By Rajesh Kumar Singh
CHICAGO, March 30 (Reuters) - When United Airlines CEO Scott Kirby wrote to employees about the oil price surge earlier this month, the most telling line was not about fuel bills or flight cuts. It was about opportunity.
If fuel prices stay elevated, he wrote, it could create a chance "to buy assets, absorb network changes, etc." — the language of a carrier that expects rivals to stumble.
The latest price spike could become the first real financial stress test for U.S. airlines
since the pandemic, with weaker carriers more likely to shrink, borrow or absorb deeper losses while stronger rivals keep investing and gaining market share.
In Europe and parts of Asia, the Iran war's impact has already appeared in route disruptions, flight cuts and downgraded outlooks.
United is preparing for the worst. Kirby said the airline is modeling Brent oil as high as $175 a barrel and remaining above $100 through 2027. Brent was trading around $112 on Friday.
Under that scenario, United's annual fuel bill would rise by roughly $11 billion — more than twice its best-ever annual profit.
Jet fuel was priced at $4.24 a gallon last Thursday, compared with $2.50 just before the first U.S.-Israeli strikes on Iran, according to trade group Airlines for America.
LOWER-COST CARRIERS VULNERABLE
Fuel accounts for about a quarter of airline operating costs, and airlines sell tickets weeks or months in advance, leaving them exposed when prices move faster than fares can follow.
Credit ratings agency Moody's said low-cost and ultra-low-cost carriers would be hit hardest if fuel prices stay high, noting that JetBlue, Spirit and Frontier were already unprofitable last year before the latest spike.
Had Brent averaged $80 a barrel last year instead of $69, Moody's said, operating profit across rated U.S. airlines would have fallen by roughly half, to about $6 billion.
WHO CAN STAY ON PLAN
Delta Air Lines and United have the clearest ability to absorb a prolonged shock without abandoning strategy.
Moody's said both carriers generated the highest operating margins among rated U.S. airlines last year, while S&P Global Ratings said low leverage, strong liquidity and a higher share of premium revenue leave the two better positioned than peers to handle sustained fuel increases.
Beyond them, the outlook is less certain. American Airlines expects to end the March quarter with more than $10 billion in total available liquidity, but carries about $25 billion in long-term debt and says every 1-cent increase in jet fuel prices adds about $50 million to annual costs.
American said it had no further comment beyond remarks by CEO Robert Isom at a J.P. Morgan conference this month, where he said the fuel run-up had added about $400 million to first-quarter costs and that the airline would aim to offset it through higher revenue while remaining flexible on capacity.
Southwest Airlines has one of the sector's stronger balance sheets, but Fitch said a prolonged fuel shock could pressure earnings and liquidity, potentially forcing tougher cash-allocation choices. Southwest declined to comment during its quiet period ahead of first-quarter results.
Alaska Air Group, which is integrating Hawaiian Airlines, told Reuters it had about $3 billion in liquidity and $18 billion in unencumbered assets, and said it had raised fares to offset higher fuel costs, had not cut capacity and was reviewing its cost structure.
WHERE PRESSURE BUILDS FIRST
If high fuel prices last, pressure is likely to build first at airlines where margins are already thin and turnarounds remain unfinished.
JetBlue ended last year with about $2.5 billion in liquidity and no fuel hedges. S&P said JetBlue would be more vulnerable because it is expected to burn cash this year before improving toward breakeven in 2027.
Frontier Group reported about $874 million in liquidity while posting a net loss last year, leaving it with less room to absorb a prolonged fuel shock in a low-fare business.
JetBlue and Frontier did not respond to requests for comment.
Spirit Airlines, which is in bankruptcy proceedings, warned in its latest annual report that the fuel spike posed an "immediate and substantial negative impact" to results and said a sustained increase could derail talks with creditors and force liquidation.
THE SHAKEOUT QUESTION
The 2008 fuel spike and financial crisis triggered a merger wave that compressed a fragmented industry into four carriers controlling most U.S. air travel.
This cycle is likely to widen competitive gaps before producing any formal consolidation. J.P. Morgan analysts said sustained high fuel prices could speed a shakeout among weaker low-cost carriers, ultimately improving the outlook for larger brand-loyal airlines after 2027.
Fitch said the first signs of stress would likely show up in deeper capacity cuts, parked aircraft, deferred spending and new borrowing to boost liquidity.
"When you double your number one or number two cost item on your (profit and loss statement) almost overnight, that has a significant impact," Delta CEO Ed Bastian said. "There are those that don't have any margin to absorb that."
(Reporting by Rajesh Kumar SinghEditing by Rod Nickel)
