Airfares Expected to Remain High Despite US-Iran Peace Deal, Analysts Say
Aviation analysts do not anticipate a significant decrease in airfares, even if a US-Iran peace deal leads to lower oil prices. Despite oil prices falling below $80 a barrel from highs above $100 after a preliminary agreement to end a nearly four-month conflict, airlines are not expected to cut ticket prices or ancillary fees. Industry experts cite factors such as tight seat supply, robust demand, and airlines' focus on maintaining profitable margins as reasons for sustained elevated fares.
Aviation analysts predict that airfares are unlikely to decrease in the near future, even with a potential peace deal between the United States and Iran that could ease oil prices.
Oil prices, which represent airlines' second-largest expense after labor, have fallen below $80 a barrel from over $100. This drop follows a preliminary agreement between the US and Iran to end a conflict that had closed the Strait of Hormuz, a crucial route for global oil shipments. However, analysts believe airlines will not rush to reduce ticket prices or checked-bag fees.
According to Richard Aboulafia, managing director of AeroDynamic Advisory, tight seat supply combined with resilient demand provides airlines little incentive to reverse their current pricing strategies. Data from KAYAK flight search indicates that average domestic airfares have increased by approximately 8% since the conflict began, while international airfares have risen by about 18%. For instance, roundtrip fares from the US to Amsterdam and London have seen increases exceeding $200.
US airlines have also raised checked bag fees by as much as $50 one-way, with most major carriers now charging between $40 and $50 per bag each way, to offset higher fuel costs.
Airline CEOs, including those from Delta, United, and Southwest, support analysts' warnings. They attribute the likelihood of continued elevated fares to strong demand, limited capacity, and durable pricing power. Southwest CEO Bob Jordan stated at the Bernstein Strategic Decisions Conference in May that airlines are focused on sustainable margins and are unlikely to reverse recent fare increases.
Raymond James analyst Savanthi Sath notes that for air ticket prices to fall, either supply must increase or demand must soften. She considers this unlikely, especially as oil prices remain up 50% year-over-year. Sath added that capacity through August is largely finalized, suggesting any opportunity to add more capacity would be in the fourth quarter at the earliest. United CEO Scott Kirby expressed skepticism about the durability of any deal to reopen the Strait of Hormuz in early June.
The Trump administration announced the preliminary agreement, which is expected to be signed at a Friday ceremony in Switzerland. Officials have spoken broadly about the deal, though specific terms remain undisclosed. President Donald Trump issued a warning regarding Iran's potential acquisition of a nuclear weapon earlier in the week. (Source: Business Insider)
