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How do jet fuel changes actually affect airfares?

As concerns grow over global fuel supplies and the cost of flying, new research from the University of Adelaide shows the relationship between jet fuel prices and airfares is not as simple as passengers might think. The study found that different types of jet fuel price shocks have very different effects on Australian domestic airfares, with some shocks leading to higher ticket prices, some having little effect, and others pushing fares in different directions across fare classes.

Published in Research in Transportation Economics, the study examined business-class, restricted-economy and best-discount airfares in Australia, and found the source of the fuel price shock matters more than the price movement alone.

"Not all fuel price shocks are economically harmful in the same way. The source of the shock matters greatly," said Professor of Aviation Shane Zhang from the University of Adelaide's College of Engineering and Information Technology.

"At first glance, it may seem that fuel price increases can be easily passed on to consumers through higher fares. In reality, the relationship is more complex.

"Airfare adjustments are shaped not only by rising input costs, but also by airline pricing strategies, passenger behavior, competitive pressures and consumer sensitivity to price."

Jet fuel is one of the airline industry's biggest costs, typically accounting for 25% to 40% of total operating expenses. In Australia, where about 90% of jet fuel is imported, understanding how airfares respond to fuel price shocks is particularly important.

Analyzing Australian domestic airfare data from the Bureau of Infrastructure and Transport Research Economics, the study separated jet fuel price shocks into three categories: supply shocks, aggregate demand shocks and jet fuel-specific demand shocks.

Fuel supply shocks, which can be caused by events such as wars, natural disasters or disrupted supply chains, were found to have little direct impact on domestic ticket prices.

"This was one of the more surprising findings," said Dr. Yifei Cai from the University of Adelaide's College of Engineering and Information Technology.

"Many people would expect airlines to immediately pass fuel cost increases on to passengers, but our results suggest airlines can often smooth these effects through fuel hedging, long-term supply contracts and other operational strategies."

By contrast, aggregate demand shocks, which are usually linked to periods of economic growth, were found to increase business-class and restricted-economy fares.

"When economic conditions are stronger, travel demand tends to increase, particularly among business travelers," Professor Zhang said. "That gives airlines more room to raise prices in these fare classes."

The third category, jet fuel-specific demand shocks, had more complex effects. These shocks can occur when market participants begin buying or hoarding oil because of fears about future shortages, geopolitical risks or climate-related disruption.

The research found these shocks can reduce business-class fares in the short term, as uncertainty dampens corporate travel budgets, while increasing discount fares as more travelers seek cheaper tickets.

"Oil-specific demand shocks are particularly destabilizing because they can trigger sharp price increases without corresponding changes in actual supply or global demand," Dr. Cai said. "Overall, the findings highlight that airfare responses are shaped not only by fuel costs, but also by passenger behavior and broader macroeconomic conditions."

The findings are especially relevant amid current global concerns about fuel supply and aviation costs.

"In the current context, fuel market disruption can act in more than one way," Professor Zhang explained. "On one hand, it can be understood as a supply shock, where the physical flow of oil or refined products is constrained. Our research suggests these supply shocks do not necessarily lead to immediate domestic airfare increases, because airlines may be able to absorb them.

"At the same time, uncertainty can create an oil-specific demand shock, where buyers respond to fears of future shortages. That can be more destabilizing for aviation markets and may lead to very different fare responses across domestic and international routes."

Dr. Cai said the findings could help passengers better understand why airfare changes are often uneven and not always directly tied to fuel price movements, while for airlines, the results highlight the importance of flexible pricing strategies and fuel risk management.

The findings also have implications for future discussions around aviation fuel policy, carbon pricing and the transition to sustainable aviation fuel.

Jet fuel changes directly affect airfares because fuel accounts for up to 30% of airline operating costs. When fuel prices spike, airlines pass the burden onto consumers by raising base ticket prices, adding explicit fuel surcharges, reducing the number of cheap discount seats, and cutting less profitable flight routes.

Higher Ticket Prices & Surcharges: Airlines—especially on long-haul and international routes—often add explicit fuel surcharges to the ticket price or raise the overall base fare. For instance, recent geopolitical shocks have driven a surge in global fuel costs, causing some transcontinental and international ticket prices to spike.

Reduced Supply of Cheap Seats: Rather than raising every ticket evenly, carriers use dynamic pricing algorithms to limit the availability of basic economy and discounted seats, pushing travelers into slightly more expensive main economy classes.

Route Cuts and Cancellations: If fuel costs remain stubbornly high, airlines may park less fuel-efficient aircraft or cancel routes with lower profit margins to save money.

The "Rocket and Feather" Effect: Airfares rise rapidly when fuel prices spike, but rarely drop at the same pace when fuel costs go back down (often called asymmetric price transmission). Airlines often delay lowering fares while waiting to ensure fuel price drops are permanent.

Fuel Hedging: Some airlines lock in fuel prices months or even years in advance to protect against sudden market changes. This means a sudden spike in crude oil prices might not hit your ticket price immediately, but will likely be factored in once those hedges expire.

Provided by University of Adelaide