European airlines slow capacity plans as fuel prices stay high
Europe's big three legacy airline groups have all shaved back their capacity growth plans for 2026. High fuel prices are forcing a tighter focus on routes than have sufficient pricing power to be profitable in spite of the additional cost.
Air France-KLM, IAG and Lufthansa Group each reported faster growth in fuel costs than in revenues in 1H2026, although healthy demand for air travel helped to soften the impact on profits.
Their unit revenues were boosted by enforced capacity cuts at the Gulf hub airlines, driving more traffic into the Asia networks of the European groups. The durability of this factor over 2H2026 will be closely watched and will influenced by the pace and extent of capacity recovery by Gulf competitors.
Either way, fuel prices are set to remain well above their levels of before the Iran conflict. Meanwhile, capacity growth in Europe as a whole is set to slow to just 1% in the latter weeks of 2026 (source: CAPA - Centre for Aviation/OAG), an illustration of the cautious mood adopted by airlines in this market.
Summary
- Air France-KLM, IAG and Lufthansa Group are trimming 2026 capacity growth plans as high fuel prices pressure profitability.
- In 1H2026, fuel costs rose faster than revenues for all three groups, increasing fuel’s share of revenue.
- Heavy fuel hedging (Air France-KLM 67%, IAG 70%, Lufthansa 86%) mitigates but does not prevent higher fuel bills.
- Strong demand - especially premium travel - lifted unit revenues and partially offset fuel inflation, with varying recovery rates by group.
- Reduced Gulf hub airline capacity temporarily boosted European carriers’ Asia Pacific unit revenues, but this benefit may fade as Gulf capacity returns.
- Overall European seat capacity growth is slowing sharply in 2026, reflecting a cautious market outlook amid fuel prices still well above pre-conflict levels.
Fuel cost growth outpaced revenue growth in 1H2026…
All three groups experienced faster growth in their fuel bill than in their revenue in 1H2026.
Air France-KLM's fuel bill increased by 16.3%, compared with revenue growth of 7.4%. IAG's fuel bill was up by 12.3%, with revenue up by just 1.0%, while for Lufthansa fuel cost grew by 18.1% and revenue grew by 7.8%.
As a share of revenue, Air France-KLM fuel costs increased from 21.4% in 1H2025 to 23.2% in 1H2026. For IAG the increase was from 22.1% to 24.6%, while Lufthansa reported a rise from 19.2% to 21.0%.
Air France-KLM, IAG and Lufthansa Group: revenue and fuel cost 1H2026
|
Group |
Revenue EUR million |
% chg y-o-y |
Fuel cost EUR million |
% chg y-o-y |
Fuel as % of revenue |
ppt chg y-o-y |
|---|---|---|---|---|---|---|
|
16,756 |
7.4% |
3,887 |
16.3% |
23.2% |
+1.8 |
|
|
16,064 |
1.0% |
3,956 |
12.3% |
24.6% |
+2.5 |
|
|
19,887 |
7.8% |
4,176 |
18.1% |
21.0% |
+1.8 |
Source: company reports, CAPA - Centre for Aviation.
…in spite of high levels of fuel hedging
As is typical for most leading European airline groups, the three make significant use of fuel hedging Air France-KLM has hedged 67% of its fuel needs for 2026, while IAG has hedged 70% and Lufthansa 86%.
In a time of higher fuel prices, hedging helps to mitigate the impact on profits. However, as evidenced above, it cannot prevent increases in fuel costs.
Healthy demand and unit revenues softened the impact of higher fuel costs
In spite of a challenging backdrop healthy demand boosted unit revenues for all three groups. This helped to soften the impact of higher fuel costs.
Air France-KLM reported that it recovered 85% of the additional fuel cost through higher revenues (ahead of its previously estimated 60%).
It noted "steady demand for premium travel, notably on the Asian and North American markets". The group achieved an increase in overall unit revenue of 6.6% in 1H2026.
For IAG, this fuel cost recovery rate was 60%, in line with expectation for the full year.
The group attributed revenue performance to "continued strong demand for air travel as well as our diverse portfolio of markets and customer propositions". Its 1H2026 passenger unit revenue was up by 2.4%.
Lufthansa Group reported a 5.0% increase in unit revenue for its network airlines in 1H2026 and a 7.9% increase for its point-to-point airlines.
Lufthansa said this was "mainly due to a strong rise in demand on account of the drop in capacity handled via the hubs in the Middle East".
All three slowed their capacity growth in 1H2026
Healthy unit revenue performance was also assisted by cautious capacity growth, itself a response to higher fuel costs and restrictions on some destinations in the Middle East.
