United Airlines (UAL.US) plans to reduce flights by 5% as high oil prices erode profits, entering into a battle to defend profitability in the aviation industry.

American Airlines Group Inc.'s industry leader United Airlines (UAL.US) announced on Friday that it plans to cut its planned flights by 5% in the second and third quarters to deal with the long-term high oil price environment caused by the surge in aviation fuel costs due to the Iran war. United Airlines' latest decision highlights that, despite strong travel demand helping American Airlines Group Inc. companies significantly increase ticket prices to mitigate the impact of high oil prices, they are still committed to maintaining profit growth trends by cutting operating costs. CEO Scott Kirby stated in a memo to employees that the airline is preparing for oil prices to rise to $175 a barrel and stay above $100 by the end of 2027. Kirby stated that if oil prices remain at these rare levels, United Airlines' annual fuel expenditure would increase by about $11 billion, more than double its historically best annual profit. The Iran war has pushed airlines into the latest phase of fuel shocks. Since late February, the international oil benchmark Brent crude prices have surged by 80% at their peak, currently hovering around $100 to $110, while aviation fuel prices have almost doubled compared to before the Iran war. The rising energy costs are affecting the entire industry, and flight disruptions due to rerouting and airspace restrictions under the geopolitical situation in the Middle East are further driving up energy costs. While major U.S. airlines have stated that strong demand allows them room to continue raising ticket prices, these cuts are expected to further support the industry's pricing power. Wall Street financial giant Goldman Sachs Group, Inc. recently released a research report stating that oil prices are likely to continue rising in the short term due to extremely low flow rates in the Strait of Hormuz. If the low flow rates draw market attention to the risk of extended downtime, Brent crude futures prices have the opportunity to surpass their 2008 historical high. The firm believes that given recent attacks on energy infrastructure, there is a high probability that the Iran war will push oil prices to remain above $100 in the long term. "Continuing to operate flights in the short term that cannot digest these fuel costs, thereby consuming cash continuously, is completely meaningless," Kirby said. Kirby stated on Tuesday that if fuel costs remain high, the airline would rather not operate loss-making routes even if it means not meeting some demand. The North American airline leader, headquartered in Chicago, had previously cut flights with weaker profit performance, such as midday, early morning, and nighttime flights on Saturdays. In the employee memo, Kirby stated that United Airlines will cancel about 3 percentage points of non-peak flights in the second and third quarters, including red-eye flights and weaker weekday midday flights. The company will also cut air capacity by a full percentage point from Chicago O'Hare Airport and continue to suspend flights to Tel Aviv and Dubai important Middle Eastern markets making the total planned capacity reduction this year reach approximately 5 percentage points. Kirby stated that the airline plans to resume full flight schedules in the fall. Despite exceptionally strong demand for business and international tourism routes, the capacity cuts are still being pursued. Kirby stated that the company's highest revenue booking volumes in the past 10 weeks have all occurred within the last 10 weeks, a trend that is further confirmed by other reports from large American Airlines Group Inc. companies reporting strong spring airline bookings. North American airline leaders, including Delta Air Lines, Inc. (DAL.US) and American Airlines Group Inc. (AAL.US), have stated that strong market demand enables them to partially offset the negative impact of recent fuel price spikes by raising ticket prices. However, Kirby stated that United Airlines will still cut flights that have significant risk of loss at the current fuel price levels.