Analysis: The risk of renewed war in the Middle East is rising

President Trump’s threat to Oman is a reminder of the impasse in the Gulf and its potential impact. Ian Taylor reports

 

The US president’s threat to bomb Oman this week if it “gets in the way” of US-Iran negotiations shows we are nowhere near a resolution of the war.

 

The blockade of oil and refined products leaving the Gulf continues. 

 

The threat to travel and tourism in the region is also now explicit – and not just because Oman is now threatened. 

 

The UAE suspended commercial ties and trade with Iran on Tuesday, accusing Tehran of firing two missiles towards its territory in the first attacks on the Emirates since May.

 

On Thursday, the US threatened an “economic D-Day” against Iran, and Treasury Secretary Scott Bessent warned that the US “will put its full might and force towards enforcing against” any country conducting business with Tehran.

That would include China and Russia then and, until this week, the UAE.

 

Any idea that this lessens the prospect of military attacks would be mistaken, and it certainly won’t set oil flowing from the Gulf.

 

As tensions rise, it’s worth recalling the UAE bore the brunt of Iran’s military response to US attacks in March and April, when Tehran fired almost 3,000 missiles and drones at the Emirates, shutting down travel and transit.

 

Iran has confined its attacks to Bahrain, Kuwait and Jordan since then, but it appears this more-limited stage of the regional conflict may be over.

 

A drone, most likely linked to Iran, even took out a US-owned ship at an Egyptian port at the end of July, signalling Tehran’s ability to escalate its reaction to attacks.

 

It must only be a matter of time before the UK Foreign Office updates its travel advice to the UAE if tensions continue to rise and attacks proliferate.

 

That would be an especial blow to Dubai, with its Arabian Travel Market scheduled for September 14-17, as well as to those booking transit via and travel to the Gulf states as the winter season approaches.

 

It is largely irrelevant that Trump issued his threat to Oman as the 60-day deadline expired for extending the US-Iranian ‘ceasefire’ signed in June. The ceasefire barely held anyway.

 

Trump is angry at discussions between Iran and Oman over control of the Strait of Hormuz, of course. But his actions seem unlikely to encourage Iran to make concessions, especially as barely a fortnight ago the same talks were hailed as signalling a breakthrough. 

 

On August 4, Scott Bessent hailed the prospect of a deal “today or tomorrow to open the Strait” amid discussions between Oman and Iran.

 

However, Iran has consistently denied resuming talks with the US despite repeated claims to the contrary by Trump. Iranian foreign minister Abbas Aragchi made clear: “As long as the US naval blockade against Iran remains in place and its military aggression continues, there will be no change in the status quo.”

 

The reaction of oil traders thus far has been muted, with the oil price up but well below the level it hit earlier this year. There have been so many gyrations between White House promises of peace and threats of war that this is hardly a surprise. Yet it won’t remain the reaction indefinitely.

 

To make matters worse for Trump, Israel has made clear its rejection of his Board of Peace proposal for a disarmament agreement with Hamas in Gaza. This had been greeted as though a signal of progress on agreement with Iran when it was no such thing.

 

We should assume now that the crisis will continue at least through to the US mid-term elections in November, and thus to the end of the year but probably beyond.

 

Multiple Middle East analysts now agree with Vali Nasr, an expert on Iranian strategic thinking, that “Iran is expecting a very long war.”

 

Iran war’s impact on travel

 

Tui’s report this month of booked revenue down 6% year on year in the three months to June reflects the impact of the first months of the conflict, although Tui reported an improvement since mid-July.

 

Major airlines’ recent results have revealed similar. British Airways’ parent International Airlines Group (IAG) reported a 35% fall in profit for the three months to June, albeit the group still recorded €732 million in income. 

 

The shortfall on the previous year’s €1.125 billion profit was almost wholly due to a €433 million increase in fuel costs year on year, despite IAG reporting €769 million in fuel hedging gains in the previous six months and a €243 million gain from favourable exchange rates.

 

IAG also reported recouping 60% of the higher costs on the unhedged portion of its fuel through increased fares.

 

The Lufthansa Group reported a plunge in profits to €123 million for the same quarter, down from €1 billion the previous year, with fuel costs up by €750 million year on year.

 

Lufthansa likewise reported recovering 60% of the increased fuel costs through higher fares and forecast it would recoup 100% or more through the summer.

 

Air France-KLM reported an €800-million hike in fuel costs for the quarter although it still managed a turnaround a €459 million loss last year to a €190 million profit this, having recovered 85% of its higher fuel costs through increased fares. The group forecast its full-year fuel bill would be €2 billion up on last year.

 

The problem facing airlines is that fares would normally fall in the coming winter season just as higher fuel prices work through into the hedged portions of their fuel bills.

 

Travel demand remains strong but will pricing?

 

The summer season appears likely to draw to close with the sector in reasonably good health. 

 

But prospects for the winter can best be described as uncertain.

 

Travel demand clearly remains strong. But pricing, and therefore margin, could be squeezed. 

 

Airlines will want to retain higher fares if they can. As Air France-KLM chief executive Ben Smith noted this month: “Where we have an opportunity to maintain pricing, we would like to.”

 

The major carriers will no doubt reduce capacity in an effort to do that, having reduced their growth plans this summer. IAG chief executive Luis Gallego noted: “Pricing is going to be related to the capacity we have in the market.”

 

But the willingness of the Gulf carriers to price aggressively to win back traffic via Dubai, Abu Dhabi and Doha could squeeze margins next to nothing on many long-haul routes.

 

The price of benchmark Brent crude oil was back above $90 a barrel this week, while the price of jet fuel was close to $164 a barrel in Europe before the latest round of threats – 80% up on last year when this summer’s hedging prices were set.

 

As hedges unwind and carriers must agree forward fuel prices at considerably higher prices, the pressure on margins can only intensify.

 

So, a lot will depend on what happens in the US-Iran confrontation and its impact on fuel costs. 

 

Ironically, peace could trigger a price war while war could help maintain pricing for a time as it did in March and April.

 

Yet most likely, we’ll remain stuck with uncertainty.