Impacts on the Aviation Market of the War in Iran

The closure of the Strait of Hormuz has triggered a global jet fuel crisis that is putting heavy strain on the airline industry and causing cancelled flights, longer detours, and rising fares. Legal and business consequences for airlines, lessors, and other industry stakeholders, including regulatory responses, market impacts, and strategic considerations, could amount to lasting changes across the global aviation industry.

BACKGROUND

The outbreak of the US–Iran conflict in February 2026 led to heavy restrictions on commercial shipping through the Strait of Hormuz, a vital maritime corridor for global oil supply. Approximately 20% of the world’s oil supply, including a major share of jet fuel exports, has been cut off from international markets as a result of Iranian military actions and threats to maritime vessels. Europe and Asia, which rely heavily on Middle Eastern jet fuel, have been acutely affected, exacerbated by existing vulnerabilities from previous disruptions—such as the shift away from Russian oil after the Ukraine conflict. The resulting supply shock has driven dramatic price increases and raised the risk of physical shortages at key aviation hubs.

JET FUEL PRICE VOLATILITY AND MARKET IMPACTS

Jet fuel prices have surged more than 120% since the onset of hostilities, reaching $1,838 per tonne in early April 2026 before stabilizing at historically high levels above $1,500. The surge reflects not only higher crude prices but also an acute shortage of refined fuels, as tighter global supply has driven refining margins sharply higher. That squeeze has been compounded by China’s export restrictions, which have removed a key regional supplier from the market. As a result, the premium for finished products over crude has widened dramatically, with spreads for diesel and jet fuel jumping to $50–$80 a barrel from just $15–$20 before the conflict, intensifying cost pressures across the aviation industry.

The current jet fuel crisis is not merely a matter of price but also of physical availability. Inventories are already perilously low across much of East Africa, with airports and distribution hubs operating hand-to-mouth as shortages ripple through broader fuel systems. In several countries, reserves have dwindled to just days, raising the risk of flight disruptions and rationing.

Asia is emerging as the next pressure point. Excluding China, which still holds comfortable reserves, regional crude inventories have fallen sharply—down 13% to about 545 million barrels. The loss of Gulf crude, a key input for many Asian refineries, has forced operators to cut runs significantly. That, in turn, is squeezing output of refined products, including jet fuel. Aviation markets in countries such as Indonesia, Pakistan, and the Philippines are particularly exposed, with fuel availability potentially tightening within weeks. Even Australia faces a growing risk of jet fuel scarcity.

Latin America may appear more insulated given its crude production, but its aviation sector remains vulnerable. Limited refining capacity means the region depends heavily on imported fuels, especially from the US Gulf Coast. As competition for supplies intensifies, cargoes may be diverted to higher-paying markets, leaving airlines in the region exposed to both shortages and price spikes.

Europe faces a similar imbalance. While crude supply is relatively secure, refinery configurations skew output toward petrol rather than middle distillates like diesel and jet fuel—the very products aviation depends on. With traditional suppliers disrupted, Europe’s reliance on imports is becoming more acute. As global competition for jet fuel intensifies, the continent’s aviation sector is likely to feel the squeeze through higher costs and tighter availability.

For airlines, fuel typically comprises 25%-30% of operating costs, so the price spike has had immediate effects on profitability. Some airlines hedge against rising fuel costs using futures and options, while also managing exposure to fluctuations in the US dollar, the currency in which jet fuel is priced. Airlines with secure access to jet fuel, whether through long-term supply contracts, strong refining links, or strategic stockpiles, are emerging as clear winners.

Moreover, some airlines are already moving to secure their advantage. Malaysia Aviation Group, the parent of Malaysia Airlines, has taken steps to lock in long-term jet fuel supply commitments, insulating itself from short-term volatility and potential shortages. By securing stable access to fuel, the group is better positioned to maintain flight schedules and avoid the operational disruptions affecting less-prepared competitors. Low-cost carriers are among the hardest hit as they typically do not hedge fuel costs due to their lean business models and quick turnaround time.

Airlines have passed on increased costs to passengers, especially on long-haul routes where capacity reductions and high fuel prices have combined to push fares up by as much as 76% year over year in some sectors. Some short-haul routes have seen less dramatic fare increases or even temporary decreases as airlines seek to maintain demand, but the long-term trend remains upward.

