Wall Street analysts are warning that U.S. airlines could face a painful earnings squeeze as oil prices surge amid the escalating war with Iran. Crude prices jumped over 9% on Thursday as the conflict rattled energy markets and heightened fears of disruption around the Strait of Hormuz. Many U.S. carriers largely abandoned fuel hedging in recent years, leaving them far more exposed to sudden price spikes and raising the prospect that only a handful of airlines can remain profitable at current oil prices.

Airlines and oil producers typically rely on hedging strategies to manage extreme oil price volatility. Airlines seek predictable fuel costs, while producers aim to stabilize revenue. Fuel accounts for roughly 15% or more of airline operating expenses, making price swings particularly damaging. By using futures, swaps, or options, carriers can lock in prices and shield themselves from sudden spikes that can quickly erode profitability. Airlines often hedge up to two-thirds of expected fuel consumption about six months in advance, with European carriers generally taking a more aggressive approach.

According to UBS analyst Atul Maheswari, Delta Air Lines (NYSE:DAL), United Airlines (NYSE:UAL) and Southwest Airlines (NYSE:LUV) are the only U.S. airlines that can generate even "meagre profits" if fuel prices remain at or above $4 a gallon. Maheswari has noted that while these three might be able to stay in the black, no other major airlines are expected to make money at current oil prices, with many likely to face deep losses.

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Delta and United are considered less sensitive to fuel shocks mainly due to their higher operating margins. Both airlines have traditionally benefited from a "K-shaped" demand environment, whereby premium travel demand remains robust, allowing them to maintain higher margins during times of surging costs compared to low-cost airlines. Additionally, these carriers are better equipped to pass higher fuel costs on to passengers through elevated ticket prices and fuel surcharges. Meanwhile, Delta Air Lines owns the Monroe Energy refinery in Pennsylvania; whereas the refinery does not directly protect the company against crude oil price spikes, it provides a partial hedge against "crack spreads"i.e. the difference between the cost of crude oil and the price of finished jet fuel.

For its part, Southwest Airlines also enjoys significant downside protection despite being the largest low-cost carrier. Southwest has traditionally used aggressive fuel hedging strategies to manage fuel price volatility, although some reports indicate the airline slowed down in 2025 amid a low oil price environment. Southwest’s extensive fuel hedging program has provided significant cost savings ever since the airline adopted this tool during the Great Recession.

The carrier also manages fuel expenses through a combination of a fuel-efficient fleet and operational efficiencies, coupled with the integration of Sustainable Aviation Fuels (SAFs). By operating an all-Boeing 737 fleet, Southwest reduces maintenance and training costs, while utilizing newer, more fuel-efficient 737 MAX aircraft, which are roughly 16% more efficient than earlier models. The airline focuses on short-haul, point-to-point flights, which are generally more fuel-efficient than hub-and-spoke models. Further, Southwest has expanded its use of SAF made from renewable waste and residue in recent years, helping it to reduce reliance on conventional fuel.

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European and Asian airlines tend to hedge more aggressively than their American peers. For instance, Air France-KLM (OTCPK:AFRAF) has covered 87% of its fuel needs and Ryanair (NASDAQ:RYAAY) has covered 77% while Singapore Airlines (OTCPK:SINGY), Cathay Pacific (OTCPK:CPCAY) and Virgin Australia (OTCPK:VBHLF) also enjoy strong protection. Unfortunately, these carriers are still facing high costs because their hedges are tied to Brent crude, which did not rise as rapidly as the "crack spread" (the gap between crude oil and refined jet fuel).

That said, technical charts for major airline indicators such as the U.S. Global Jets ETF (JETS), suggest the recent selloff is driven by more than just high fuel costs.

Analysts have noted that airline stocks continued to fall even when crude oil prices pulled back sharply, signaling a breakdown in long-term uptrends.

To wit, JETS ETF has fallen below its 200-day moving average and key uptrend lines that had held since early 2025. There’s a method to the madness though. First off, the ongoing conflict in the Middle East has caused widespread flight cancellations and forced expensive rerouting for international carriers.

Second, there are growing concerns that sharp fare increases to offset fuel costs will lead to a pullback in consumer travel demand, especially among price-sensitive leisure travelers. Indeed, major airlines across Asia, Europe, and Oceania have begun aggressively raising ticket prices and implementing fuel surcharges following a massive spike in jet fuel costs from approximately $85 to as high as $200 per barrel amid the intensifying conflict in the Middle East.

Additionally, major carriers such as United Airlines (NYSE:UAL) face margin pressure from new labor contracts and general inflationary wage adjustments. Finally, cybersecurity has become a critical operational risk for 2026, with the FAA recently introducing new regulatory standards to combat sophisticated AI-enabled attacks.

United Airlines stock is down nearly 21% over the past month, while Delta is down around 17% during the same time period, and American Airlines is down over 25%.

By Alex Kimani for Oilprice.com

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