Iran War Exposes Cracks for Airlines That Connect the World

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(Bloomberg) — The Iran war has exposed the fragility of modern travel, with airlines left reeling from a conflict that’s squeezed them into increasingly narrow flight paths and thrown their long-term growth plans into disarray. 

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Gulf carriers have spent decades positioning themselves at the center of global air travel and places like Dubai, Abu Dhabi and Doha are now key stopover points for long-haul trips. That means when disruptions hit, a delicately mapped out schedule for passengers, crews and aircraft is tossed out, leaving tens of thousands of travelers and hundreds of planes out of position. 

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Flying between Europe and Asia is a lot trickier and, for many travelers, a lot more expensive. Many airlines were already avoiding Russian airspace following its invasion of Ukraine in 2022, and the war in the Middle East has now closed off even more routes in large areas like Iran and in the Gulf — essentially funneling flights through a narrow strip of airspace over Georgia and Azerbaijan.

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Alongside the closure in conflict countries, Azerbaijan briefly shut airspace over parts of the country, leaving only a small path of about 50 miles for airplanes to pass through. 

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All the restrictions can add hours to some flights, with routes from India particularly affected as airlines avoid Pakistan’s airspace. Emirates, the world’s largest international carrier, has to add more than an hour on most of its routes as it avoids the Gulf as well as Iranian and Iraqi airspace. The additional flight time means planes must carry more fuel — an expensive burden in light of the spike in energy costs.

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The United Arab Emirates and Qatar have said they were able to establish safe air corridors amid the ongoing attacks. 

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Oil Shock

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It’s not just airlines that are facing logistical troubles. The conflict has effectively shut the Strait of Hormuz, a narrow waterway that handles a fifth of global oil flows, sparking major Gulf producers to slash production and driving up prices of crude and products like diesel and jet fuel. 

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That’s seen some carriers hike fares as they add fuel surcharges to cover the ballooning cost, while airlines and other large energy consumers panic buy oil derivatives contracts to shield them from wild price swings. 

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The market gyrations have put a spotlight on airlines’ hedging practices, which vary considerably across the sector and are limited in Asia. China’s Big Three carriers and India’s IndiGo are among the most exposed to fuel-price swings, according to Bloomberg Intelligence. Cathay Pacific Airways Ltd. has hedged roughly 30% of its expected near-term fuel consumption.

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Stock Rout

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Global airlines have seen billions of dollars wiped from their market capitalization on the surging cost of fuel and uncertainty about when safe operations can resume. Bloomberg’s World Airlines Index has fallen more than 11% since the war started almost two weeks ago.