Can Airlines Weather the Shock of Oil at $105?

There are turbulent times ahead for the aviation industry! As Brent crude oil prices have surged 75% YTD to $105 per barrel, airlines have no choice but to contend with supply shortages and rising costs. The problem: fuel accounts for up to a third of an airline's operating costs, and the spike in black gold directly impacts margins. However, even in the skies, not all carriers are on equal footing: here we have the breakdown.

Since the launch of Operation "Epic Fury," Middle Eastern airspace has become a danger zone. Several regional aviation hubs are particularly exposed, including Dubai, Doha, Abu Dhabi, Bahrain and Tel Aviv.

As a result, between February 28 and March 4, airports in the region faced the cancellation of approximately 2/3 of all flights. For Middle Eastern carriers (Emirates, Qatar Airways, FlyDubai, Etihad), cancellation rates have reached 75%, according to Jefferies comments published yesterday.

And the situation is not expected to change quickly: at the start of the conflict, Donald Trump mentioned four to five weeks of operations.

Furthermore, this weekend, Iraq, Kuwait, and Qatar announced production cuts to avoid saturating their storage capacities while the Strait of Hormuz remains congested. This is no minor decision: "Production shutdowns imply a longer return to normality, as it would take between two and four weeks to return to full capacity," UBS highlighted this morning.

"As long as flows from the Middle East remain heavily disrupted, the risk remains to the upside for oil," the analyst added.

The impact vaies according to the Airline

However, not all airlines are in the same boat. "The most immediately affected airlines are those with hubs in the concerned countries, such as the United Arab Emirates and Qatar, or those with limited or no fuel hedging," notes Fitch Ratings. Etihad Airways is expected to be the most operationally affected among airlines rated by the analyst, though its liquidity reserves and state support limit the risk to its credit rating.

It should be noted that airlines do not share the same financial structures or profitability levels. Jefferies estimates, for example, that for groups like Delta, Southwest, or United, a 10% increase in fuel prices would weigh on results, whild remaining absorbable, with an estimated profit decline of between 15% and 20%.

In contrast, for American Airlines, which starts from a much lower profitability level and higher debt, the same shock could reduce EPS by... 65%! The logic is relentless: when margins are already thin, a cost increase mechanically translates into a much sharper drop in profits.

European Carriers Less Exposed

Meanwhile, Fitch Ratings believes that more diversified European airlines have sufficient headroom in their ratings to absorb disruptions related to the conflict with Iran... provided it does not exceed four weeks.

Most European carriers also have fuel hedges in place that mitigate the short-term impact of rising oil prices, unlike many North American airlines, which are generally less hedged and therefore more vulnerable to rapid fuel price fluctuations.

Consequently, for major European groups such as British Airways, Lufthansa, Air France-KLM, or Turkish Airlines, the impact should remain generally limited. Conversely, a carrier like AirBaltic is particularly sensitive to rising fuel costs due to its limited hedging, the analyst points out.

However, a prolonged conflict could lead to a lasting increase in oil prices and further disrupt air routes between Europe and Asia. This could weaken demand for air travel, create overcapacity, and weigh on airline revenues, posing a risk to their ratings.

Thus, in a sector where margins remain fragile, the surge in oil prices could quickly transform geopolitical turbulence into financial turbulence.