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The summer months are typically the busiest travel season of the year for airlines in the United States. Unfortunately, just as the travel season is starting to heat up, airlines are facing soaring fuel prices that could make it impossible for most airlines throughout the country to profit.
As a result of the ongoing conflict between the United States and Israel against Iran, the worldwide price of oil has begun to surge across the world, leading to a massive jump in the worldwide price of jet fuel.
While this is expected to lead to a surge in ticket prices for air travel over the next several months, one expert believes that only three airlines are in a position to make a profit at the current oil prices.
Airline Ticket Prices Expected to Surge
On Feb. 28, the United States and Israel initiated a joint offensive targeting Iran, with no definitive conclusion on the horizon. In retaliation, Iran has begun preventing ships from traveling through the Strait of Hormuz, a key shipping lane that more than 20% of the world’s oil passes through. As a result, the worldwide price of oil has begun to surge.
As the price of oil begins to rise, so does the cost of jet fuel, which accounts for about one-fifth of airlines’ operating expenses. Jet fuel has already surged to more than $4.00 a gallon, which is up nearly 60% from its $2.50 in late February, one day before the joint U.S.-Israel attack on Iran, according to the Argus U.S. Jet Fuel Index.
As a result of the jet fuel prices, experts expect airline ticket prices to surge, with United Airlines CEO Scott Kirby issuing a warning to customers last week.
Only 3 U.S. Airlines Can Profit
The soaring fuel prices won’t just mean higher prices for customers; the situation could spell disaster for most airlines throughout the country.
According to UBS analyst Atul Maheswari, there are only three airlines in the United States that are capable of generating even “meager profits” if fuel prices remain at or above $4 per gallon: Delta Air Lines, United Airlines, and Southwest Airlines.
One big reason that Delta and United are able to generate profits despite the soaring fuel prices is that those airlines have positioned themselves as premier airlines with more high-income customers. As a result, they will be better positioned to maintain higher margins and pass these costs onto their higher-end consumers.
Southwest Airlines, meanwhile, has traditionally made use of hedging strategies to manage extreme oil price volatility, according to Alex Kimani of OilPrice.com. These strategies use tools like futures, swaps, or options to shield from sudden spikes.
While these airlines are expected to survive and remain at least marginally profitable despite these current fuel prices, no other major airlines are expected to be able to profit at current oil prices. In fact, Maheswari expects that many will face deep losses.
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