Airlines are “cautiously optimistic” about the second half of the year, as volatile jet fuel prices and persistently high airfares could soften travel demand, requiring carriers to continue with tactical adjustment strategies, according to Alton Aviation Consultancy.
“It remains very much a wait-and-see situation, with airlines monitoring booking trends in this higher-fare environment,” said Clark Johns, director at Alton Aviation.
Flexible and tactical fleet planning is crucial as airlines may retain aircraft despite cutting flights, hoping to quickly expand services when demand surges during peak travel periods, he said.
Trends indicate airlines have mostly reduced capacity on regional or domestic routes with higher frequencies via merging some flights, while maintaining less frequent long-haul services to ensure sufficient network connectivity and keep their slots at airports, said Mr Johns.
Airlines have not yet made drastic changes, such as shrinking their fleets, unlike during the abrupt economic downturn during the pandemic.
High airfares could persist in the near term amid the ongoing crisis, he said.
Since the US-Iran conflict emerged several months ago, jet fuel prices have risen to around US$160 per barrel, surging by more than 75% year-on-year, but airlines are unable to pass on all of the costs to passengers.
Their first-half earnings were affected by fuel costs, and as a result airlines will likely seek to compensate for the losses by maintaining high airfares in the second half, said Mr Johns.
The cost uptick affected airlines to varying degrees, depending on their business models. Long-haul and corporate passengers on full-service carriers may be less price-sensitive than leisure travellers on low-cost airlines, who are more concerned with price increases, he noted.
“There are going to be customers who say, ‘This is too expensive to fly’,” said Mr Johns.
“This segment is where airlines need to find the right balance in reducing capacity.”
Airfares have also lagged behind jet fuel prices. Even if jet fuel prices begin to decline, this would not translate into an immediate reduction in airfares, he noted.
However, high airfares are unlikely to continue indefinitely. Competition among airlines will eventually intensify as carriers seek to capture market share on certain routes. If one airline lowers its fares, it will force others to follow, said Mr Johns.
As airlines in the Middle East start to restore their services, this should put further pressure on airfares.
Aviation hubs in the Gulf region will eventually regain some traffic for Europe-Asia routes from Asian hubs, which previously seized the momentum during the conflict, he noted.
A near-term challenge for airlines is supply chain disruptions, particularly delays in aircraft deliveries amid a large backlog of orders. Airlines have been forced to use older aircraft for longer than expected, increasing their maintenance and overhaul requirements.
Maintenance facilities also face capacity constraints, with airlines struggling to secure available service slots.
Airlines owning in-house maintenance facilities could be better positioned than those that need to fully outsource their maintenance, said Mr Johns.
In the long term, aviation growth in Southeast Asia should remain positive as aircraft manufacturers are banking on the region’s expanding population and rising disposable incomes to support greater air connectivity, he said.