Airlines brace for fuel shock as UBS sees revenue recovery as key earnings driver Proactive uses images sourced from Shutterstock
Airline stocks are heading into first-quarter earnings season under pressure from surging fuel costs, with analysts at UBS warning that the sector’s outlook hinges on how effectively carriers can recapture those costs through higher fares and fees.
UBS has cut earnings per share (EPS) estimates across the industry after jet fuel prices nearly doubled in March, a move expected to weigh heavily on profitability in the near term.
The bank outlined two potential paths for the sector. In one scenario, persistently high fuel prices could force lower-margin airlines to shrink operations or explore strategic alternatives. In another, a quicker-than-expected resolution to geopolitical tensions could trigger a sharp earnings recovery.
UBS said it continues to favor structurally stronger carriers, reiterating its preference for Buy-rated Delta Air Lines Inc (NYSE:DAL) and United Airlines Holdings Inc (NASDAQ:UAL, XETRA:UAL1), which it expects to better withstand volatility due to stronger margins and balance sheets.
The rapid rise in jet fuel has prompted UBS to significantly reduce its forecasts, with 2026 EPS estimates cut by an average of 53%. The bank now assumes second-quarter fuel costs of about $4 per gallon, compared with recent spot prices closer to $4.49 on the Gulf Coast.
Despite the cost pressure, airlines have moved quickly to offset the impact. UBS estimates that Delta and United can recapture about 50% of higher fuel costs through pricing and network advantages, including global re-routing. Other carriers are expected to offset roughly 40% to 45%.
That recovery is already showing up in demand indicators. March credit card spending on airlines rose about 10%, accelerating from February, while carriers have pushed through multiple fare increases and higher ancillary fees.
UBS said the industry’s swift pricing response led to first-quarter unit revenues beating expectations by roughly 350 basis points. The second quarter is expected to benefit further from easier comparisons and a full period of higher fares.
The bank’s assumption that roughly half of fuel costs can be passed on to customers implies double-digit unit revenue growth across the sector, marking a sharp sequential acceleration.
While that may appear aggressive, UBS said current demand trends and pricing power support the outlook.
Delta will kick off the reporting season on April 8.