Higher Fuel Prices Likely to Pressure Some Airlines Q1 Earnings, BofA Says

As the airline industry continues to recover from the COVID-19 pandemic, rising fuel prices pose a significant challenge for carriers in the first quarter of 2025. Bank of America (BofA) analysts have warned that higher fuel costs could pressure some airlines' earnings, particularly those with less exposure to premium and corporate travel. This article explores the impact of rising fuel prices on airlines and the strategies they can employ to mitigate the effects on their profitability.



Rising Fuel Prices: A Challenge for Airlines

Fuel is one of the largest operating costs for airlines, accounting for around 25% of total costs. A rapid spike in fuel prices, as seen in recent months, can significantly impact airlines' profitability. Since the start of 2022, the price of jet fuel has increased by approximately 90 percent, with costs roughly 120 percent higher than in 2021 (U.S. Energy Information Administration; Federal Reserve Bank of St. Louis economic data).

Network Carriers vs. Leisure-focused Airlines

BofA analysts have highlighted the divergence in performance between network carriers and domestic airlines in the face of higher fuel costs. Network carriers like Delta and United, with greater exposure to premium and corporate travel, are expected to outperform leisure-focused airlines such as Southwest and JetBlue. This is due to several factors:

1. Premium Travel Exposure: Network carriers have a higher exposure to premium travel, which is less sensitive to price increases compared to leisure travel. This trend is evident in Delta's recent earnings report, where premium travel outperformed main cabin by 6 points in the fourth quarter, contributing to 57% of 2024 total revenue (Bank of America analyst note).
2. Corporate Travel Recovery: Network carriers are also benefiting from a recovery in corporate travel, which is more resilient to price increases compared to leisure travel. This trend is supported by Delta's strong performance in corporate travel, which is expected to drive growth in 2025 (Bank of America, 2025).
3. Atlantic Route Expansion: Network carriers are expanding their Atlantic route offerings, which can help offset higher fuel costs by tapping into more lucrative markets. This trend is evident in Delta's recent expansion into new European markets (Bank of America, 2025).
4. Capacity Discipline: Higher fuel prices increase the marginal cost of flying, which can lead to greater capacity discipline. This can help network carriers maintain healthier industry economics and improve profitability (McKinsey & Company, 2022).
5. Hedging Strategies: Network carriers often employ hedging strategies to mitigate the impact of fuel price volatility on their operations. While the effectiveness of these strategies can vary, they can help network carriers manage their fuel costs more effectively compared to leisure-focused airlines (Carter et al., 2006).

In contrast, leisure-focused airlines like Southwest and JetBlue have less exposure to premium, corporate, and international routes, making them more vulnerable to higher fuel costs and potential execution risks (Bank of America, 2025).

Strategies to Mitigate the Impact of Rising Fuel Prices

Airlines can employ several strategies to mitigate the impact of rising fuel prices on their profitability:

1. Capacity Discipline: Higher fuel prices increase marginal costs, which can lead to greater capacity discipline. This helps drive healthier industry economics and can improve profitability. In the past, airlines have shown a positive correlation between unit revenue and high fuel prices (Exhibit 2). For instance, Delta Air Lines' premium demand outperformed main cabin by 6 points in the fourth quarter of 2024, contributing to 57% of total revenue (Bank of America analyst note).
2. Passing on Costs to Consumers: Airlines can pass on some of the fuel price increase to consumers through higher ticket prices. This has been done in the past, and there is evidence that consumers are willing to pay more for air travel despite high inflation. For example, United Airlines' CEO Scott Kirby stated that the airline has been able to pass on higher costs to consumers without significantly impacting demand (CNBC, April 2022).
3. Hedging: Airlines can use financial instruments like fuel hedges to protect against sudden price increases. However, it's important to note that hedging does not appear to alter the impact of oil price dynamics on airline earnings or predictability (Wang & Gao, 2025). For instance, Southwest Airlines, which has historically hedged a significant portion of its fuel needs, still faced higher costs and revised its fuel cost outlook in 2024 (Bank of America analyst note).
4. Improving Operational Efficiency: Airlines can focus on improving operational efficiency to reduce fuel consumption. This can be achieved through better route planning, aircraft maintenance, and crew scheduling. For example, Delta Air Lines has been investing in more fuel-efficient aircraft and improving its operational efficiency, which has helped it maintain profitability despite rising fuel prices (Delta Air Lines' annual report, 2024).
5. Diversifying Revenue Streams: Airlines can explore new revenue streams to offset the impact of rising fuel prices. This can include offering premium services, partnerships, and ancillary services. For instance, American Airlines has been focusing on growing its premium offerings and loyalty program to drive revenue growth (Bank of America analyst note).

In conclusion, rising fuel prices pose a significant challenge for airlines in the first quarter of 2025. Network carriers like Delta and United are expected to outperform leisure-focused airlines due to their greater exposure to premium and corporate travel. Airlines can employ various strategies to mitigate the impact of rising fuel prices on their profitability, such as capacity discipline, passing on costs to consumers, hedging, improving operational efficiency, and diversifying revenue streams. By implementing these strategies, airlines can better navigate the challenges posed by higher fuel costs and maintain their profitability.