Do Industry Paricipants Need a NACHO strategy?

There is another Mexican food abbreviation these days, as NACHO has joined TACO in the alphabet soup of acronyms. NACHO stands for Not A Chance Hormuz Opens, in reference to the recalcitrance of either side to compromise in the Iran war, with both actively keeping the Strait closed. While I have no idea why social media has chosen Mexican food as an abbreviation meme, this does bring up the need for longer-term planning that includes a downside scenario. [caption id="attachment_192282" align="aligncenter" width="580"] Image: AFP[/caption] If NACHO indeed proves to be the case, a new round of longer-term planning will be needed for the industry, which won’t be an easy task. So far, the impact of the war hasn’t materially impacted demand outside of the Gulf and the immediate region of the conflict - as yet. But each day that goes on without the Strait open adds to the probability of deeper downside economic impacts. Short-Term Impacts The short-term impacts are easy to see today. Overflights and routing changes are adding to the time and cost of many routes, particularly Europe to Asian overflights already impacted by the Ukraine-Russia conflict now having to avoid Iran. The Middle East 3 are dodging attacks and are only operating at about 50% of normal schedules. And of course, the price of jet fuel has doubled. With a substantial portion of the world’s oil transiting the Strait, fuel prices are now expected to remain high throughout 2026 as no rapid solution to end the war is on the horizon. With inflation rising worldwide on higher energy costs, the question is not whether higher prices will impact air travel, but how soon and how heavy the price elasticity impacts will be. So far, travel in Europe and North America continues with strong bookings for the summer season, but expectations are for a more significant demand hit in the fall and winter. The question is not whether a downturn will occur, but how soon and how strong the downturn will be. We’ve already seen the beginning of the downturn with Lufthansa Group cancelling 20,000 flights, and cancellation of marginal profitability flights by a bevy of carriers from Australia to North America. Cancellations are likely to increase as the impacts of the Strait closing make their way through the economy, from higher prices for everything that needs to be transported by truck, ship, or plane to even higher Jet fuel prices. Of course, for the Gulf carriers, with operations dramatically impacted by the war, this becomes an existential crisis if the conflict expands with resumed missile strikes at their hub airports. Looking Beyond to the Longer Term In the panoply of what ifs, the NACHO option is now one that planners need to integrate into their strategies. For airlines the questions revolve around decreased demand and flight cancellations, and how all of this impacts their route structures and fleet renewal plans. For the OEMs, the question is whether airlines will continue to take on new aircraft as fast as Airbus and Boeing can build them, or defer orders. The OEMs, looking at decade long backlogs, today can quickly up-fill delivery positions if a carrier wants to defer deliveries. The question is whether we will be able to say the same thing six months from now, particularly if a major economic downturn occurs as a result of the Strait remaining closed. Free markets always tend to self-balance, even after economic shocks. But if this shortfall cannot be quickly solved, there will be pain for most players. New scenarios in which the Strait remains closed are under discussion throughout the supply chain. The questions are changing from planned Airbus and Boeing production rates to how a prolonged airline downturn will an impact the OEMs, their supply chain, and deliveries? How long can the industry continue without major flight cancellations due to a shortage in fuel? Can higher fuel prices be passed on to passengers without impacting demand, load factors, and margins? Could those impacts carry beyond 2026 into 2027? All of these issues are now under consideration as the industry re-thinks the worst case strategy. NACHO is the New Worst Case Scenario Key issues for planning now include fare elasticity, advanced bookings, and the percentage of fuel cost increases that airlines can recover in the near and intermediate term while the Strait is closed. Those answers will translate into whether airlines will defer delivery of new aircraft due to cash flow concerns, or continue to take delivery of more fuel efficient models that offer much better operating economics. Finally, in a shortage environment, how creative can the oil industry become in moving crude oil and Jet A by alternative transportation to partially ameliorate a part of the shortfall. Airlines such as Ryanair, that hedged fuel, are in better shape than others who stopped hedging, including multiple large European and North American airlines that have already begun to cancel marginal flights. But even Ryanair is seeing some emerging fare weakness in light of the global economic impacts of higher fuel costs. The Bottom Line For the industry and the supply chain, the key question is whether NACHO will have an impact on aircraft demand, production, and its impact on the supply chain. In the near term, the answer is no, but should the closure persist, that specter becomes more realistic. It may be time to revise the worst case scenario downward, and plan for the worst while hoping for the best.

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