Morgan Stanley: Surging aviation fuel costs lead to a broad downgrade of the U.S. airline sector outlook

Morgan Stanley released a report on April 7, stating that due to the expected shock from surging aviation fuel prices caused by the Middle East war, the bank is comprehensively lowering its forecasts for the US aviation sector. The bank expects the first quarter to trend toward the low end of initial guidance, and subsequently, the second quarter to face significant drag (assuming a benchmark aviation fuel price of around $4 per gallon, the initial fuel shock after deducting transportation costs will be partially offset by the rebound in prices for the remaining 60% of summer bookings). The bank currently forecasts aviation fuel prices at around $3.2 per gallon in the third quarter and about $2.8 per gallon in the fourth quarter; third-quarter capacity is expected to be moderately reduced, resulting in a net impact on US airlines' unit cost per available seat mile, excluding foreign exchange effects. The bank also anticipates that guidance for fiscal year 2026 will either be fully withdrawn or, more likely, updated to a much wider range (potentially based on several fuel price scenarios).