The war with Iran and ensuing blockade in the Strait of Hormuz, a critical shipping lane, has spiked oil prices and sent governments scrabbling for their reserves. How high will prices go, and how bad could it get?
On Friday night, United Airlines CEO Scott Kirby published a memo to his employees showing that his very fuel-dependent business is prepping for a very long fallout. “Our plans assume oil goes to $175/barrel and doesn’t get back down to $100/barrel until the end of 2027,” 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 started four weeks ago, threatening to seriously cut into airlines’ profitability. Kirby said that his airline has a strategy: United will cut some 5 percent of its planned flight schedule during the second and third quarters of this year, with trims coming especially in off-peak periods like 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 isn’t much downside for us to prepare for that outcome.”
United’s moves are significant for not only the travel industry but the wider global economy, analysts say. If it all plays out the way Kirby predicts, “this would be incredibly unwelcome news to everyone who is not in the oil refining business,” says Jason Miller, a professor of supply chain management at Michigan State University’s Eli Broad College of Business.
Airlines might be a particularly notable canary in the economic coal mine because their business leans even more heavily on oil prices, and especially refined oil prices, than most. Air transportation ranks just below asphalt paving as the US industry that spends the greatest share of its non-labor costs on refined petroleum products, Miller has calculated. Kirby’s predictions, while dire, are in line with what others in the commodity market are predicting, Miller says.
“Economically, this energy shock is hitting at the worst time possible,” Miller says. Add its effects to a sluggish job market and a global economy shaken by the US’s erratic tariff regime, and economists start to think about recession. The Iran war and the ensuing energy crisis “have played out longer than many expected it to,” Miller says. Kirby’s memo is an acknowledgment that “Hormuz may not be open for business very quickly.”
The effects of the fuel price spikes are already affecting the travel industry. Last week, American Airlines CEO Robert Isom said the company had spent an additional $400 million on fuel. Airlines have reported strong demand in the past weeks, with United’s Kirby noting in his memo that the past 10 weeks had seen the airline take in the most revenue on bookings ever. But it remains to be seen whether lots of people are actually enthusiastic about travel, or flyers spooked about geopolitics and fears of high ticket prices moved early to lock in their plans before oil costs got higher. Isom noted that, if oil prices remain high, “we’re certainly going to be nimble in terms of capacity, to make sure that supply and demand stay in balance.”
How bad it could get for airlines—and its passengers—depends not just on how long oil prices stay elevated, but how long the businesses’ questions about the crisis remain unanswered.
“If we stay in this uncertainty for a long time, this is adding to the complexity,” says Ahmed Abdelghany, who studies airline operations as a professor in Embry-Riddle Aeronautical University’s College of Business. “The longer it goes, the more problematic to the airlines that remain.”
Source: www.wired.com
