Analysis: Few signs of resolution to US-Iran impasse

A pause in the military exchanges between the US and Iran at the weekend ended a fortnight’s escalating resumption of war which sent the oil price back above $100 a barrel last week despite a supposed ceasefire.

 

Unfortunately, hopes of a lengthy cessation seem misplaced, and not just because the US accused Iran of violating the pause in fighting on Wednesday and launched joint attacks with Saudi Arabia on Iranian-backed forces in Iraq.

 

The announcement that Hamas, which controls Israeli-occupied Gaza, has agreed to a disarmament plan in return for Israeli withdrawal will not change the current balance of forces between the US and Iran in the Gulf.

 

Fundamentally, the US cannot be seen to accept Iranian control of the Strait of Hormuz, while the Iranian regime recognises maintenance of this control is its strongest card in negotiations and its best guarantor of survival.

 

The latest military exchanges over the Strait have taken place regardless of any diplomatic moves over Gaza, and there is a long way to go between an announcement of an agreement and its implementation – as we have seen all too clearly in attempts to end the US war on Tehran.

 

Iran torpedoed Washington’s attempt to ’reopen’ the Strait by protecting ships passing closing to the coast of Oman with successful missile strikes on two vessels last week.

 

It has clearly retained a capacity to deter shipping entering and leaving the Gulf, hit US bases around the region and threaten infrastructure across the UAE and neighbouring states if the US escalates attacks.

 

A retired naval commander told the Financial Times: “The US cannot drive the threat down to such a level that the Strait can reopen.” 

 

Oil consultancy chief Amrita Sen described the latest Iranian strikes as “a gamechanger”, suggesting: “Even vessel owners prepared to take risks will need more than headlines about peace.”

 

The threat has been exacerbated by the Iranian-backed Houthi group in Yemen threatening ships in the Red Sea, location of a major Saudi oil terminal.

 

Iranian-US analyst Vali Nasr warned Iran will “seek to absorb US military pressure and intensify its attacks . . . to signal the war will not remain at the level of Washington’s choosing”.

The pause in US attacks and Iranian counter strikes at the weekend coincided with an Omani delegation visiting Tehran for talks on joint arrangements to manage shipping through the Strait, suggesting ‘peace’ will require the US accept Iran’s position.

 

The US administration acknowledged it paused its military action to see what came out of these. It’s unclear much did, though no doubt informal talks continue through multiple third parties.

 

Meantime, civilian populations in the Gulf must deal with the risks and uncertainty, and the rest of the world and the travel industry must deal with the fall-out.

 

The one difference the Hamas announcement may make is in offering President Trump a rationale to retreat on his declaration to give Iran "a beating" this week, claiming it demonstrates Iranian desperation for a ’deal’.

 

In reality, Hamas is not wholly controlled by Iran, and Iran stood by without overtly intervening through Israel’s three-year-long assault on Gaza following the October 2023 atrocities.

 

Iran war’s impact on travel sector

 

Ryanair and easyJet quarterly results last week gave the clearest indication yet of the war’s impact on the sector.

 

EasyJet reported a near 70% fall in profits for April to June, blaming half of a £201-million shortfall year on year on extra fuel costs and the remainder on “softer demand”. 

 

Chief executive Kenton Jarvis noted a 1% fall in average fares and described peak summer flight prices as “flat”, saying: “Fares would be more expensive if we were passing on fuel.” 

 

He reported bookings “strong in the month of departure but down before that”. 

 

Ryanair profits for April to June were down 34% but still totalled €538 million, with average fares down 6% year on year. 

 

Group chief executive Michael O’Leary said: “We’d hoped close-in bookings would dramatically recover. They’ve improved but not enough. The resumption of hospitalities hasn’t helped. We’ll need more discounting.”

 

O’Leary noted: “Before the war, pricing looked like it would be up in the mid-single digits. I don’t expect a material change now. Fuel prices are going to be volatile up to the US mid-terms [elections in November].”

 

In the circumstances, talk of any serious recovery in travel to the UAE must be on hold and transit via the Gulf could be at risk of another suspension if the conflict escalates further.

 

Domestically at least the situation appeared somewhat improved as the new UK government offered the sector some stability – with transport secretary Heidi Alexander and aviation minister Keir Mather remaining in post, and John Healey’s appointment as Chancellor appearing to reassure the bond markets.

 

However, the resumption of war has led to higher government borrowing costs anyway. Coupled with inflation weakening the value of committed government spending by an estimated £24 billion, this makes tax rises and spending cuts only more likely this autumn.