Airfares Expected to Stay High Despite Potential Ceasefire

Despite the possibility of a lasting ceasefire between the US and Iran leading to lower oil prices, airfares are expected to remain high. According to recent data from June's consumer price index, US domestic airfares have increased by 26.5% compared to last year, while globally they have risen by 25-30%. This surge in jet fuel costs has been caused by strong demand for travel and reduced global oil refining capacity.

Jet fuel prices have spiked during the early weeks of the war on Iran, reaching $149 a barrel as of August 4, up from $90 at the start of this year, a 65% increase. Crude-oil prices are up about 30% since January, trading around $76 a barrel.

Jet fuel costs rise slightly higher than oil prices because only about 10% of refined oil can be turned into jet fuel, making it more vulnerable to supply shocks. Analysts say that refinery closures have contributed significantly to the increase in jet fuel prices, with some refiners taking advantage of the higher prices by boosting output.

Airlines have little wiggle room to control the impact of higher jet fuel prices, with costs ranging between 30% and 35% of their operating expenses. Some airlines may hedge their fuel costs to limit losses, but others buy on the volatile spot market.