Multiple airlines worldwide are cutting flights and raising fares; 'can’t afford to fly' has become a global problem. How long will the aviation industry’s self-preservation mode last, and how should passengers respond?

From a business perspective, this is the aviation industry’s self-preservation; from an economic perspective, it reflects how initial inflationary pressures have been temporarily masked by demand-side price elasticity—thereby concealing underlying structural risks. First, airlines’ flight cancellations are a direct result of demand elasticity. We know fuel costs constitute airlines’ largest variable expense—accounting for roughly 30% of total operating costs. For longer-haul routes, this share can marginally rise to around 40%; on intercontinental routes, it can climb even higher. Although international oil prices have fluctuated recently due to confusing news developments and mutual claims of victory by conflicting parties, the price baseline has clearly risen since February 28—the date when Iran’s escalation led to the de facto closure of the Strait of Hormuz. Moreover, the Middle East hosts a large concentration of refining and petrochemical capacity. As such, alternative production capacity cannot fill the supply gap in the short term, further amplifying upward pressure on refined fuel prices. Aviation turbine fuel (jet fuel) is a typical refined petroleum product. A one-third increase in crude oil prices can more than double—or even more—aviation fuel prices. Although domestic Chinese airlines do engage in hedging, they primarily hedge against crude oil—not refined aviation fuel. Thus, even airlines claiming relatively high crude-oil hedging ratios remain vulnerable to the amplified premium on refined fuel and its consequent cost impact. Faced with such pronounced cost shocks, airlines essentially have only two options: either sharply raise ticket prices (or—as many domestic carriers do—maintain nominal fares while significantly increasing fuel surcharges) to pass on costs; or cancel flights with lower load factors and thinner margins to limit losses, thereby preserving core route profitability. Domestic airlines have already widely adopted the practice of announcing cancellations two to three weeks before departure for routes to Southeast Asia and Oceania. Though nominally categorized as relatively premium outbound travel, demand for these destinations during China’s May Day holiday is in fact driven almost exclusively by short-term leisure travelers—making it fundamentally price-sensitive. In theory, airlines could fully offset rising fuel costs via fuel surcharges—but in practice, they cannot. Consumers simply refuse to pay higher fares; once ticket prices rise, many switch to domestic alternatives, causing load factors to plummet. Consequently, even with higher fares, overall revenue declines due to drastically reduced occupancy—rendering the strategy counterproductive. By cancelling such flights two to three weeks ahead, airlines avoid larger sunk costs arising from low load factors close to departure time. They can instead allocate expensive jet fuel to shorter-haul or business-oriented routes—where demand is more inelastic and cost-pass-through via fuel surcharges is more effective. This approach also avoids controversies that would otherwise arise from last-minute cancellations. The same logic applies broadly: foreign airlines’ recent flight cuts likewise stem from rigorous cost-benefit calculations. For instance, although European carriers possess greater experience in hedging, Europe’s longstanding environmental policies and energy-transition commitments have led to the voluntary shutdown of numerous refineries—and the cessation of Russian refined-fuel imports. Unlike China—which maintains substantial domestic refining capacity capable of partially offsetting supply shocks—European carriers face unavoidable cost pressures. They too have begun cancelling lower-load-factor flights well in advance.

Aviation, toy manufacturing, and green industries: How is the Iran war affecting Asian countries’ economies?

France’s Le Monde has published a series of articles detailing the economic impact of the Iran war on Asian countries—one focusing on the aviation sector, another on the toy industry, and a third on the green industry. The newspaper writes that surging oil prices are rendering Asian airlines increasingly vulnerable; toys manufactured in Asian countries are being swept up in a ‘storm of high-priced plastics’; meanwhile, Asian green industries are benefiting from the Middle East conflict. Airlines growing increasingly vulnerable Regarding aviation, Le Monde reports that soaring aviation fuel prices are severely weakening Asian airlines. It notes that carriers such as Air China, China Eastern, and China Southern—operating under strict state regulation—have far less flexibility than Western airlines in responding to fuel-price volatility. Compounding this challenge is intensifying competition from high-speed rail on domestic routes. Le Monde points out that, during the first quarter of this year, performance at China’s three major state-owned airlines improved slightly—driven by the nascent recovery of international routes and seasonal peaks in domestic travel demand during the Spring Festival holiday. Yet this brief respite is unlikely to last. Between February 28—the outbreak of the Iran conflict—and late April, the aviation fuel purchased by these three carriers rose approximately 70%, despite the National Development and Reform Commission’s directive requiring refiners to cut prices by RMB 1,000 per ton. Typically, fuel accounts for 30%–40% of their operating costs. Soaring fuel prices, persistently low long-haul flight volumes relative to pre-pandemic levels, and fierce fare competition have cast a shadow over prospects for 2026. A Singapore-based report states: “China’s state-owned airlines are expected to post losses again this year.” Overcapacity and structural challenges Le Monde observes that, unlike major international carriers such as Air France, Asian airlines rarely use financial hedging instruments to mitigate oil-price volatility risk. This stems from the 2008 financial crisis. At that time, Air China and China Eastern entered into massive fuel-hedging contracts—only to suffer enormous losses when oil prices plunged from over USD 140 per barrel to roughly USD 40. Each company lost more than RMB 6 billion. Consequently, under stringent regulatory oversight today, Asian airlines struggle to fully pass on rising fuel costs to ticket prices—especially on domestic routes, where governments still aim to stimulate consumer spending.

As Iran War Drags On, Airlines Pull Back on Fuel Hedges and Warn on Fares

3 days ago

Major airlines are halting fuel hedging amidst soaring jet fuel prices caused by the Iran conflict, warning of steep fare hikes. Carriers like Ryanair and AirAsia cite cost uncertainties, signaling increased industry exposure to volatile energy markets.

reuters

As Iran War Drags On, Airlines Pull Back on Fuel Hedges and Warn on Fares

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