Strong demand can't protect airlines from rising fuel costs

How can airlines be filling more seats yet earning less? IATA expects global airline net income to fall to USD 23 bn in 2026 — almost half its earlier USD 41 bn forecast and well below the USD 45 bn expected for 2025 — as conflict-driven disruptions in the Middle East and surging fuel prices squeeze the industry, according to a report. Net margins are forecast to shrink to just 2%, while income per passenger falls to USD 4.5 — highlighting how thin the sector's buffer has become against any additional cost pressures.

The margin shock lands in fuel

Airline fuel costs are expected to jump nearly 40% to USD 350 bn in 2026, up from USD 252 bn last year. IATA forecasts jet fuel to average USD 152 per barrel this year — almost 70% above 2025 levels — while Brent is expected to average USD 95 per barrel — leaving airlines exposed to a record USD 57 from the premium of jet fuel over crude.

That makes this fuel cycle nastier: “While the sector has experienced high fuel prices before, the difference this time is that the crack spread for jet fuel has also been reaching all-time highs in certain regions,” Garth Lund, aviation consultant, tells EnterpriseAM.

This is not a demand problem: Total fuel consumption is expected to remain flat at 104 bn gallons, meaning airlines are not necessarily burning more fuel. The higher bill is likely a price story — as a result, fuel's share of total operating expenses is projected to rise to 31.4% from 25.4% in 2025, transforming it from a routine cost line into the sector's primary earnings swing factor.

The fuel shock hits harder when mixed with operational disruption: “The point is that a fuel shock, combined with weak margins, debt, aircraft issues or intense competition, can turn an already difficult situation into a survival crisis,” Wouter Dewulf, professor of air transport management and economics at the University of Antwerp, tells EnterpriseAM.

Hedging can only soften the blow. Airlines have hedged roughly one-third of expected 2026 fuel consumption, which could help smooth short-term volatility, but doesn’t protect the sector from a sustained reset in prices. The crack spread also matters because many airlines hedge crude rather than jet fuel directly, leaving them exposed when refinery economics and product shortages drive jet fuel above crude.

Higher fares do not fully close the gap: “Airlines have typically communicated a recapture rate of around 30-60% in terms of passing on higher fares to offset higher fuel expenses. That said, most airlines have also trimmed some capacity to remove flights which may not be economically viable with higher input costs,” Lund says.

The Middle East bears the brunt

Middle Eastern airlines are expected to swing to a collective USD 4.3 bn loss in 2026 — making the region the only major airline market expected to slip into the red this year.

The downturn reflects pressure across the entire operating chain — airspace closures, flight cancellations, longer routings, weaker connecting traffic, and sharply higher fuel costs. IATA expects regional passenger demand to decline 11.4%, while capacity is projected to contract 4.4%.

Gulf carriers depend heavily on east-west transfer flows through Dubai, Doha, and Abu Dhabi, which makes lost connectivity more expensive than a normal demand dip.

The Gulf has the fuel problem plus the conflict: “The Gulf region faces additional challenges in terms of the impact of the Iran conflict on demand and airspace. However, the likes of Etihad or Emirates are now starting to approach their pre-conflict level of capacity,” Lund argues.

IN CONTEXT- Gulf carriers’ reliance on east-west transfer traffic through hubs such as Dubai, Doha, and Abu Dhabi means disruptions to connectivity can have an outsized impact on earnings. While that has created a near-term opening for rivals including IAG, Lufthansa, Air France-KLM, and Cathay Pacific on long-haul routes linking Asia and Africa, Bloomberg reports industry executives as saying that the shift in demand is likely to prove temporary as Emirates, Qatar Airways, and Etihad restore capacity and passengers return to their usual transit options.

Emirati airlines are also preparing for more growth. Etihad is placing a double-digit order for more widebody aircraft and expects to be flying about 8% more than it was a year ago by mid-June, while Emirates — which is heavily hedged on fuel — had three-quarters of its flights operating at pre-conflict capacity as of May.