US airline company debt weakened recently as soaring jet fuel costs raised investor fears about lower earnings and potential credit ratings downgrades. This concern was reflected in five-year credit default swaps (CDS), which hit their highest levels since November for United Airlines, Southwest Airlines, and JetBlue Airways. For Delta Air Lines, CDS jumped to their highest point since June, indicating heightened investor anxiety.
The surge in jet fuel prices is largely attributed to the war in Iran and the closure of the Strait of Hormuz. This conflict has driven Brent crude oil prices to six-week highs at $97 per barrel and spot Northwest European jet fuel prices to $1,476 per metric ton. This situation complicates what was projected to be a record year for the global airline industry, with expectations of over 5 billion passengers and a busy summer travel season.
Several airlines, particularly those in the US, could be hit hard if the war is prolonged, as many have abandoned fuel hedging practices. Lufthansa has already warned of profit risk due to volatile jet fuel prices and shortened booking cycles, expecting full-year adjusted earnings before interest and taxes to be in the range of €1.7 billion to €2.2 billion. Stronger carriers like Delta may be able to absorb these costs and pass them on to customers, but discount or leisure airlines are more vulnerable to capacity cuts or consolidation if oil prices continue to rise significantly.