All three groups slowed their capacity growth in 1H2026 compared with 2025.
Air France-KLM increased capacity by 2.2% in its network airlines (after +3.3% in 2025) and by 9.7% at Transavia (+14.9% in 2025). Lufthansa reduced capacity by 2% in its network airlines (growth of +3.2% in 2025) and in its point-to-point airlines (+8.7% in 2025). IAG's group capacity was just below flat, -0.1% (+2.4% in 2025).
2H2026 outlook: how far will revenue strength offset higher fuel costs?
Assuming that fuel prices remain higher than they were last year, the outlook into the rest of 2026 is likely to be characterised by the question of to what extent will revenue strength offset fuel cost increases?
The duration and consequences of the conflict in the Middle East will be a large part of the answer.
Lufthansa's observation that it benefited from a fall in demand for flights that connect over rival hubs in the Gulf was echoed by both Air France-KLM and IAG.
This translated into strong unit revenue growth for all three on routes to Asia Pacific, for which the Middle East hubs are usually strong competitors.
If a durable peace returns and the leading Gulf airlines return to full levels of operations, the windfall gains in unit revenue enjoyed by Europe's big three legacy airline groups are unlikely to be sustainable.
According to data from CAPA - Centre for Aviation/OAG for the week of 4-Aug-2026, seat capacity at Emirates and Qatar Airways is above 90% of the levels of the equivalent week of last year.
Emirates is scheduled to be operating more capacity than last year by the start of the winter schedule, when Qatar Airways is projected to be very close to prior year capacity.
The smaller Etihad Airways has been above last year's capacity levels since mid Jun-2026.
Emirates, Qatar Airways and Etihad will seek to recapture previous traffic volumes through aggressive price discounting. Weaker revenues for the European airlines will be set against a faster fall in fuel prices.
If the conflict continues to cloud the rest of the year, fuel prices are likely to stay higher in the range of recent trading. At the same time, unit revenues may remain firmer for longer for the European airlines.
All three groups are trimming capacity plans for 2026
Meanwhile, the big three European legacy airline groups are trimming their capacity plans.
Air France-KLM has modestly lowered its guidance on group capacity growth in 2026 from a range of 2-4% to a range of 2-3%.
Lufthansa Group capacity growth guidance has fallen from a range of 0-2% to flat on last year.
IAG now also expects 2026 capacity to be flat year-on-year, compared with growth of 3% planned at the start of the year.
Capacity growth is slowing across Europe in 2026…
Growth is slowing this year in the Europe market as a whole, not just for the leading legacy airline groups.
According to data from CAPA - Centre for Aviation/OAG, growth in seat numbers to/from/within Europe is scheduled to be 3.0% in 2026, compared with 8.4% in 2024 and 4.7% in 2025.
Europe: growth in annual seat capacity, 2020 to 2026*
|
Year |
Growth rate |
|---|---|
|
2020 |
-56.3% |
|
2021 |
15.1% |
|
2022 |
65.3% |
|
2023 |
15.8% |
|
2024 |
8.4% |
|
2025 |
4.7% |
|
2026 |
3.0% |
*includes projected data after 3-Aug-2026 and may be subject to change.
Source: CAPA - Centre for Aviation, OAG.
Capacity growth is projected to be 3.0% in summer 2026, a deceleration from 4.2% in winter 2025-2026, slowing to just 1.0% in the first 11 weeks of winter 2026-2027.
…as fuel prices are set to remain high
Reduced capacity plans are a recognition that that fuel prices are set to remain high at least for the rest of the year and likely longer.
The price of jet fuel spiked to USD218 per barrel on 2-Apr-2026 (source: Platts), a record daily high sparked by the attacks on Iran by US and Israel that stared on 28-Feb-2026.
In the week ending 31-Jul-2026, the weekly average price was USD159 per barrel. This was 27% below the peak, but still 77% higher than the average price throughout 2025, which was USD90.
Even under a scenario of a lasting peace in the Middle East, it will take time for damaged energy infrastructure to be fully restored and for fuel prices to return to pre-conflict levels.
This will have a negative impact on European airline profits in 2026. IATA's Jun-2026 update of its industry outlook forecast a 24% drop in European airline operating profit this year.
The big three European groups are expected to be relatively resilient.
Current consensus forecasts by stock market analysts of 2026 operating profit are down by only 11% year-on-year for Air France-KLM, by 10% for IAG and by 2% for Lufthansa Group (source: MarketScreener).
This resilience underlines the benefits of scale, and therefore of consolidation, in the European airline market.
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