United Airlines plans to reduce additional flights as it anticipates oil prices exceeding $100 until 2027

United Airlines is reducing additional unprofitable flights in the upcoming two quarters as it braces for an extended phase of elevated jet fuel prices stemming from the Iran war, despite robust travel demand enabling U.S. carriers to increase fares.

In a staff memo on Friday, Chief Executive Scott Kirby indicated that the airline is bracing for oil prices to potentially reach $175 a barrel and stay above $100 through the end of 2027. At those levels, United’s annual fuel bill would increase by approximately $11 billion, more than double the profit it achieved in its “best year ever,” he stated.

The conflict in Iran has led airlines to face a new fuel crisis. Since late February, jet fuel prices have almost doubled, leading to increased costs throughout the industry and causing disruptions in global flying patterns due to reroutings and airspace restrictions.

U.S. carriers have managed to implement fare increases, supported by strong travel demand and limited capacity.

Kirby said the airline’s fuel assumptions may not be as bad as expected. “However, there isn’t significant risk for us in getting ready for that possibility.”

REDUCING MARGINAL FLYING

United had started to reduce less profitable flights, including certain midweek, Saturday, and overnight services.

In the staff memo distributed by the company, Kirby indicated that the airline would reduce off-peak flying by approximately three percentage points in the second and third quarters, focusing on routes and times with lower demand.

It will also reduce capacity from Chicago O’Hare by approximately one percentage point and maintain the suspension of service to Tel Aviv and Dubai, resulting in a total reduction of around five percentage points of this year’s planned capacity.

Kirby indicated that United anticipates resuming the complete schedule in the fall.

The recent reductions follow Kirby’s remarks earlier this week, indicating that the airline prefers to leave certain demand unfulfilled rather than continue operating routes that are unprofitable if fuel prices remain elevated.

FARES ASSIST IN EASING THE IMPACT

Major U.S. airlines have indicated that robust demand is allowing them to increase fares, which is helping to mitigate the effects of rising fuel costs. We anticipate that United’s capacity reductions will strengthen the industry’s pricing power.

Delta Air Lines, a competitor, has increased its revenue forecast for the first quarter this week and has indicated that it can reduce capacity if fuel prices stay high.

U.S. carriers face significant vulnerability, as the majority do not engage in hedging fuel costs, in contrast to certain European and Asian airlines that utilize hedging strategies to mitigate price fluctuations. They have been depending on fare increases and capacity discipline to regain some of the additional costs.

Soaring fuel costs are adding further pressure on low-cost carriers, intensifying the challenges faced by business models already strained by increasing labor expenses, which may lead to higher ticket prices and reduced service options for consumers.

Airline executives have expressed confidence in the strength of fares and demand, despite the ongoing rise in operating expenses.

United has reported that the initial 10 weeks of the year marked the most successful booking period in its history, a trend that is also reflected by other major U.S. carriers experiencing strong spring bookings.

A robust demand landscape has enabled airlines to implement two fare hikes of approximately $10 each way and may facilitate an additional increase of 5% to 7%, as per Melius Research.

Earlier this week, Kirby mentioned that United intended to completely counterbalance the increased fuel costs for this year, highlighting that fares booked in the past week had increased by 15% to 20%.

Long-term growth remains strong.

Despite reducing its flight operations in the short term, Kirby informed employees that United remains committed to its overall growth strategy.

The carrier based in Chicago will proceed with the delivery of approximately 120 new aircraft this year, which includes 20 Boeing 787s, and an additional 130 aircraft are expected by April 2028, he stated.

According to Kirby’s memo, United will not react to this downturn as it has in previous ones by furloughing employees or postponing future investments.