- Airlines weathered 2Q26 better than feared, with resilient load factors across regions suggesting limited demand destruction despite sharp fare increases and elevated fuel costs
- US airlines led on pricing, while APAC benefited from transit and cargotailwinds, as Europe remained constrained by intense competition and weaker fare momentum
- We prefer US pricing power and APAC’s transit and cargo exposure, supported by further fuel-cost recapture, rerouted traffic and sustained AI-related freight demand
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Airlines navigated a highly volatile 2Q26 better than feared, with passengers showing limited resistance to higher fares. The June MOU initially raised hopes of de-escalation before tensions re-escalated, although recent diplomatic progress has once again improved prospects for a more durable ceasefire or interim agreement. Geopolitical uncertainty remains, but jet fuel prices have fallen materially from their conflict-driven peaks, easing immediate cost pressure. More importantly, airlines across North America, Europe, and APAC have generally raised fares without triggering meaningful demand destruction. North America saw the strongest fare increases, APAC network carriers also achieved firmer pricing, while Europe remained more constrained by competition. Load factors have nevertheless held up across all three regions, reinforcing our view that underlying travel demand remains healthy and airlines still have scope to pass through elevated costs.
2Q26 performance diverged sharply, with US airlines showing the strongest pricing power while cargo-heavy APAC carriers benefitted from additional freight tailwinds. North American network carriers recorded high single-digit to low double-digit passenger yield growth, supported by favourable supply-demand dynamics and tighter capacity following Spirit Airlines’ exit, allowing them to recapture around 50-60% of the incremental fuel headwind. Europe was more challenging, as heavier fuel hedging reduced the urgency for immediate fare increases while intense competition weighed on pricing, particularly among LCCs. European network carriers fared better, although recovery varied materially, with Air France-KLM recapturing around 85% of incremental fuel costs versus roughly 60% at IAG and Lufthansa. In APAC, network carriers with greater cargo exposure outperformed as disruptions in the Middle East redirected passenger traffic and constrained competing freight capacity, while robust AI-related shipments supported air freight rates.
We prefer US pricing power and APAC transit and cargo exposure in the near term. The US offers the clearest path to further margin recovery as additional repricing flows through the booking curve, with some carriers targeting full fuel-cost recovery by year-end. European carriers remain less upbeat, with guidance generally implying only partial recovery as competitive intensity limits further fare increases. In APAC, we expect the transit benefit to persist even if geopolitical tensions ease, as travellers, particularly premium passengers, may take time to regain confidence in Middle Eastern routings. Cargo provides an additional tailwind, with sustained AI infrastructure investment supporting high-value air freight demand. The key sector-wide risk remains another sharp rise in jet fuel prices, especially as current recovery expectations were formed against more benign forward curves. Overall, we continue to see the best risk-reward in US pricing power and APAC transit and cargo exposure.
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