The second quarter saw the airline industry shift sharply from expanding its business to managing disruptions caused by the Middle East conflict and a surge in jet fuel prices. Passenger demand softened, particularly in the Gulf region, as hubs and airspace were disrupted and operational economics altered.
Despite the jump in fuel costs and geopolitical uncertainty, the airline industry showed resilience: Worldwide capacity expanded by 3.3%, with operating margins running at roughly 4.1%. But while revenue rose 11.7% — the result of higher fares designed to offset elevated fuel costs — expenses climbed even more, jumping 19.1%.
Outside the Middle East, demand proved robust, with traffic performance increasingly dependent on network exposure to the regional conflict and uncertainty. European and Asian carriers with direct long-haul options benefited, while Gulf-reliant itineraries faced cancellations, longer journey times, and schedule uncertainty.
The challenge facing carriers in the second half of this year will be adapting to a world in which flight economics and the geography of global connecting traffic are being reshaped. Flexible rebooking, proactive communication, and targeted fare management will be critical to retain passenger trust as traffic patterns stabilize.
Geopolitical tensions drive up airline fuel prices and costs
Geopolitical issues continued to drive fuel prices higher across the world, resulting in elevated operating costs for the airline industry in the quarter. While global margins settled above 4%, regional margins dropped lower than in prior quarters. Europe’s was the highest at roughly 6%.
Although year-over-year real global GDP growth rose 3.2%, growth was distributed unevenly across major regions and markets, with North America seeing the smallest GDP growth and IMEA recording the strongest. Airline revenue outpaced GDP growth across the Americas and Asia, but remained relatively similar to the rate in Europe and IMEA.
Growth in nominal consumer spending and nominal disposable income increased across all regions, with worldwide growth in consumer spending increasing at 7.3%, not adjusted for inflation. Here again, North America experienced the least growth across both metrics, while Latin America led the regions.
The latest edition of our Airline Economic Analysis details the industry's second quarter results and assesses the impact of the conflict in the Middle East so far.
US airline industry performance in 2025 shows profit pressures
The US airline industry is divided into full-service carriers (FSCs), low-cost carriers (LCCs), and ultra-low-cost carriers (ULLCs). Typically, FSCs lead the industry in profitability, and 2025 was no exception, with Delta and United posting profit margins of 9% and 8%, respectively. America trailed with a 2.8% margin.
Among LCCs, Alaska and Southwest reported modest operating profits in 2025, while JetBlue and Hawaiian reported losses. Similarly, ULCC performance was split, with Sun Country and Allegiant posting profits and Frontier and Spirit suffering losses. Indeed, Spirit’s eventual insolvency weighed heavily on the ULCC category, with the now-defunct carrier representing 34% of group operating revenue. Spirit officially went out of business in May 2026.
Revenue increased modestly for both full-service and low-cost carriers, although the LCCs’ revenue gains were smaller than the FSCs’, despite higher ancillary revenue. ULCC revenue in 2025 declined, weighed down by Spirit’s struggles.
A key measure for the industry as a whole — revenue per available seat mile (RASM) — declined domestically and internationally. Despite a 3.4% rise in capacity, FSCs saw RASM fall slightly, while RASM grew less than 1% at both LCCs and ULCCs, based on flat capacity at LCCs and reductions among ULCCs.
Cost pressures — particularly from labor — increased. Low-cost carriers lost their historic labor cost advantage, reporting a 6.5-cent increase in labor costs per available seat mile (ASM). ULCCs maintained a significant labor cost advantage, despite reporting the largest increase.
But the decline in fuel cost per ASM of 9% to 10% in 2025 for all the groups helps offset higher costs in other areas. Excluding fuel, cost per ASM rose for all three groups: FSCs, up 2.6%, LCCs, up 4.6%, and ULCCs, up 6.3%.
