There's a quote Buffett never said, but could have: "When oil sneezes, the passenger catches pneumonia."
Well, here we are. It's been less than two weeks since the US and Israel struck Iran, and jet fuel — that cost airlines pretend they have under control — has more than doubled in some parts of the world. And guess who's footing the bill? Spoiler: it's not the United CEO sitting in the leather seat of his corporate jet.
The circus has already begun
Cathay Pacific announced Thursday that it will virtually double the fuel surcharge on tickets starting March 18. Qantas, down in Australia, already hiked fares. SAS (Scandinavian Airlines) openly said the increase was "unusually rapid and substantial" — translation from Scandinavian corpo-speak: holy shit, we didn't see this coming. And Air New Zealand was the most honest of them all: they pulled their financial guidance until the fuel market stabilizes. In other words, they're flying blind. Literally.
Here's the number that matters: jet fuel is the second largest cost for any airline, behind only salaries. It accounts for 20% or more of operating expenses. United Airlines alone spent $11.4 billion on fuel last year, at an average price of $2.44 per gallon. On Wednesday, the gallon was trading at $3.78 according to Platts. Do the math: that's an increase of over 50% — and climbing.
The airlines' chess game (and you're the pawn)
Scott Kirby, United's CEO, said last week — casually, behind the scenes at a Harvard event — that higher fares are "probably on the way." He also said travel demand remains strong. Two other senior executives at American airlines confirmed the same, of course under anonymity, because nobody wants to be the guy in the headline saying "we're going to charge you more."
And that's where the cruel paradox lives: as long as demand stays strong, airlines have pricing power. It's the same old supply and demand law wearing a suit and tie. Jefferies analyst Sheila Kahyaoglu put her finger right on the wound: the sharpest financial impact will hit in the next 30 to 90 days, because airlines had already sold tickets assuming much lower fuel prices. They can't retroactively jack up fares on tickets already issued. So the short-term losses are baked in.
UBS has already called it: a hit to first-quarter earnings is virtually certain. If the war drags on, the entire first half goes down the drain.
Delta and United should take less damage because they serve the premium crowd — the guy who pays $8,000 for business class without blinking. The ones who'll bleed are the low-cost carriers and airlines that depend on price-sensitive passengers. And with gasoline also rising, the ripple effect hits the American consumer — and by extension, the whole damn world.
So what do you do? Buy tickets now or wait?
Scott Keyes, founder of Going (formerly Scott's Cheap Flights), dropped the smartest advice I've heard on this: buy now, but do NOT buy a restrictive basic economy fare.
The logic is simple and elegant, like a well-executed trade: if you buy a summer ticket for $500 today and two weeks from now the price drops to $350, you call the airline and get $150 in credit back. Heads, you win. Tails, the airline loses.
It's basically a free call option on the ticket price. Nassim Taleb would love it — favorable asymmetry, limited risk.
Now, if you sit on your hands thinking jet fuel will drop because "the war will be over soon" — good luck. Nobody knows how long this conflict lasts. Nobody knows if it'll escalate. And every day Iran is in the news is a day some airline is adjusting its pricing spreadsheet upward.
The question nobody's asking
Everyone focuses on the ticket price. But the real question is: what happens to the $11.7 trillion global tourism industry if this war doesn't end quickly? Hotels, cruises, travel insurance, canceled routes, detours, refunds — it's a domino chain that goes way beyond the price of a gallon of jet fuel.
Meanwhile, American airline CEOs will gather Tuesday at the J.P. Morgan conference in Washington to "update investors." Translation: they'll try to convince Wall Street that everything's under control while the Middle East burns.
Do you believe them?
