Scott Kirby, the CEO of United Airlines, has issued a caution to travelers regarding potential increases in ticket prices due to climbing jet fuel costs.
At a recent event at Harvard University, Kirby mentioned, “Nobody hedges anymore, and even if they did, it’s really hard to hedge against the spread of crack.” He suggested that, as the airline industry grapples with these rising fuel expenses, “airfare increases will likely begin soon.”
The “crack spread” refers to the difference between the cost of crude oil and the price of refined products like gasoline and jet fuel, essentially reflecting refinery profits from turning crude into usable fuels. Airlines and oil companies keep an eye on this as a way to manage potential losses from fluctuating fuel prices.
This warning comes in light of escalating tensions in the Middle East tied to the U.S.-Israel conflict involving Iran, coupled with an increase in jet fuel prices, which is raising alarms in the airline sector just as the summer travel season approaches.
Experts warn that these rising fuel prices might lead to higher airfares and possible surcharges, which could ultimately limit options for travelers.
As jet fuel prices rise sharply, airlines find themselves under increasing strain. Currently, the average gasoline price in the U.S. stands at $3.69 a gallon, a significant jump from just below $3 before the recent conflict.
California is experiencing the steepest increases, with fuel costs surging nearly $1 since tensions escalated. The state’s average price for regular gasoline has now reached $5.509 per gallon, compared to $4.582 a month ago, according to data from the American Automobile Association. Just a week earlier, it was at $5.159.
Fuel expenses typically account for about 20% to 25% of an airline’s overall operating costs. In times of rapid price increases, airlines often feel pressured to pass some of those costs onto passengers. While some carriers rely on fuel hedging—contracts that set fuel prices well in advance—most are only partially shielded against sudden spikes.
The surge in fuel prices is, in part, a result of instability in the Middle East. Actions affecting commercial shipping and oil facilities have disrupted normal transit in the Strait of Hormuz, a crucial passageway that handles around one-fifth of the globe’s oil supply.
This instability has caused global oil prices to rise and has hampered the ability of several significant oil-producing nations to ship crude, thus tightening supply. When crude prices increase, refined fuels like gasoline and jet fuel typically follow suit fairly quickly.
The effects of these rising fuel prices will hit California particularly hard, where local fuel supplies are already tighter than in other regions. A number of refineries in the state, including those operated by Phillips 66 in Carson and Valero in Benicia, have either shut down or reduced their output in recent years.
Additionally, California mandates specific cleaner-burning gasoline blends and imposes some of the highest fuel taxes and regulatory costs in the country, contributing to faster price increases when global oil markets face disruptions.
As airlines navigate these higher costs, travelers might notice a variety of impacts. While many international carriers add fuel surcharges on top of base ticket prices, U.S. airlines often integrate those fuel costs into overall fares. However, that can still lead to increased ticket prices.
Furthermore, airlines may also raise prices for optional services, such as:
- Upgrading seats or acquiring extra legroom
- Checked baggage fees
- Priority boarding
- Other premium features
Some international airlines have already started to increase fares and introduce new fuel surcharges. For instance, Cathay Pacific Airways has noted that the cost of jet fuel has nearly doubled amid recent tensions, prompting them to raise fuel surcharges.
Other airlines implementing these increases include:
- Air France-KLM, announcing potential increases of around 50 euros on some long-haul economy fares.
- Air India, with fuel surcharges on certain international flights that can reach up to $50.
- Hong Kong Airlines, which has also raised surcharges on several routes.
- South Africa’s Flysafair, announcing a temporary fuel surcharge.
