Middle East capacity nosedives as Iran conflict rolls on

Southeast Asia was up 13 per cent year-on-year last month, according to Airservices’ figures, with mainland China up 25 per cent and other Asia up 10 per cent. It comes as major Gulf carriers such as Emirates, Etihad and Qatar have severely limited capacity amid the Middle East crisis.

“Short-term volatility remained the defining theme for aviation in March 2026, however against a backdrop of Middle East conflict and uncertainties in fuel and energy supply, the Australian aviation network demonstrated strong resilience. Overall activity levels broadly aligned with the trend over the last two years,” the report said.

“Asian gateways such as Singapore, Kuala Lumpur, Hong Kong, Tokyo, and Seoul are capturing much of this displaced [Middle East] demand and may emerge as alternative hubs and travel destinations.

“Growth in international markets is mixed, with media reporting that some Chinese airlines are reducing flights to Australia to focus on higher yield routes while outbound demand to Southeast Asia remains resilient.”

The report comes as airlines including Qantas and Virgin Australia cut back on domestic capacity, with Qantas also pulling larger aircraft from domestic and US services to bolster Europe flights.

“Domestic leisure and mining demand, together with solid international travel across Asia Pacific markets, largely offset the reduction in Middle East and European traffic in March 2026,” said Airservices in its report.

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“Operators have responded with a cautious and disciplined approach to the evolving environment, underpinned by regular risk assessment and cross-sector coordination.

“Notwithstanding, forecast domestic schedules for May and June show current schedule forecast have decreased to pre-conflict schedules, with domestic capacity reductions of up to -1.5 per cent and recent industry announcements of up to five per cent reductions in domestic capacity.”

Airlines are also facing “heightened energy supply uncertainty, logistics risks and renewed inflationary pressures” due to the conflict, with jet fuel a major concern.

“Jet fuel prices, which typically represent around 30 per cent of airline operating costs, increased around 80 per cent over the previous month, driving higher airfares and reduction in forward seat capacity by approximately three per cent over the next three months,” said Airservices.

“Combined with weaker consumer confidence, these factors are weighing on industry operating costs and near-term demand outlook.”

Airservices in February’s report warned that long-haul demand was expected to soften after the outbreak of the Iran conflict.