Why airfare is rising as airline profits get squeezed

Volatile fuel prices and resilient travel demand are threatening to keep airfare high this year. Airline profits will be harder to come by.

The Iran war that began at the end of February sent fuel prices to multi-year if not record highs, including for diesel, gasoline and jet fuel, airlines’ biggest expense after labor. Supply scares with the Strait of Hormuz disruptions lasting most of this year and high demand have sent jet fuel prices and other distilled products up more than crude oil.

Airline executives aren’t expecting much relief in fuel costs anytime soon, or a drop in travel demand.

“You can’t run the business on the hope that the Strait of Hormuz is going to open at a certain time,” Qantas Airways CEO Vanessa Hudson told CNBC in an interview late last month. The Australian airline operates some of the world’s longest flights and is planning even longer ones for next year and 2028, starting routes between London and Sydney and New York and Sydney.

“There’s a backdrop of resilient demand in in this environment. We’re making sure that we’ve got our capacity settings right,” she said.

Airlines have been passing higher fuel costs along to consumers by raising fares, adding fuel surcharges or increasing their checked baggage fees. The United States’ on-again-off-again truce talks with Iran since the spring have kept fuel prices volatile, but airlines are holding onto those fare gains as customers continue to book.

Carriers have also raced to add more luxurious seats on board to capitalize on demand for pricier and roomier offerings, sometimes taking down the number of standard coach seats to do so.

Slightly fewer people are flying this year compared with last, but demand overall remains strong, even with higher ticket prices. Security screenings at U.S. airports were down 1% this year through Sept. 20 compared with the same period of 2025, according to a Sept. 23 Bernstein note.

Still, the latest U.S. inflation read showed airfare rose 23.4% in August from a year earlier. Holiday travel could be up even more. As of Sept. 24, fare-tracking platform Hopper said domestic, round-trip tickets were going for $402 over Thanksgiving, up 31% from last year. U.S. Christmas fares, meanwhile, are up 23% at $452 a round-trip.

Those holiday visits are essential to many families, said Hopper economist Hayley Berg, so a lot of flyers might not like the fare but book it anyway. Berg said many customers have been locking in their Thanksgiving and Christmas flights earlier than usual.

While business travel demand has been strong in recent months and off-peak trips are no longer a savvy traveler’s secret, customers’ focus on those key holiday trips this year could mean there are deals in the interim, Berg said.

“To me, that signals that they’re already thinking about end of year travel and not thinking about any of those filler trips, fall shoulder-season trips,” she said.

Carriers are forecasting double-digit revenue growth for the third quarter as customers spend more. That’s even with slightly fewer people flying.

“I’ve never seen in my career, outside of recovery after maybe the pandemic or 9/11 … seen a revenue environment in terms of year-over-year improvement,” American Airlines CEO Robert Isom said at a Morgan Stanley investor conference last month. The carrier has been revamping its cabins to add more premium seats and other changes to catch up to rivals.

But despite the higher fares, Wall Street analysts have cut their profit estimates for U.S. carriers since another hike in jet fuel in the summer.

American in July said it expects to lose between 10 and 70 cents a share, on an adjusted basis, for the third quarter and cut its profit outlook for 2026.

Investors and anyone looking to buy a plane ticket in the next few months will get an updated view of what’s to come when airline earnings season kicks off on Friday with Delta Air Lines. The most profitable U.S. carrier, which also stands to benefit from its owned refinery, will report third-quarter results and will give a fresh outlook for the end of the year.

Wall Street’s focus will be on the fourth quarter and beyond. Airlines are likely to lower their earnings outlooks for that quarter, said Savanthi Syth, airline analyst at Raymond James.

She said carriers aren’t likely to make as many broad-based fare increases now, but if jet fuel remains in the $4 to $4.50 a gallon range, they’re likely to cut more flights, which can end up raising fares with customers facing fewer seats to choose from.

“You’re going to see more rationalization in capacity,” she said.

Along with fewer routes, the collapse of budget carrier Spirit Airlines in May took 1% to 2% of capacity out of the U.S. market, according to Barclays, meaning low-cost and full-service airlines alike have enjoyed more pricing power this year.

But should oil prices fall, investors will be watchful of whether airlines increase capacity in a big way, which could end up driving fares lower.

“We expect higher booked fares should result in similar unit revenue trends in the fourth quarter for most airlines, but elevated domestic capacity growth at American and United (+10% and +9% in current schedules) will likely be the most watched guidance by investors,” Barclays airline analyst Brandon Oglenski said in a note Sept. 28. “With elevated energy prices and refining margins for jet fuel persisting, we expect capacity growth ambitions will be meaningfully curtailed by most management teams, with some potentially providing early expectations on 2027 planning assumptions.”