On Friday night, United Airlines CEO Scott Kirby published a memo to his employees indicating that his fuel-dependent business is preparing for a very prolonged decline. “Our plan assumes that oil will drop to $175 per barrel by the end of 2027 and will not return to $100 per barrel,” 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 began four weeks ago, threatening to severely cut into the airlines’ profitability. Kirby said his airline has a strategy: United will cut its planned flight schedule by about 5 percent during the second and third quarters of this year, with trims coming specifically during “off peak periods” such as redeyes and less popular travel days: Tuesday, Wednesday and Saturday.
“Honestly, I think there’s a good chance it won’t be that bad,” Kirby wrote in the memo, “but … there’s not much downside for us to prepare for that outcome.”
Analysts say United’s moves are important not only for the travel industry but the broader global economy. If all this happens as Kirby predicts, “it will be incredibly unwelcome news to anyone 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 may be a particularly notable canary in the economic coal mine because their business is more dependent on oil prices, and especially refined oil prices, than others. Miller calculated that American industry spends the largest share of its non-labor costs on refined petroleum products, so air transportation ranks just below asphalt paving. Miller says Kirby’s predictions, while dire, are in line with what others in the commodities market have predicted.
“Economically, this energy shock is probably coming at the worst possible time,” Miller says. Add to that the effects of a slowing job market and a global economy troubled by America’s tariff regime, and economists start thinking about a recession. The Iran war and the ensuing energy crisis “have lasted longer than many people expected,” Miller says. Kirby’s memo is an acknowledgment that “Hormuz cannot be open for business too soon.”
The rise in fuel prices is already having an impact on 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 over the past weeks, with United’s Kirby writing in his memo that the airline has achieved the highest revenue ever on bookings over the past 10 weeks. But it remains to be seen whether many people are actually enthusiastic about traveling, or whether travelers have simply put off their plans before oil prices soar due to geopolitics and fear of higher ticket prices. Isom said that, if oil prices remain high, “we will certainly be agile in terms of capacity, to make sure that supply and demand remain in balance.”
How bad this could get for airlines – and its passengers – depends not only on how long oil prices remain high, but also how long businesses’ questions about the crisis remain unanswered.
“If we stay in this uncertainty for a long time, it’s going to increase complexity,” says Ahmed Abdelghani, who studies airline operations as a professor in Embry-Riddle Aeronautical University’s College of Business. “The longer this goes on, the bigger the problems will be for the airlines.”
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