An uptick in FSC cargo/transport revenue compensated for slower passenger revenue growth. Total revenue climbed to $177 billion for FSCs, up 2.4% over 2024, while capacity (ASMs) increased 3.4% during the same period. Passenger revenue, which represents nearly 72% of total airline revenue, increased only 1.2% in 2025 over 2024. Cargo and transport-related revenue increased the most, outpacing capacity.
In 2025, domestic RASM for full-service carriers continued its slowing trend, down 2.4% from 2024, while stage length increased 1.3%. International RASM fell 1.2% over 2024, while stage length decreased 2.1%. Load factor domestically fell 2.2 percentage points against 2024 to 83.5%. In contrast, the international load factor increased by 0.2 points in 2024 to 83.1%.
FSC’s regional mix was largely unchanged in 2025 from the previous year, with the biggest changes coming from international regions. Unit revenue (RASM) had mixed results among the carrier groups and regions, with RASM dropping for the FSC group in both the domestic and Latin regions — down 2.4% and 4.9%, respectively. Latin RASM also fell 1.7 points for the LCC group.
Low-cost carriers see 18% growth in ancillary revenue in 2025
While total revenue at LCCs increased to $51.3 billion in 2025, up 1.6% over the prior year, the increase was smaller than the gain reported by FSCs. Capacity in 2025 increased by 0.9% over 2024 across all carrier types.
Passenger revenue decreased by 0.4% and accounted for 81% of total operating revenue across all carrier classes. Transport-related revenue increased 2.6% over 2024. Other revenue, made up largely of ancillary fee revenue, rose 18.2% in 2024 and represented 11% of total revenue.
Spirit airlines struggles drive 8.3% drop in ULCC revenue
ULCC RASM continued to decline through the fourth quarter of 2025. 2025 domestic RASM increased 0.7%, to 10.2 cents over 2024, with stage length staying constant at 928 miles. International RASM also rose 0.7%, despite stage length increasing 0.9%. Domestic load factor dropped 1.4 percentage points in 2025 over 2024 to 79.7%, while international load factor declined to 71.7%, the lowest point since the post-pandemic recovery.
ULCC revenue declined by 8.3% versus 2024, with Spirit’s looming default accounting for nearly all of the decline. Capacity was down 9.2% over 2024. Passenger and ancillary revenue fell by 7% and 11%, respectively, while transport-related revenue decreased moderately by 1.1% over 2024. Cargo revenue grew 41% over 2024 and represented only 1.4% of total revenue.
Why rising unit labor costs at FSCs, LCCs, and ULCCs create vulnerability
Fuel savings in 2025 helped offset increases in other areas for the FSCs. The cost of jet fuel declined steadily between 2022 and 2025 for FSCs, but the Middle East conflict has driven prices higher. At the same time, other FSC cost areas generally increased over the same time frame. Fuel and labor, the largest cost line items, had the most movement from 2024 to 2025. Fuel savings provided 0.3 cents of CASM savings, while the increase in labor resulted in an additional 0.2 cents of CASM.
Meanwhile, rising fuel costs could hobble low-cost carriers, given rising workforce costs. LCC labor costs per ASM continued to climb from their 2022 levels, reaching 6.5 cents in 2025. Fuel cost, down 0.4 cents per ASM, served as a buffer, but 2026 results will be different. All other categories had mixed results but were generally flat, given their relative size compared with overall costs.
At ultra-low-cost carriers, rising labor and aircraft costs outpace airline groups. Like FSCs and LCCs, ULCC labor cost per ASM has risen steadily since 2022. Aircraft costs (maintenance and ownership) increased 0.4 cents per ASM, with maintenance and ownership up 14% and 13%, respectively. That said, lower fuel costs over the same period dampened overall CASM growth.
Since the end of the pandemic, full-service carriers have consistently posted the highest margins, while ULCCs have remained unprofitable. Long-term, whether ULCCs can return to profitability with Spirit no longer in the picture remains to be seen.
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