War with Iran and subsequent blockades in the Strait of Hormuz, an important shipping route, have been oil prices have risen and led the government to seek their refuge. How high will the price go, and how bad can it get?
On Friday night, United Airlines CEO Scott Kirby posted a memo to his employees indicating that his oil-based business is preparing for a very long run. “Our plans assume that oil reaches $175/barrel and will not drop to $100/barrel until the end of 2027,” he said. he wrote.
Jet fuel accounts for between a quarter and a third of airlines’ operating costs. Prices have doubled from $70 a barrel since the war began four weeks ago, threatening to cut airlines’ revenues. Kirby said that his airline has a strategy: United will cut some 5 percent of its scheduled flight schedule in the second and third quarters of this year, and the adjustments come mainly during off-peak periods such as red eyes and less popular travel days: Tuesdays, Wednesdays, and Saturdays.
“Honestly, I think there’s a good chance it won’t be that bad,” Kirby wrote in the memo, “but … there’s no great loss for us to prepare for that outcome.”
United’s moves are important not just for the travel industry but for the broader global economy, analysts say. If it all turns out the way Kirby predicts, “this is going to be very sad news for everybody who’s not in the oil refining business,” says Jason Miller, a professor of supply chain management at the University of Michigan’s Eli Broad College of Business.
Airlines can be a prominent conduit in the economic coal mine because their business is more dependent on the price of oil, and especially the price of refined oil, than most. Aviation ranks just below asphalt as the U.S. industry that spends the largest share of non-labor costs on refined petroleum products, Miller calculated. Kirby’s forecast, while dire, is consistent with what others in the commodity market are predicting, Miller says.
“Economically, this energy shock is hitting at the worst possible time,” Miller says. Add to that the effects of a sluggish labor market and a global economy rocked by the US tariff regime, and economists are starting to think about a recession. The Iran war and the energy crisis that followed “have played out longer than many expected,” Miller says. Kirby’s memo is an admission that “Hormuz may not be open for business very soon.”
The effects of rising oil prices are already affecting the transport sector. Last week, American Airlines CEO Robert Isom he said the company used it an additional 400 million dollars for oil. Airlines have reported high demand in previous weeks, with United’s Kirby noting in his memo that the airline received more revenue per booking 10 weeks ago. But it remains to be seen whether many people are eager to travel, or flyers who feared geopolitics and fear of high ticket prices moved early to seal their plans before the cost of fuel rose. Isom noted that, if oil prices continue to be high, “we will certainly be smart in terms of capacity, to make sure that supply and demand remain in balance.”
How bad the situation could be for airlines—and their passengers—depends not only on how long fuel prices stay high, but how long business questions about the crisis remain unanswered.
“If we stay in this uncertainty for a long time, this increases the complexity,” says Ahmed Abdelghany, who studies airline operations as a professor at Embry-Riddle Aeronautical University’s College of Business. “The longer it goes on, the more trouble it will be for the remaining airlines.”
