Jet fuel prices in the U.S. rose 57% during the first 18 days of the Iran war, according to energy market intelligence company Argus, rising to $3.93 per gallon on March 17.
It's a hefty increase, but U.S. airlines say they've been able to quickly pass along the escalating fuel costs to consumers.
During the J.P. Morgan Industrial Conference on March 17, United CEO Scott Kirby called it "pretty remarkable" to possibly recover 100% of the increase in fuel costs so far and to do it more quickly than the industry had during previous crises.
Robust demand and the absence of fuel hedging are factors in U.S. airlines' good fortune. The timing of the crisis is another. And a potential wild card is savvy consumers moving up their booking decisions to buy before airfares spike even further.
During the J.P. Morgan conference, American, Delta and United each said they will spend approximately $400 million more on fuel this quarter than they had anticipated. But carriers also spoke about a demand strength that will enable them to get through the quarter with earnings that land within the ranges they forecasted in January.
"It's across all segments," Delta CEO Ed Bastian said. "It covers corporate, international, premium leisure, main cabin, our domestic system. We're seeing strength in every market."
In the week leading up to the J.P. Morgan conference, sales were up 25%, Bastian said. And Delta reported that first-quarter revenue would grow in the high single digits, up from a previous projection of 5% to 7%, while earnings per share would track as previously expected.
Southwest also isn't changing its projections for earnings per share. And American reported a year-over-year leap of more than 10% in revenue per available seat mile, a metric that is tied to demand and fares. Frontier reported a 15% jump.
Airfares were already on the rise prior to the war and were up 7.1% in February compared to a year earlier, according to Consumer Price Index data. In the two weeks preceding March 17, U.S. airlines successfully implemented two fare increases, Bastian and Alaska CEO Ben Minicucci said.
Though competition laws forbid airlines from coordinating on prices, carriers often respond to one another's pricing decisions.
Besides high demand, seasonality has likely played a role in airlines' ability to pass along fuel costs, said Bloomberg Intelligence analyst George Ferguson.
March is a prime month for booking summer vacation flights, he said, and most consumers are likely deciding to go forward despite the higher costs. In fact, Ferguson said, some might have moved up their booking timeline in case tickets get even more expensive.
Minicucci offered similar thoughts on March 17, saying that Alaska saw a spike in demand when fares went up.
Still, even aided by high demand, airlines likely wouldn't have increased prices so quickly had the industry not moved away from fuel hedging over the past decade, Ferguson said.
Hedges are a form of insurance in which airlines pay what amounts to a premium to lock in future fuel prices. When the price of jet fuel goes up, hedged airlines don't have a strong impetus to raise fares at the pace that unhedged carriers would want to. On the contrary, they would have the flexibility to gain share by lowering fares, which might force other airlines to match those lower fares.
"We're at the point where nobody is materially hedged in the business, so they all have to move pretty quickly to recoup these high fuel costs," Ferguson said. "When they all have to move in the same direction, it's easier."
United CFO Mike Leskinen expressed similar thoughts at the J.P. Morgan conference.
"For the first time, no major U.S. carrier has fuel hedges," he said. Leskinen called the industrywide pass-through of costs to the consumer "the natural hedge."
What remains to be seen is how long the Iran war will last and how high fuel prices will rise, as well as how long consumer demand will hold up to rising fares.
Kirby said United sees a scenario in which it could increase its profit margin even if oil prices end up averaging $120 per barrel this year and stay at $100 per barrel through 2027, though it would involve more downsizing from discount airlines.
Minicucci offered a more cautious appraisal. He said that keeping up with a $1-per-gallon increase in jet fuel requires a 10% increase in airfares.
"But it would have to stick," he said.
Deutsche Bank research analyst Michael Linenberg is now forecasting that jet fuel will average 75 cents more in the first half of this year than Deutsche Bank's previous forecast, with carriers passing on 75% of that cost to flyers. Full-service carriers, he wrote, will have more success than discounters, whose customers are more price sensitive.
Reducing capacity might be necessary to keep fares up. American CEO Robert Isom has that consideration in mind.
"We're certainly going to be nimble in terms of capacity to make sure that supply and demand stay in balance," he said.