This article first appeared in The Edge Malaysia Weekly on April 27, 2026 - May 3, 2026

AIRLINES are approaching a critical tipping point as the war in the Middle East drags on with no clear end in sight, threatening deeper cuts to flight operations and the grounding of aircraft, aviation experts warn.

Jet fuel prices, which had hovered between US$85 and US$90 a barrel before the outbreak of the Iran war on Feb 28, have surged to more than US$200. This spike is squeezing the already thin margins of global carriers, undermining profitability even as travel demand remains relatively resilient.

While the airlines have responded by raising fares and imposing fuel surcharges — pushing ticket prices up by 30% to 50% in many markets — the increases have failed to keep pace with skyrocketing operational costs.

“We are nearing a tipping point where flying actually loses more money than staying on the ground. The industry is likely to see a strategic retreat,” says Datuk Captain Izham Ismail, former managing director of Malaysia Aviation Group Bhd (MAG).

He tells The Edge that airlines now face a delicate balancing act. “They must keep flying to capture higher yields or risk losing revenue opportunities. But flying too much risks burning cash,” he says.

The problem is partly structural. Seats being flown today were often sold weeks or months ago, when fuel was far cheaper. This locks in revenue but costs have surged. That mismatch is leaving airlines with little room to recover losses on already-sold tickets.

Still, unlike the sweeping shutdowns of the Covid-19 pandemic, the industry’s response is expected to be more measured. Izham estimates airlines could cut 5% to 10% of their least efficient routes, trimming capacity while attempting to preserve revenue streams.

The impact has been uneven across the sector, with Asian carriers hit harder than their US counterparts. Since the start of the Iran war, the share price of Hong Kong’s Cathay Pacific Airways Ltd had fallen 15% as at April 22. That of Japan Airlines Co Ltd had dropped 22% while that of Singapore Airlines Ltd (SIA) had declined 10%. In Malaysia, Capital A Bhd (KL:CAPITALA) had closed 21% lower as at April 22 while AirAsia X Bhd (KL:AAX) was down 34%.

Airlines with robust fuel hedging strategies and large domestic markets, particularly in North America and parts of Europe, are better positioned to ride out the turbulence as the carriers are more experienced in managing fuel volatility.

Domestic-oriented airlines, which are less exposed to costly rerouting to avoid conflict zones, may also prove more resilient. In some cases, detours to avoid restricted airspace add up to four hours to flight times, significantly increasing fuel burn.

Izham says the likely winners are not necessarily the most profitable carriers but those with the strongest defensive positioning. North American airlines and some European operators such as Delta Air Lines Inc, United Airlines Holdings Inc and Lufthansa are expected to fare better than many of their Asian peers.

“With strong hedging strategies, the impact of higher fuel costs can be partly mitigated, allowing these airlines to adjust more effectively.

“Carriers with large domestic markets, such as Southwest Airlines in North America and IndiGo in India, will also gain. They are less exposed to the logistical challenges of rerouting around conflict zones,” he says.

Some airlines are finding pockets of opportunity. Cathay Pacific, for instance, has continued to use Russian airspace on certain European routes, enabling it to expand capacity while competitors are forced to take longer, more fuel-intensive paths.

Elsewhere, the response has already turned defensive. Batik Air Malaysia, AAX, Vietnam Airlines and VietJet have already trimmed schedules; Batik Air Malaysia and Korean T’way Air are also offering voluntary unpaid leave for their staff as part of cost-cutting efforts.

“This isn’t just about reducing salary costs. It’s about aligning labour with a shrinking schedule. I call it the V-shaped labour strategy of airlines,” Izham says, adding that voluntary no-pay leave allows airlines to cut payroll expenses while retaining talent needed to scale back up quickly when conditions improve. “Airlines learnt a hard lesson during the pandemic, when letting go of staff made it difficult to recover once demand returned,” Izham explains.

For Shukor Yusof, founder and analyst at aviation consultancy Endau Analytics, the industry has entered what he calls “crunch time”.

“The International Energy Agency has reportedly warned that Europe has maybe six weeks of jet fuel left. And then after that, what happens? Nobody really knows,” he tells The Edge.

Shukor stresses that the crisis is less about supply and more about liquidity. “If you have strong cash reserves, it’s going to be fine. But for most airlines like AAX and Batik Air Malaysia, they are all running on a day-to-day basis,” he says.

