Jet fuel is one of the biggest costs an airline faces, so when prices climb, investors often worry about profit margins. In a Monday note, analysts at Bernstein said International Consolidated Airlines Group (IAG) — the parent of British Airways, Iberia, and Vueling — can take the hit without giving up its key financial targets.
Bernstein argued that IAG can absorb higher fuel bills and still deliver on its 12%+ operating margin goal and planned share buybacks, even if fuel stays expensive at levels implied by current futures prices. The firm raised its price target on IAG to £5.55 from £5.50, while trimming its 2026 and 2027 adjusted earnings-per-share forecasts to €0.58 and €0.71.
How airlines cope with a fuel shock
When jet fuel prices jump, an airline's costs rise almost immediately, but it can't instantly raise fares to compensate. That's why fuel spikes often squeeze profits in the short term. Airlines have a few levers to pull: raise ticket prices, fill more seats, cut capacity on less profitable routes, or shift more passengers into premium cabins where they're less price-sensitive.
Bernstein believes IAG has more of these levers than many rivals. The note pointed to still-strong travel demand, "healthy" ticket yields — the average revenue an airline earns per passenger — and a growing premium cabin business. It also highlighted "selective capacity reductions," meaning IAG can trim flights on certain routes to keep seats scarce enough that fares hold up.
That combination, Bernstein argues, should let IAG rebuild some of the margin lost to higher fuel costs the old-fashioned way: charging more per seat and keeping planes full.
What it means for the sector
IAG's 12%+ margin target is really a test of pricing power. If fuel stays high, the carriers that can defend their margins will pull ahead of those that can't. Bernstein named Virgin Atlantic and Air Europa as more exposed in a prolonged fuel squeeze, which could shift market share and even create occasional deal-making openings for stronger players.
For everyday investors, the key takeaway is that not all airlines are equally vulnerable to fuel costs. A carrier with a strong premium mix, disciplined capacity management, and resilient demand can weather a fuel spike better than one that relies on budget fares and thin margins. That's why Bernstein's view on IAG is more nuanced than a simple "fuel is up, airlines are down" story.
Investors will be watching whether IAG can actually deliver on those margin targets in the coming quarters. The company's ability to hold fares and keep planes full will be the real test. If it succeeds, higher fuel costs could actually widen the gap between IAG and its weaker competitors.
For context, airlines across the industry have been dealing with volatile fuel prices for years. Some hedge their fuel costs, locking in prices in advance, while others take the spot price and adjust fares accordingly. IAG has historically used a mix of hedging and pricing power to manage fuel exposure.
The broader market backdrop also matters. If oil prices stay elevated, that pressures the whole sector, but it can also create opportunities for stronger carriers to gain share. As Occidental's recent earnings showed, higher oil prices can be a tailwind for producers but a headwind for fuel buyers like airlines.
What to watch next
Investors should keep an eye on IAG's next earnings report for updates on ticket yields, load factors, and any changes to its capacity plans. Also watch for any commentary on fuel hedging and whether the company reaffirms its 12%+ margin target.
Bernstein's price target increase, even with lower earnings forecasts, suggests the firm sees more upside in the stock than it previously did. That's a signal that the market may be underpricing IAG's ability to manage fuel costs.
For those holding IAG shares or considering them, the key question is whether the company can keep its pricing power intact. If it can, higher fuel bills may not be the profit killer many fear.