FLIGHT CANCELLATIONS AND SCHEDULE REDUCTIONS

Airlines worldwide have responded to the jet fuel shortage by cancelling thousands of flights and removing nearly two million seats from May 2026 schedules alone. The reductions are expected to continue into the summer, particularly if supply disruptions persist. The UK government has temporarily suspended slot-use rules, enabling airlines to reduce capacity at major airports like Heathrow without risking the loss of valuable takeoff and landing slots. This regulatory flexibility aims to allow operators to trim schedules in advance and avoid last-minute cancellations, which can be more disruptive for both airlines and passengers. The European Commission has adopted similar measures and clarified that cancellations or severe delays due to jet fuel shortages will be treated as “exceptional circumstances,” shielding airlines from certain passenger compensation obligations under EU law.

AVIATION INSURANCE

The escalation in operational risk has had a direct effect on the aviation insurance market. Insurers, already dealing with unresolved claims and capacity constraints from previous conflicts, are reassessing exposures related to aircraft operating in or near conflict zones. This has resulted in increased premiums, tightened war-risk exclusions, and in some cases, revised policy terms for hull war, passenger liability, and third-party coverage. In some cases, coverage is being amended or withdrawn altogether for specific regions, raising the possibility that certain airspaces could become effectively uninsurable. Insurers may cancel coverage by providing formal notice, subject to the terms and conditions of the policy. In the current environment, this flexibility has taken on greater significance, as insurers reassess exposure to geopolitical risk and rapidly changing conflict zones. Depending on the wording of the contract, insurers may withdraw or amend coverage after a specified notice period, particularly for war-risk or high-risk geographic extensions. This means airlines can face not only rising premiums but also the possibility of reduced or terminated coverage at relatively short notice, especially for operations involving elevated risk corridors. For airlines, this creates a dual challenge: not only are costs rising, but access to insurance itself is becoming less certain—particularly for carriers operating in volatile corridors between Asia, Europe and the Middle East.

IMPACT ON LESSORS

Aircraft lessors are facing a parallel but structurally different set of risks driven by the jet fuel crisis. As airlines come under pressure from rising fuel costs and operational disruption, their ability to meet lease obligations is increasingly under strain. Extended flight cancellations and route reductions weaken cash flows, raising the risk of rent deferrals, restructuring requests, and, in more severe cases, lease defaults, particularly among weaker credit carriers.

At the same time, the crisis is influencing aircraft values and remarketing conditions. Older, less fuel-efficient aircraft are becoming less attractive as airlines prioritize fleet efficiency to offset high fuel costs. This is creating a bifurcated market, where demand and valuations for new-generation, fuel-efficient aircraft remain resilient, while legacy aircraft face accelerated depreciation and longer lease-up periods. Lessors with concentrated exposure to older narrow-body fleets are therefore more vulnerable to valuation pressure.

IMPLICATIONS

The jet fuel crisis presents immediate and longer-term challenges for airlines, lessors, airports, and their insurers. Airlines should carefully review their hedging strategies and operational plans, particularly for routes dependent on Middle Eastern fuel supplier. Those with existing hedges are better positioned to manage cost volatility, while others may need to consider adopting or expanding such arrangements to mitigate future shocks.

Regulatory changes in the United Kingdom and EU provide temporary relief by allowing more flexible schedule adjustments and clarifying compensation obligations in cases of fuel-related disruption. Airlines should ensure that their compliance teams are up to date on these temporary rules and prepared to document circumstances qualifying as “exceptional” to avoid unnecessary financial liabilities.

Lessors, financiers, and insurers should monitor the evolving risk environment. Prolonged high fuel prices and operational uncertainty may increase the likelihood of rental deferrals, lease defaults, or credit concerns, particularly for low-cost and financially weaker airlines. Aircraft acquisition and financing plans should be reviewed to account for potential delays, capital constraints, and the growing premium placed on new-generation, fuel-efficient fleets.

Looking ahead, governments and industry stakeholders may need to consider longer-term measures to enhance fuel supply resilience, such as increasing local refining capacity or investing in alternative fuels like sustainable aviation fuel (SAF). However, such structural changes will require significant investment and time to implement.

CONCLUSION

The global jet fuel shortage triggered by the war in Iran is causing unprecedented disruption to airline operations, finances, and risk management strategies. Regulatory flexibility and industry adaptation can help mitigate some immediate impacts, but prolonged instability may lead to persistent market challenges and higher costs for all aviation stakeholders. Continued monitoring and proactive planning are essential as the situation evolves.