Why airfare could rise even more, but airline profits won't

• Jet fuel prices remain volatile due to Strait of Hormuz disruptions, staying in the $4 to $4.50 per gallon range, with airlines unlikely to see relief soon despite strong travel demand
• American Airlines lowered its 2026 profit outlook in July, expecting losses between 10 and 70 cents per share, as fuel costs offset revenue gains across the industry
• Airlines have reduced capacity by trimming unprofitable routes, with Spirit's collapse removing 1-2% of U.S. capacity, though analysts warn that capacity increases could drive fares lower if oil prices fall

Summary

Key Developments:

U.S. airfares surged 23.4% year-over-year in August 2026, with holiday travel costs rising even more sharply—Thanksgiving fares up 31% to $402 and Christmas fares up 23% to $452 for domestic round-trips. Despite higher ticket prices, airline profitability remains constrained as elevated fuel costs offset revenue gains.

Market Drivers:

Jet fuel prices have spiked to multi-year highs following disruptions in the Strait of Hormuz beginning in late February 2026, with prices ranging between $4.00-$4.50 per gallon. Airlines face volatile fuel costs—their largest expense after labor—while travel demand remains resilient. However, airport security screenings show passenger volumes down 1% year-over-year through September 20.

Industry Response:

Airlines are passing fuel costs to consumers through fare increases and surcharges while adding premium seating to capture higher revenues. Carriers expect double-digit revenue growth in Q3 but have cut profit forecasts. American Airlines revised its 2026 outlook in July to a potential loss of 10-70 cents per share.

Capacity Constraints:

The collapse of a budget carrier in May removed 1-2% of U.S. market capacity, strengthening pricing power. Airlines are trimming unprofitable routes, with American and United planning +10% and +9% domestic capacity growth respectively in Q4—levels analysts believe will be curtailed.

Outlook:

Analysts expect airlines to rationalize capacity further if fuel remains elevated, potentially driving fares higher through reduced seat availability. Delta Air Lines kicks off earnings season Friday, providing insights into Q4 expectations and 2027 planning assumptions.