Surging Jet Fuel Prices Put Global Airlines Under Pressure

BY MIRABEL ODETA

Airlines across the world are facing growing financial pressure as jet fuel prices surge far faster than crude oil, creating new challenges for carriers already dealing with volatile energy markets and geopolitical tensions. The sharp increase in fuel costs is forcing many airlines to reconsider pricing strategies, introduce fuel surcharges, and even reduce flight capacity in order to protect their profit margins.

The rapid spike in jet fuel prices has followed escalating tensions surrounding the conflict involving the United States, Israel, and Iran. While crude oil prices have climbed by roughly one-third since the conflict intensified, jet fuel prices have risen at a much faster pace, in some cases doubling over the same period. This widening gap between crude oil prices and jet fuel costs has unsettled the aviation industry and is threatening to significantly erode airline profitability.

Typically, jet fuel prices move closely alongside crude oil prices, since crude oil is the primary raw material used in fuel production. However, recent market conditions have disrupted this relationship. Refining margins—the difference between the cost of crude oil and the price of refined products like jet fuel—have surged to unusually high levels. As a result, airlines are paying far more for jet fuel than the increase in crude prices alone would normally justify.

Even airlines that have attempted to protect themselves through fuel hedging are finding that their strategies offer only partial relief. Many carriers hedge against fluctuations in crude oil prices rather than jet fuel specifically. This means that when refining margins widen dramatically, the hedges fail to fully shield airlines from the higher costs they ultimately face at the pump.

Rebecca Sharpe, Chief Financial Officer of Cathay Pacific Airways, highlighted this challenge while speaking in Hong Kong after the airline released its earnings report. She described the recent increase in jet fuel costs as dramatic, explaining that while the airline does have hedging contracts tied to crude oil, those protections do not fully cover the soaring cost of jet fuel itself. As a result, even well-hedged airlines remain exposed to the sharp rise in fuel expenses.

The situation is even more challenging for carriers that have chosen not to hedge fuel prices at all. Several major airlines in the United States and China operate without hedging contracts, leaving them completely exposed to sudden fuel price increases. Without financial protection mechanisms in place, these airlines must absorb the full impact of higher jet fuel costs or quickly pass those costs on to passengers through higher ticket prices.

Industry experts say that during periods of geopolitical unrest, such as conflicts in the Middle East, fuel prices often remain elevated for extended periods. Aviation analyst Hans Joergen Elnaes noted that historically, fuel price spikes linked to regional instability can last for months, prolonging the pressure on airline balance sheets and making it difficult for carriers to plan ahead.

Low-cost airlines are particularly vulnerable in such environments. These carriers typically operate with thinner profit margins and serve passengers who are highly sensitive to ticket price increases. According to Nathan Gee, head of Asia Pacific transportation research at Bank of America, budget airlines often feel the greatest squeeze when fuel prices climb sharply. Raising fares too aggressively risks driving away customers, yet failing to do so can severely impact profitability.

Fuel hedging itself presents a complex trade-off. While derivative contracts can protect airlines from sudden increases in fuel prices, they can also backfire when prices fall. In those situations, airlines may end up locked into purchasing fuel at above-market rates. Several airlines have experienced significant financial losses in the past after entering hedging contracts that later proved unfavorable when oil prices dropped.

In Europe, where hedging is more common among airlines, analysts estimate that a sustained 10 percent increase in jet fuel prices could have significant financial consequences. For instance, analysts at J.P. Morgan estimate that such an increase could reduce the operating profit of budget carrier Wizz Air by as much as 31 percent this year. Other major European airlines—including Air France‑KLM, Lufthansa, International Airlines Group, and Ryanair—could see operating profits fall by between 3 percent and 10 percent if high fuel costs persist.

Wizz Air has already warned that tensions in the Middle East could cost the company around 50 million euros. While the airline has hedged about 83 percent of its jet fuel requirements through March, its coverage drops to roughly 55 percent for the following year through March 2027. Chief Executive Officer Jozsef Varadi said the company remains reasonably protected against the current fuel market volatility.

Another major concern for airlines is the dramatic rise in refining margins. Before the conflict, jet fuel in Asia typically traded about $21 per barrel higher than crude oil. However, the refining margin surged to as much as $144 per barrel on March 4, before easing to around $65 per barrel. Even at that lower level, the margin remains unusually high compared with historical norms.

This spike in refining margins has caught many airlines off guard. As analysts point out, while carriers may hedge crude oil prices, very few hedge refining margins directly. This means that when the cost of turning crude oil into jet fuel rises sharply, airlines are left with little protection.

Airlines in the Asia-Pacific region are already taking steps to mitigate the impact. Air New Zealand and Qantas Airways do not operate flights to the Middle East, yet they are still feeling the effects of higher global fuel costs. Both airlines are more than 80 percent hedged against crude oil for the half-year ending in June, but they have nonetheless raised fares in an effort to safeguard their financial performance.

The ripple effects of rising jet fuel costs are likely to be felt by travelers worldwide. Higher ticket prices, reduced flight availability, and the possible introduction of additional fuel surcharges could become increasingly common if fuel markets remain volatile.

For the aviation industry, fuel is one of the largest operating expenses, often accounting for a significant share of total costs. As long as refining margins remain elevated and geopolitical tensions continue to disrupt energy markets, airlines may struggle to stabilize their finances. The coming months will determine whether fuel prices begin to ease or continue to strain airline operations and passenger travel budgets around the world.