A mix of geopolitical and economic challenges, jet fuel prices and persistently high operating costs is polarizing the financial performance of aviation companies. The gap between the strong and the weak airline groups is set to widen until 2027, with a significant number of the latter at risk of restructuring or bankruptcy, according to Morningstar DBRS.
The geopolitical instability, particularly the unrest in the Middle East, contributes to soaring prices for jet fuel and the need for alternative, expensive flight routes. In addition, other challenges that have persisted for several years, including the significant increase in personnel and maintenance costs, add up to create serious financial strains.
Namely, personnel and maintenance costs grew by nearly four percent in 2025. Deliveries of new aircraft have been delayed, and leasing costs have increased due to higher interest rates during the year. In the future, Morningstar DBRS expects the current situation with jet fuel to improve; however, the prolonged supply chain issues and increased maintenance costs will persist, thereby negatively impacting the financial performance of airlines.
Thus, the fundamental divide between the financially stable and unstable airline groups will continue to grow. The former will be able to withstand the ongoing challenges, while the latter will experience serious cash flow issues throughout the forecast period.
Declining Protection from Jet Fuel Hedges
European airlines have historically been more aggressive in protecting themselves against volatile jet fuel prices than their US counterparts. However, the trend is changing as several key European airlines are planning to reduce their hedging rates in the coming year. Thus, Lufthansa Group’s hedging rate is expected to be 70% in the first half of 2026 and 40% in the following 12 months. IAG, the parent company of British Airways and Iberia, is expected to hedge 70% of its needs in 2026 and 40% in 2027. Meanwhile, Air France-KLM’s hedging rate is expected to decline from 67% to 40%. United Airlines and American Airlines do not hedge their fuel needs, making them more vulnerable to price fluctuations.
Smaller Airlines Are Most Vulnerable
Smaller carriers are the most significant casualties of the ongoing financial challenges. While most large airline groups have substantial liquidity, some smaller airlines find themselves in dire straits as their operating costs skyrocket. Several weak US carriers have entered bankruptcy protection recently, including Spirit Airlines in May 2026 and Air Baltic in mid-September. In addition, the Spanish airline Volotea filed for bankruptcy at the end of last month.
Winter to Be a Crucial Test for the Aviation Industry
The winter of 2026-27 is expected to be a crucial test for the airline industry. If kerosene prices remain high despite decreased demand, the EBITDA margins of vulnerable airlines will come under serious pressure. Premium and business class seats on long-haul flights will remain in demand, making them a safe haven for airlines. In contrast, leisure travelers will seek cheaper fares and alternative airports, making it even more challenging for struggling airlines to compete with respect to price and fill seats.
Strong airlines will benefit from the headwinds that weak carriers will encounter, including the significant increase in maintenance and labor costs, reduced access to affordable aircraft, and the adverse impact of higher interest rates. While the jet fuel costs for airlines are expected to decrease, the lingering issues in the supply chain and soaring maintenance costs will create cash flow challenges for vulnerable companies, thus polarizing the industry during the forecast period.
