Turkish budget carrier Pegasus Airlines (Istanbul/PGSUS) has so far refrained from passing on skyrocketing jet fuel costs to passengers, its chairman Mehmet Nane told BloombergHT on September 2.

The Iran War and soaring global refining margins are taking a heavy toll on regional aviation. Speaking on the sidelines of the Airports Council International Airport Experience Summit, Nane also disclosed that crude oil prices rose around 30% in 1H while jet fuel expenditure surged by roughly 70%.

The disparity underscores a widening "crack margin", the premium refiners charge to turn raw crude into aviation fuel. Nane warned that the spread hits airlines with a doubling of the operational intensity of baseline oil inflation.

"The effect of the Middle East conflict hits us on multiple fronts," Nane said, adding: "One is the rise in oil prices... and when it comes to aviation, that impact is doubled because of the conversion ratio from crude oil to jet fuel."

Despite a 26% y/y increase in 1H revenues, Pegasus has opted to absorb the brunt of the cost spike rather than risk dampening passenger demand with higher fare surcharges.

"Fuel costs have not yet been reflected in ticket prices," Nane said, adding that management was relying on dynamic monthly budgeting and a substantial hedging strategy to navigate the turbulence.

Pegasus has hedged about 62% of its fuel exposure, well above the global airline industry average of less than 50%. While this derivative buffer has shielded the airline from the worst of the volatility, Nane conceded that the rapid rise in jet fuel prices continues to exert severe downward pressure on margins.

The geopolitical friction both south and north of Turkey’s borders has created secondary headwinds for the country's aviation and tourism sectors. Positioned as a critical crossroads linking Europe, the Middle East and Asia, Turkish carriers rely heavily on regional transit and inbound leisure traffic.

According to Nane, tourist arrivals from key markets such as Iran have fallen short of initial forecasts as regional security fears weigh on consumer travel sentiment.

"Looking at it from this perspective, because our country sits at a juncture connecting the world, we have experienced the negative impacts of this war through rising fuel prices, elevated costs and a drop in tourist arrivals from the regions," he said.

Airlines across Europe and the Middle East are watching the refined fuel markets closely. If jet fuel prices remain elevated, low-cost carriers, which operate on razor-thin operating margins, will eventually be forced to raise base fares or reintroduce aggressive fuel surcharges before the winter travel season.

Separately, on September 2, Pegasus said that it had cancelled Russia flights for "technical and operational" reasons. Earlier in the day, Ukraine’s president, Volodymyr Zelenskiy, declared that due to expanding warfare Russia’s airspace was becoming unsafe for commercial airlines.