent coverage in the first quarter drops to just 31 percent by early 2027.9

IAG fuel hedging coverage by quarter (%), Q1 2026 to Q2 2027. Source: IAG investor disclosures; Bloomberg.9
9

The outlier is Delta Air Lines, which in 2012 purchased the Monroe Energy refinery in Pennsylvania. The refinery does not shield Delta from crude prices, but it captures the crack spread. Delta's filings show Monroe lowered its average fuel cost by 23 cents per gallon in 2022, equivalent to roughly $785 million in savings.10 CEO Ed Bastian has described it as a "meaningful hedge" and expects Monroe to contribute positively from the second quarter onward.

The competitive implication is stark. While American Airlines absorbed a $400 million hit to its first-quarter fuel bill, Delta's vertical integration provides a buffer no derivative can replicate. In concentrated industries, the firms that survive supply shocks are often those with the most resilient cost structures, not necessarily the best routes.

Rockets Up, Feathers Down

One final concept is worth flagging. Economists observe that consumer prices tend to rise quickly when input costs increase but fall slowly when they decrease, a pattern called "asymmetric price adjustment." Airlines are a textbook case. Once fares go up, they do not come back down at the same speed, even if oil retreats.8 If the Strait reopens and crude falls toward $70, passengers should not expect ticket prices to follow promptly.

Before the conflict, IATA had forecast record industry profits of $41 billion in 2026 on a net margin of roughly 3.9 percent.11 Even in the best of times, airlines are a low-margin business. The current shock demonstrates that cost increases do not translate mechanically into price increases. The path runs through demand elasticity, market structure, hedging strategy, and the strategic behaviour of oligopolistic firms. Whether airlines can shrink supply without triggering a collapse in demand is the question that will define the rest of 2026.

The turbulence is far from over.

Footnotes

  1. IATA, Jet Fuel Price Monitor (opens in a new tab), week ending 28 March 2026. ↩

  2. IATA; Airlines for America (opens in a new tab), weekly fuel data, week of 20 March 2026. ↩

  3. EIA, Short-Term Energy Outlook (opens in a new tab), 10 March 2026. ↩

  4. Scott Kirby, United Airlines CEO, Bloomberg Television (opens in a new tab), 24 March 2026. ↩ ↩2

  5. InterVISTAS Consulting, Estimating Air Travel Demand Elasticities (opens in a new tab), commissioned by IATA. ↩

  6. Skift Research, "Oil Price Shock: The Impact on Airline Costs and Fares," (opens in a new tab) 9 March 2026. ↩ ↩2

  7. Reuters, "Airlines face fare dilemma as fuel spike threatens travel demand," (opens in a new tab) 30 March 2026. ↩ ↩2

  8. CNN Business, "Despite soaring jet fuel prices, air fares aren't up that much. But they will be," (opens in a new tab) 3 April 2026. ↩ ↩2 ↩3

  9. IAG, Lufthansa, and easyJet investor disclosures; Bloomberg (opens in a new tab) hedging data, March 2026. ↩ ↩2

  10. Delta Air Lines SEC filings; Reuters, "Delta Air Lines' refinery bet looks more valuable in jet fuel squeeze," (opens in a new tab) 25 March 2026. ↩

  11. IATA, Financial Outlook (opens in a new tab), 2026. ↩