In the words of my late grandfather, “It ain’t lookin’ great.”

Despite over three months of conflict and two months of “will they/won’t they” peace talks, the conflict-affected large Middle East hubs are still dealing with the threat of inbound missiles and drones.

At what point do we consider a short-term impact a long-term problem? Now exceeding one-quarter of the year, we’ve made the switch. We now consider the impacts to commercial aviation from the Iran conflict a long-term problem.

And this problem is currently two-fold .

The first is oil prices. If oil markets are any indication, futures prices remain substantially lower than spot prices - an indication that nobody believes (or is willing to put money on a trade) that futures oil prices will increase to match the undersupply. There are dueling pundits talking about the increasing potential of a severe shortage of oil and the potential for a sharp glut.

Which side do we take? Yes.

If COVID has taught us anything of supply chain disruption, it is that a sharp glut of supply can follow a severe shortage, particularly when boats are involved. And yet, the market appears unable to come to terms with this duality-separated by timing.

Oil production continues to increase in other places around the world not reliant on the Strait of Hormuz. At some point, the entirety of the oil locked behind the strait can be replaced. That creates long-term downward pressure on prices. But supply remains below demand and inventories continue to be drawn down, creating the chance for a shock to the system.

Then, we have Strait bypass capacity in the Middle East that has been proven to be very vulnerable to smaller militaries with capable drones (see black clouds over Russia courtesy: Ukraine). The potential for further reductions in supply is still very present. Yes, oil prices will fall eventually, but that’s not the problem at hand. How high will they go for how long before we get there?

The second impact for which we change our framing from short-term to long-term is the impact to Middle East airlines. Originally grounded to avoid the hot metal coursing through the air, the Middle East airlines have started to rebuild schedules. This week, we’ll look at Emirates as the primary example. While most of the deep March cancellations were operational in nature (in other words, the schedules still existed but the flights were cancelled on short notice), the airline prudently trimmed schedules in April and May.

By-in-large the hot metal stopped coursing through the same skies occupied by the airplanes, and so flights slowly resumed. Despite several strikes on Dubai airport, the damage was limited enough to resume operations safely.

We don’t show this chart often, but it is one we look at weekly for many airlines. It’s a different way to view future schedules, and how those future schedules change over time.

As you would expect, airline schedules shouldn’t change much over time. Sure, tweeks are made here and there, but for an airline like Emirates, the schedule ultimately flown looks very similar to the schedule initially filed.

But, of course, things were different for Emirates this spring. With the Iran conflict arriving in very late February, Emirates didn’t react right away. And why would they? Just eight months prior a short-lived conflict between the United States and Iran lasted a few days. Even though Qatar, Kuwait, and the UAE were targeted in the early days, Emirates continued to operate in the very short term.

But, by March 9, Emirates started to pull its remaining March schedules back. This was the first indication that the airline considered the conflict a reason to pull back future schedules. By March 16th, the airline pulled March down more, but notable left all other months intact. That changed by March 23rd.

Down came planned April flying on the 23rd of March, with another sharp drop the following week just before start of the April schedule. But May and June stayed normal.

The May schedule didn’t see material cuts until April 27th. Now, we’ve seen the June cuts arrive May 25th. If the trend holds, July should start to come down on June 22nd (ish).

The chart illustrates the natural reaction of short-term planning for an increasingly long-term problem.

It’s a risk for the industry we’ve identified to many of our research clients over the past two months. Not only do we think this could drag on much longer than expected, we don’t see the mechanisms in place for it to conclude in a way that brings confidence back to travelers looking to transit the Middle East - and people transiting the Middle East is largely why many of the Middle East airlines exist.

But, as high the levels of risk are for the Middle East airlines, oil is what the industry as a whole is watching closely. Consider that oil prices today are largely being kept manageable by continuous and significant drawdowns of inventories and strategic reserves, particularly in the U.S. and China. When things go back toward normal, those reserves will need to compete with the market to rebuild themselves. That means elevated oil prices are likely to be around for quite a while after the market expects a resolution. Meanwhile, high prices incentivize increased production, which ultimately brings oil prices down. For stakeholders considering the impact to aviation, the question isn’t necessarily “what”, but “when”. Timing still is everything.

And still, it is the decisions by the airlines of when to finally pull the plug on a future schedule that so well illustrates the problem at hand. The industry has handled the short-term conflict remarkably well. How will it transition to the long-term?

This doesn’t mean we’re pessimistic on the next 12 months of the industry, just that we’re watching the potential impacts of this risk growing, both in amplitude and length. Whether it be affected airline schedules coming down sooner or oil futures rising the risks to aviation today are just as present as they were in March.

The conclusion remains the same as it did 15 months ago at ISTAT Americas: “What we do know is that things are changing at a rapid pace. We are seeing new threats; we are seeing new opportunities hitting us at a pace that we haven’t seen in 88 years.”

Eventually the Strait will reopen and oil prices will fall with the increased production. Schedules will return to their familiar steady lines, and breaths of relief will be sighed, just in time for the next crisis.

Nobody signed up for aviation on career day based on the promise that it would be a boring industry.

Notably absent from the stock charts this week is Spirit Airlines, up over 150% after the U.S. government signaled a bailout for the airline.

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