He notes that many analysts have continued to call a “buy” on US carriers such as United Airlines, Delta Air Lines and American Airlines Group Inc because they remain largely insulated from broader industry volatility by strong domestic demand.

“They are not affected at all. Even though inflation is going up, the US economy is still strong. There’s no threat to their airline industry at all. Flying is like taking a taxi in the US; demand is high. It’s the most lucrative airline region in the world.”

In Europe, Shukor points to Ryanair Holdings PLC as a standout, noting that about 80% of its 2026 fuel requirements are already hedged. “Even though it’s a low-cost carrier, it is extremely well managed. Its load factors are in the high 90s because it consistently offers some of the most competitive fares in Europe and serves a wide network across the region.”

On the other end are carriers like AAX and Batik Air Malaysia, which remain largely unhedged and most exposed. “At this current elevated fuel price, it’s very hard to withstand the money that’s draining every day,” Shukor says.

Even aggressive fare increases may not solve the problem. “Even if they double airfares, it’s very hard to break even. At some point, operating flights simply becomes unsustainable,” Shukor adds.

Izham agrees that fare increases have their limits. “If airlines want to fully cover fuel costs, average fares would need to rise 70% to 80%. But if fares go up that much, people will stop flying.”

So airlines are caught between pricing power and demand destruction.

Balance sheet strength is becoming a critical divider. MAG had about RM1.53 billion in cash as at the end of 2025 while other carriers are turning to capital markets. AirAsia Aviation Group is reportedly exploring a US$230 million (RM911 million) private credit deal while Cathay Pacific is seeking to raise about HK$2 billion (RM1 billion) through a bond sale.

“What this means is that they need immediate cash to run operations. Even Cathay Pacific — a very strong airline — going to the market shows how severe conditions have become, even as it highlights its credit strength,” Shukor says.

SIA would likely be among the most resilient, he says, supported by state-linked ownership through Temasek Holdings, which holds a 53.5% stake. “In the interim, SIA has been able to capitalise on capacity shortages arising from the reduced presence of major Gulf carriers such as Emirates, Qatar Airways and Etihad. A substantial share of corporate traffic, particularly from the Indian subcontinent, has shifted to SIA,” he says.

MAG is also relatively stable, he says, due to backing from sovereign wealth fund Khazanah Nasional Bhd. However, its low-cost subsidiary Firefly has announced a temporary suspension of its Kuala Lumpur-Singapore route from May 6 to Oct 24. Its turboprop services between Subang Airport and Singapore will continue to operate as normal.

“If fuel prices stay elevated, fewer flights and grounded aircraft become unavoidable. It simply doesn’t make financial sense to fly when you’re not making money. There is very little room to manoeuvre at these fuel levels,” Shukor adds.

Despite having hedged roughly 80% of its fuel consumption, German flag carrier Lufthansa has become one of the first major airlines to ground aircraft in response to soaring jet fuel costs. The airline plans to permanently retire 27 smaller regional jets — CRJs operated by its subsidiary CityLine, according to reports, as part of efforts to stem losses. This will be followed by the withdrawal of six long-haul aircraft from Lufthansa’s core fleet, underscoring the mounting pressure even well-hedged carriers face.

Demand for air travel across Asia remains robust even as airlines grapple with soaring costs and deep uncertainty.

Routes to Japan, China and South Korea continue to see strong bookings, driven in part by currency movements that have made travel more attractive to regional tourists, Shukor says.

But that resilience offers limited relief. Much of the additional revenue generated from higher fares and fuel surcharges is being absorbed by surging jet fuel prices. “It has nothing to do with demand. The problem is the cost of jet fuel is so high that whatever airlines earn from higher fares or fuel surcharges is effectively ploughed back into paying for fuel,” Shukor adds.

Again, it boils down to the forward-looking nature of the airline business, where tickets are often sold months in advance. “Airlines don’t operate well in uncertain times and this is a very uncertain period. Even for those that are hedged, those protections will expire in the coming months. Then what do you do?” Shukor asks.

In the worst-case scenario, airlines may be forced to cancel flights despite strong bookings if operating them would result in deeper losses.

“If the situation deteriorates further, costs could become so prohibitive that airlines are better off refunding tickets than flying. Even if a flight is full, it may not make sense to operate if the losses are too large,” Shukor says.

