It is a well-known fact: with nearly a third of their operating costs related to fuel purchases, airlines are highly exposed to surging crude prices. Since the war in Iran began, jet fuel prices have soared, weighing directly on the sector's profitability, especially in the European short-haul market where margins remain structurally thin.

However, not all carriers are equal ly affected: they employ varying degrees of hedging strategies to shield themselves from rising prices. Ryanair, for instance, has disclosed that 80% of its requirements are hedged through March 2027 at $67 per barrel. Hedging levels reach 77% for Lufthansa ($846/tonne) and 62% for AFKLM ($778/tonne). Conversely, Wizz Air appears more vulnerable with only 55% hedged at $683/tonne.

The specter of a lasting shock

"If oil were to hit $150 a barrel and the Strait of Hormuz remained closed until March 2027, there would probably only be three or four airlines left in Europe," warned Ryanair CEO Michael O'Leary earlier this week, in his characteristically provocative style, on the sidelines of the company's quarterly results presentation.

Indeed, the lack of progress in the Middle East is beginning to alarm professionals. Originally expected to last "4 to 5 weeks," the war in Iran (which Trump had described as a mere excursion for his military) has primarily resulted in the blockage of the Strait of Hormuz, propelling crude prices to levels that have not been seen since 2022.

"In the refined products market, particularly heavy fuel oil, diesel, and jet fuel, price pressure is twofold: on one hand, the supply risk in the Persian Gulf, and on the other, the seasonal rise in demand," the Iranians noted via their Paris embassy, clearly monitoring the repercussions of the double blockade on the rest of the world.

Heading into a zone of turbulence?

Nearly 80 days into the conflict, UBS and Bernstein are highlighting the structural consequences weighing on the sector: by threatening airline margins, the sustained rise in fuel costs is now likely to lead to a capacity slowdown in Europe.

According to Alex Irving, an analyst at Bernstein, "the market is still underestimating the impact of durably high oil prices." This view is shared by UBS, which believes that "current results probably do not yet reflect the full extent of the energy shock."

Furthermore, while fuel hedges act as a price shield for airlines, this protection is only temporary, and "the cost of renewing hedges is becoming much higher," UBS points out. Current protections could also mask the economic reality of upcoming fiscal years, suggests Alex Irving.

For Bernstein, if oil prices remain high, European carriers will likely be forced to reduce capacity as early as next winter. The bank considers that the sector is still reacting too slowly to deteriorating economic conditions.

However, Alex Irving believes that "airlines cannot indefinitely absorb rising fuel costs" and that, consequently, a supply adjustment will become "almost inevitable" to preserve margins.

The bank is particularly cautious regarding players that are most exposed to short-haul and price-sensitive markets, such as Wizz Air, Lufthansa, or Air France-KLM. In contrast, Ryanair is seen as better equipped, thanks to its highly competitive cost structure.

UBS says that shock absorbers do exist

While these concerns are shared by UBS, the Swiss bank considers that the sector still has several shock absorbers.
Analyst,Jarrod Castle highlights the resilience of passenger demand: despite inflation and the economic slowdown, consumers continue to travel, particularly in the leisure and premium segments.

Contacted by MarketScreener, Air France-KLM confirmed "the maintenance of a strong appetite for travel." Specifically, load factors in Q2 are in line with figures recorded a year earlier, across both short/medium-haul and long-haul segments.

According to UBS, "airlines still possess some pricing power in the short term," particularly on transatlantic routes and tourist destinations.

Another significant difference: UBS does not yet consider capacity reductions as a central scenario. For the bank, this remains a risk contingent upon the persistence of high oil prices.