Airlines are facing a sharp rise in operating costs after jet fuel prices rose to their highest in more than three years due to the escalating conflict in the Middle East, raising fears of a prolonged disruption to global energy supplies.
The price of aviation jet fuel has risen in European markets to levels not seen since shortages triggered by the Covid-19 pandemic, putting immediate pressure on airline margins and causing aviation inventories to fall.
The increase has been particularly severe because jet fuel prices have far exceeded the increase in crude oil prices. Brent crude rose more than 10 percent this week to around $78.60 a barrel, about 20 percent higher than two weeks ago. However, the cost of jet fuel supplied to airlines has increased at a much faster rate, creating an unprecedented gap between jet fuel and crude oil benchmarks.
According to commodity pricing specialist Argus Media, the cost of jet fuel physically delivered to airlines has risen by around 23 percent in the past week alone. The price is now 48 percent higher than last Friday and is up 68 percent in the last month.
Market participants have described trading conditions as extremely unstable. Analysts said the jet fuel market had entered a period of extreme volatility as traders struggled to price risks caused by military tensions in the Gulf.
Amaar Khan, analyst at Argus Media, said the current market dynamics are extraordinary. While supply risks associated with the conflict are real, traders believe the current price rise has been disconnected from normal supply and demand fundamentals. One trader described the situation as “absolute chaos” and noted that “no fundamentals can explain these prices.”
The aviation sector’s involvement in the Middle East has added to the shock. European airlines are heavily dependent on jet fuel imports from the Gulf region, with a significant portion of these shipments coming via the Strait of Hormuz, one of the world’s most critical maritime energy corridors.
Industry data suggests that at least 40 percent of Europe’s jet fuel imports last year came from the Middle East’s Gulf region and were transported across the strait. Kuwait alone accounted for a significant portion of these deliveries and remains Europe’s largest single supplier of aviation fuel.
The Strait of Hormuz has become a virtual flashpoint for global energy markets after Iran imposed a blockade in response to military attacks by the United States and Israel. The narrow waterway that runs between Iran and the United Arab Emirates serves as the main export route for oil and gas shipments from the Persian Gulf.
Any sustained disruption to traffic through the strait could significantly restrict global fuel supplies, particularly aviation fuel, which is already in short supply across Europe.
Analysts warned that while European refiners could increase their production of jet fuel to offset some of the disruption, they would struggle to fully replace Gulf imports if the conflict continues.
Argus noted that the European aviation fuel market has already become structurally tighter in recent years due to increasing travel demand following the recovery from the pandemic. With refineries operating near capacity, there are limited options for increasing production quickly enough to offset a prolonged disruption in Gulf supplies.
At the same time, the costs of transporting fuel from alternative regions have also risen sharply. Tanker freight rates have risen sharply as insurers raise premiums for ships sailing through conflict waters, making imports from other regions significantly more expensive.
The result was a dramatic increase in jet fuel prices relative to crude oil. Jet fuel is now trading at almost double the price of Brent crude, a difference that analysts say has never been seen before.
For airlines, the timing of the price increase presents a particular challenge, as fuel typically accounts for between 25 and 35 percent of operating costs. Even short-term volatility can therefore have a significant impact on profitability.
Shares in European airline companies have already reacted to rising costs and growing uncertainty surrounding airspace in the Middle East.
International Airlines Group’s share price is down about 16 percent from the record high it hit last week when it reported strong annual results. The airline group, which includes carriers such as British Airways, Iberia and Aer Lingus, is facing both higher fuel costs and service disruptions on long-haul routes across the region.
Shares in budget airline easyJet also fell by around 6 percent this week. The airline does not operate direct routes in the Middle East but remains vulnerable to rising fuel costs across the industry. The share was already under pressure and had fallen by around 15 percent since the beginning of the year.
Meanwhile, Wizz Air warned that the conflict could cost 50 million euros in annual profits due to canceled regional flights and unfavorable developments in fuel and currency costs. The airline said the combined impact could result in a full-year loss, as its shares fell about 20 percent last week.
Airlines have tried to protect themselves from fuel volatility through hedging strategies, locking in fuel purchases months or even years in advance. These hedges can mitigate the immediate impact of price spikes, but cannot fully insulate operators if increased costs persist over a longer period.
Europe’s largest airline by passenger numbers, Ryanair, recently confirmed that it has purchased about 80 percent of its jet fuel needs by March 2027 at an average price of $67 per barrel.
The International Airlines Group has also hedged a large portion of its future fuel consumption and has set prices for around 62 percent of its fuel requirements through 2026.
Similarly, easyJet said it had hedged around 62 percent of its fuel requirements for the upcoming summer season at an average price of $68.80 a barrel.
While these measures provide some protection against sudden spikes, analysts warn that sustained price increases would still impact airlines’ costs over time as hedges expire and new contracts are negotiated.
Industry observers say the deciding factor in the severity of the crisis will be the length of disruption to energy flows in the Gulf and whether shipping through the Strait of Hormuz can safely resume.
If the blockade continues or the conflict in the region continues to spread, aviation fuel prices could remain elevated for months, forcing airlines to absorb higher costs or pass them on to passengers through higher ticket prices.
Currently, airlines and investors are closely monitoring energy markets as geopolitical tensions continue to be felt across the global aviation industry.