The risks are especially acute for unhedged carriers, which remain fully exposed to volatile fuel prices.

Currency movements are adding another layer of strain, particularly for airlines in emerging markets where costs are largely denominated in US dollars.

“The ringgit has weakened against the US dollar. Fuel and leasing costs are in US dollars so that adds further pressure,” Shukor points out. 

These dynamics underscore the stark reality for the aviation industry: strong demand alone is no longer enough to guarantee viability as airlines navigate a volatile mix of rising costs, currency pressures and geopolitical risk.

The current crisis has exposed a deep structural flaw in how jet fuel is priced across the region — one that may require a fundamental rethink, Izham suggests.

He proposes moving away from global benchmarks that leave carriers exposed to global price swings and instead explore a more controlled pricing mechanism. “By negotiating a fixed, fair margin for local refiners to provide fuel to Malaysia-based airlines, we decouple our national interest from hyper-volatile global indices such as the Mean of Platts Singapore (MOPS),” he says.

The MOPS underpins much of jet fuel pricing across Asia. North America, in contrast, operates a more fragmented system with multiple pricing references, which Izham says offers greater resilience during periods of disruption.

“While Asean carriers rely heavily on jet fuel prices linked to the MOPS, North American airlines use a range of benchmarks, including the Platts American GulfCoast Select and the Argus US Jet Fuel Index. There isn’t a single dominant pricing index across the continent.

“Instead, pricing is distributed across regional hubs such as New York Harbour, Chicago, Los Angeles and San Francisco, supported by a more decentralised refining and distribution network. That diversity in pricing references allows North American airlines to absorb shocks better than many of their global peers,” Izham says.

The proposal is not to follow the MOPS blindly but instead consider a direct cost-plus pricing model that applies a markup to a product’s unit cost, particularly for Malaysia-registered airlines.

Other stakeholders, including airport operators and the national aviation regulator could also consider adopting a cost-plus approach to help ease the financial burden on airlines, particularly in areas such as rental fees, air navigation charges and passenger service charges, Izham says.

Beyond pricing, he sees scope for operational adjustments, particularly in how airlines structure long-haul routes. He suggests that carriers explore alternative routings to Europe via Central Asia, reducing reliance on long-range wide-body aircraft and potentially lowering costs.

“I see growing potential in developing routes to Europe via Central Asia, through cities like Tashkent and Almaty. This would allow airlines to deploy more efficient aircraft such as the Airbus A330-900, rather than relying solely on long-range wide bodies,” he says.

Such an approach could also open up new pricing strategies.

“With an additional stop, airlines can offer lower fares and capture more price-sensitive demand. At the same time, they can continue offering direct flights as a premium product, while introducing a secondary, lower-cost one-stop option to Europe,” Izham adds.

As the crisis ripples through the ecosystem, experts believe government intervention may become unavoidable.

“This is not just an airline issue. Aviation is a national economic multiplier. As the crisis persists, the effects will ripple across the entire ecosystem,” says Izham.

Endau Analytics’ Shukor shares the view, warning that the financial strain on airlines is intensifying by the day. “Every day that goes by is bad for them. There will come a point when airlines decide it’s simply better not to fly than to keep operating at a loss,” he says.

At that stage, government intervention may become unavoidable given the broader economic stakes, Shukor says. “When that happens, it falls on the government to step in. The impact on the Malaysian economy would be severe if airlines start pulling back significantly.”

The risks are not confined to aviation. A prolonged conflict could spill over into the wider economy, weakening demand even in markets that have so far remained resilient.

“If this drags on, everyone loses. No airline stands to gain from a worsening situation in the Middle East. It will affect the global economy — inflation will rise and the risk of recession increases. In that environment, demand for air travel will drop sharply,” Shukor says.

Even the strongest carriers would struggle under such conditions, given the deeply interconnected nature of global aviation. “There is no real ‘winner’ in this industry during a prolonged crisis. Airlines rely on connectivity — alliances, partnerships and codeshares. If your partners are struggling, you will feel the impact too,” Shukor adds.

Taken together, the warnings underscore a broader reality: while resilience may determine which airlines endure, it will not be enough to shield the entire industry or the economies that depend on it from a wider fallout.

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