Morgan Stanley announced on Monday that it was cutting earnings and operational estimates across the U.S. airlines sector in response to a sharp rise in jet fuel prices tied to the Middle East war. The brokerage nevertheless highlighted signs of strength in early 2026, as carriers reported robust travel demand and solid forward bookings despite elevated fuel costs and recent weather disruptions.
The firms airline analysts, led by Ravi Shanker, said mid-quarter updates have generally exceeded expectations. Those updates were underpinned by sturdy travel demand and healthy forward booking trends, the team noted, and if that momentum holds through the upcoming slate of April and May earnings reports, the sector could move into what the analysts described as a "new era of earnings resilience," a shift that could support higher stock valuations.
Early Monday trading reflected mixed investor reaction. Shares of United Airlines Holdings Inc (NASDAQ:UAL) and Delta Air Lines Inc (NYSE:DAL) were down in the morning session, while Southwest Airlines Company (NYSE:LUV) was marginally up.
On the cost side, the analysts said they were making cuts across their models. "We are cutting numbers across the board - with 1Q trending towards the low end of initial guides followed by a big drag in 2Q (with initial fuel hit on a ~$4.00 baseline jet fuel assumption before transportation costs partially offset by price recovery on the remaining ~60% of summer bookings)," they wrote. The note makes clear the near-term hit to airline profitability is concentrated in the second quarter under their baseline fuel assumption.
Fuel prices have climbed sharply since the outbreak of the Iran war, with crude rising to nearly $120 a barrel at its peak. In response, several U.S. carriers have adjusted ancillary fees; for example, JetBlue reportedly raised baggage charges last month. Morgan Stanley now models jet fuel at roughly $3.20 per gallon in the third quarter and about $2.80 per gallon in the fourth quarter, and expects modest capacity reductions in Q3. The brokerage also projects these dynamics will have a net impact on U.S. carriers cost per available seat mile excluding foreign exchange.
The analysts added that they expect a relative reversion in the fuel-versus-pricing relationship over time. "However, we assume relative normalization of the fuel vs. pricing dynamic and our estimates are restored to previous assumptions by 2028," they said, indicating their view that the current shock is unlikely to permanently change long-run projections embedded in their models.
Looking to guidance, Morgan Stanley anticipates airlines will alter FY26 outlooks amid the heightened uncertainty. "We expect FY26 guidance to either be pulled entirely or more likely updated to very wide ranges (likely multiple ranges based on fuel assumptions), which will make them virtually meaningless though the Airlines can hardly be blamed for this," the analysts observed. Wide guidance ranges would reflect the unusual volatility in fuel costs and the difficulty of providing precise forward-looking numbers under those conditions.
Airfares around the world have trended higher since the U.S. and Israels attack on Iran at the end of February, as carriers have sought to pass some of the higher fuel expense through to passengers. The brokerage note referenced a pair of destabilizing events in early 2026 that have complicated airlines operating environment: two severe weather events in January and February, and the conflict in the Middle East that pushed jet fuel toward some of its highest levels on record.
Despite those headwinds, Morgan Stanley emphasized the industrys resilience. "The combination of these circumstances might have broken the old Airline sector but the current industry has been forged in the fires of COVID and fought back with much stronger mid-quarter updates than feared," the analysts said. They added that if demand remains firm and carriers manage costs effectively, 2026 could represent a structural shift toward more stable industry performance.
At the same time, the brokerage warned that a deterioration in demand or persistently elevated fuel prices would undermine that recovery scenario. Under such conditions, 2026 could remain a difficult year for carriers and delay a full rebound until 2027, the analysts said, highlighting the sensitivity of airline profitability to both demand trends and fuel cost trajectories.
Sector implications
- Airlines - near-term earnings pressure from higher fuel costs, offset in part by continued demand strength.
- Travel and leisure - airfare increases may dampen some discretionary travel, depending on how broadly carriers pass through fuel costs.
- Consumer discretionary - broader spending patterns could be affected if airlines raise fares and fees to offset fuel-driven cost increases.