JPMorgan has warned that surging jet fuel costs are creating a widening divide across the global airline sector, with premium, well-hedged carriers emerging as relative winners while low-cost and unhedged operators face mounting pressure on margins and earnings.
In its latest global airlines valuation dashboard, the bank said fuel price volatility, triggered by the Middle East crisis, has become the dominant driver of both earnings revisions and equity performance, with jet fuel still trading above $4 per gallon despite recent moderation.
Widening validation gaps
JPMorgan said airlines are attempting to offset higher fuel costs through fare increases and capacity discipline, but the ability to pass through costs varies significantly by business model.
Full-service and premium-focused airlines are expected to recover a greater share of higher fuel costs, around 50% in the second quarter and potentially up to 70% in the second half of 2026, supported by stronger demand from higher-income travellers and international routes.
By contrast, low-cost carriers face more limited pricing power due to more price-sensitive customer bases, increasing the risk of margin compression.
Resilient North America demand
In the US, the bank highlighted improving sentiment following recent earnings updates from Delta Air Lines, which pointed to stable booking trends and the ability to partially offset fuel costs.
However, JPMorgan cautioned that fuel remains the key “wildcard” for the sector, with airline share prices likely to track oil price movements in the near term.
Premium carriers favoured in Asia
In Asia, JPMorgan said the structural recovery in air travel demand is being overshadowed by fuel cost pressures, particularly for Chinese airlines such as Air China, China Eastern Airlines and China Southern Airlines, which have limited fuel hedging and are therefore more exposed to rising costs.
The bank is more constructive on Singapore Airlines and Cathay Pacific, both rated Overweight, citing stronger pricing power, disciplined capacity management and partial fuel hedging - estimated at around 50% and 30% respectively.
These carriers are also benefiting from traffic shifts away from Middle East hubs, supporting premium cabin demand and yields.
Latin America fare increases
In Latin America, airlines have raised fares sharply, by more than 20% year-on-year in Brazil, helping to offset fuel cost increases.
JPMorgan prefers LATAM Airlines and Copa Airlines, citing stronger balance sheets and more consistent cash flow generation, while also maintaining a positive view on Aeromexico due to its international exposure.
However, the bank warned that volatility in fuel prices continues to create downside risk to earnings forecasts across the region.
Pricing power supports European flag carriers
European airlines face a dual challenge of elevated fuel costs and limited supply visibility, with some operators indicating only a few weeks of jet fuel cover in extreme scenarios.
JPMorgan estimates that, at current price levels, fuel could reduce sector earnings by around 35% in 2026 before mitigation.
Flag carriers are expected to outperform low-cost carriers due to their ability to pass on higher costs through ticket prices, particularly on long-haul and premium routes.
Japan & Australia: profits under pressure
In Japan, rising fuel costs are expected to significantly impact earnings, with Japan Airlines forecast to see operating profit fall by around 23% year-on-year and All Nippon Airways by around 4%, with further downside risk if fuel prices remain elevated.
In Australia, Qantas is relatively well protected in the near term, with around 90% of its fuel exposure hedged in the first half of 2026, though unhedged refining margins are expected to weigh on full-year results.
Fuel to dictate industry valuations
Across all regions, JPMorgan said the outlook for airline equities will remain closely tied to fuel price movements and geopolitical developments.
While demand remains broadly resilient, particularly in premium and long-haul segments, the bank warned that sustained high fuel costs could erode profitability and eventually weigh on demand, reinforcing a more selective investment approach across the sector.