Airlines could save billions on jet fuel costs thanks to a temporary peace agreement between the U.S. and Iran that has driven down oil prices. However, travelers probably won't see cheaper tickets right away, since limited seat availability is allowing airlines to keep ticket prices higher than they were before the conflict.

The U.S. market offers the clearest example. Fare ⁠increases still lag this year's run-up in fuel costs, while domestic seat growth ⁠remains limited. That gives airlines leeway to use lower fuel bills to rebuild margins rather than reverse recent price increases.

U.S. jet fuel spot prices stood at $2.85 a gallon on June 17, down sharply from an early April high of $4.88. A decline of that size would cut ​the U.S. airline industry's annual fuel bill by more than $40 billion if sustained, according to a Reuters calculation based ​on ⁠industry fuel consumption.

Fares still lag fuel

As jet fuel prices surged, U.S. airlines raised ticket prices and bag fees, and cut schedules, but those steps have offset only part of the rise in fuel costs.

Industry data show jet fuel prices rose more than three times as fast as airfares from January through May. Deutsche Bank estimated U.S. carriers would recover only about 60 cents of every additional dollar spent on fuel – $14.4 billion in higher revenue against $24.1 billion in higher fuel costs.

Alaska Air said it was recovering about one-third of the increase, while Delta Air Lines, United Airlines and American Airlines put second-quarter recapture at about 40% to 50%. JetBlue Airways and Frontier Group expect to recover less than half.

United CEO Scott Kirby told Reuters his airline was getting closer to recouping the fuel-cost spike through pricing: "We're on a path to recovering 100% by the end of the year."

Raymond James data show that average domestic fares booked one week before travel were up 34.1% from a year earlier as of June 8.

The key question is whether airlines can keep recent fare increases as fuel prices ease. "What remains ⁠crucial ⁠is the ability to hold price," Melius Research analyst Conor Cunningham said, adding that lower gasoline prices could ease consumer pressure over high airfares.

Unequal pass-through

Outside the U.S., fare relief is likely to be uneven. Lower crude prices will take time to feed through to jet fuel, and unless jet fuel falls back toward start-of-year levels, airlines are likely to keep fares firm or push them higher where demand allows, said Dudley Shanley, head of aviation and travel research at Dublin-based Goodbody.

Europe may see a split. Long-haul fares are more likely to ease because airlines passed on higher fuel costs more successfully on those routes, RBC analyst Ruairi Cullinane said.

Short-haul fares may prove firmer if the peace agreement supports bookings and demand. In Asia, HSBC analysts said China's big three airlines face weak pricing power and falling aircraft utilization, while Hong Kong's Cathay Pacific is better placed as higher fares, cargo revenue and premium demand ⁠could offset fuel costs.

The Middle East is the clearest exception, after the war disrupted traffic flows. Some airlines may use promotions to win back traffic, said aviation analyst John Strickland, but fuel remains too expensive for widespread discounting. United Arab Emirates (UAE) carriers could be more aggressive and receive stronger government backing, he added.

Earnings before discounts

How much airlines benefit from lower fuel prices ​will depend on how long prices stay down. Fuel bills reflect purchases over time, not spot prices, and even after the latest declines, jet fuel still costs 54% ​more than a year ago, according to the International Air Transport Association (IATA).

Southwest Airlines Chief Operating Officer Andrew Watterson summed up the pressure. Asked when Southwest could return to pre-pandemic margins, Watterson told Reuters: "When's fuel going to go down?"

That leaves little incentive to cut fares as airlines try to rebuild ⁠earnings.

Jefferies estimated each ‌5% drop in ‌its roughly $3-per-gallon 2027 fuel-cost forecast would lift projected earnings per share by 10% to 15% for Delta, Southwest ⁠and United, and by as much as 50% for American Airlines.

No broad fare war

In past ‌U.S. fuel cycles, falling oil prices often triggered a capacity race that pushed fares lower. Those conditions are not broadly in place now. Aircraft delivery delays, tight airport capacity and weaker low-cost carriers are limiting ​the risk of a broad domestic fare war.

U.S. ⁠domestic airline seats are scheduled to grow just 0.4% year-over-year in the third quarter, down from 4.6% expected before the ⁠latest Middle East tensions, industry data show.

J.P. Morgan analysts said limited aircraft deliveries and budget-carrier pullbacks reduce the risk of "meaningful capacity creep" in the United ⁠States, giving airlines a better-than-usual ability to ​hold current pricing.

For passengers, fare relief may depend less on fuel than on whether demand holds up. "This is very much subject to the strength of the consumer," Shanley said.