Airlines in stand-off over cutting ticket prices

0:02Good morning from the Financial Times. Today is Tuesday, August 18th, and this is your FT News Briefing. Canada is trying to avoid new tariffs from the U.S., and airlines are in a standoff over reducing ticket prices. Plus, there's one unlikely winner in the AI boom, Malaysia. up. I'm Sonia Hudson, in for Mark Filippino, and here's the news you need to start your day.

0:43Canadian Prime Minister Mark Carney is making a last-ditch effort to stop fresh U.S. tariffs. President Donald Trump has threatened 50 % tariffs on about$20 billion worth of exports that would go into effect on Wednesday. Yesterday, Carney said he would speak with Trump and try to get him to stop or reduce those levies. Canadian officials have been in intense trade talks in Washington for weeks. The U.S. wants Canadian provinces to get rid of bans on American alcohol and for the country to dial back what it sees as protectionist policies in the dairy industry and government procurement. The Trump administration did not respond to a request for comment.

1:34Airlines are in a standoff with each other over whether to cut ticket prices. That's what one analyst told the FT. Now, the cost of jet fuel is starting to come down after a big jump as a result of the U.S.-Iran war. But it's been a bad year for carriers' bottom lines, so they want to maximize their profits. Plus, airlines are worried that if one of them lowers prices, that will trigger a race to the bottom. Here to tell us more is the FT's transport correspondent, Peter Campbell. Hi, Peter. Hello. So tell us more about why ticket prices are still so high despite jet fuel prices dropping. So at the start of the Iran conflict, which was right at the end of February, the Strait of Hormuz closed and jet fuel prices globally roughly doubled in the weeks after that.

2:27Fuel is one of the airline's biggest costs. So you saw airlines all over the world immediately start to bring in either higher ticket prices or specific fuel surcharges, those ticket prices, up sometimes by quite significantly, maybe even up to a fifth. And what you've seen at the moment is the jet fuel price has started to ease. That's because the conflicts died down. But a lot of the airlines are still paying that enormous price for fuel. And so all this means that airlines are still facing much, much higher costs than they were before the war started. And frankly, they want to hold on to those higher prices as long as they can.

3:09But wouldn't higher prices eat into demand? In a perfect economic setup, you would see price rises, particularly at the back of the plane and economy, leading to lower demand. And you have seen this in some cases. You've seen really low-cost carriers like Ryanair having to induce demand by doing some price cuts. But actually, in general, the industry has been incredibly pleasantly surprised by how resilient demand has been, even with fares going up. That is partly because many of the airlines believe they still haven't really hit the ceiling of what people are willing to pay to fly. Well, let's dive into this idea of a standoff that airlines are in.

3:52Let's say one of them does start cutting prices. How much of a decrease do you think the industry could handle? I think it's very hard to quantify and it's very different based on markets and segments, right? So you will see the more price sensitive parts of the market, like short haul European ultra low cost carriers like Ryanair and Wiz. You can see, you know, prices coming down in order to induce demand and you get a kind of classic tip for tap price war. The other area where you're likely to see prices that could fall very significantly would be from the Gulf carriers. There's still a lot of evidence that not as many people as before are flying either into the Gulf or through the Gulf.

4:36And, you know, everywhere else in the market, whether it's kind of US low cost travel, whether it's into Asia travel, all of these are places where you could see price cuts come in that will force other people to follow. And so you've kind of got this standoff at the moment between the airlines of just hoping no one else blinks and And you can all, frankly, get away with keeping prices higher than in an absolutely perfect market they probably would be. How much has the war hit airlines' bottom lines overall? The conflict has been, frankly, pretty disastrous for the profitability of the industry.

5:13IATA, the Industry Global Trade Group, estimates that global profits are going to be cut in half this year because of that. Some of that is from immediate disruption with passenger flows and people being unable to fly to the Gulf. Most of that is just higher costs. And even the price increases they've put in in the wake of the conflict have not fully clawed back all of those higher prices that they are paying for their jet fuel. You've seen the jet fuel price. It fell. It's climbed back up again. Everyone is keeping an eye on that. If that remains much higher for much longer, then it really is going to cause some problems for some of the weaker allies.

5:51Peter Campbell is the FT's transport correspondent. Thanks, Peter. Great. Thank you very much.

6:02The Ebola outbreak in the Democratic Republic of Congo is now the deadliest in the country's history. Health authorities said total deaths are now over 2300 since the outbreak started six months ago. The World Health Organization is warning that the epidemic is in a, quote, phase of intense transmission. Attempts by the WHO and other medical agencies to contain Ebola in the DRC so far have been unsuccessful because of the ongoing armed conflict and population displacement. Plus, the country has very fragile health care infrastructure and is dealing with cuts to international aid.

6:48When you think of Asia's big winners in the AI boom, your mind probably goes to countries like Taiwan or South Korea. But one winner that's been flying under the radar is Malaysia. The country's been able to flourish when many of its neighbors have been struggling with U.S. tariffs and rising energy prices. I'm joined now by the FT's Owen Walker to tell us more. Hi, Owen. Hi, how's it going? It's going well. So just give me some more detail on how well Malaysia is doing. Well, if you look at Malaysia's economic growth in the second quarter, it was up 5.8%, which is pretty satisfying growth. And now much of this growth was powered by Malaysia's manufacturing sector, which was up 7.5 % in the quarter.

7:36And much of that is really tied to chip making, also data center development. So you've really got these two themes, which is chip making and data center development. And both of those are very much tied to the global AI boom. And how is Malaysia in particular able to capitalize on the AI boom? It's really focused on the what's known as back-end processing part of the supply chain, which is kind of the lower value activity, things like packaging, assembling, putting them together and testing them. Now, in more recent years, Malaysia has really benefited because of the so-called China plus one strategy where global manufacturers have looked for alternative sources outside China in the sort of broader Asian region as a kind of a protection against geopolitical pressures affecting operating within China.

8:32Now, clearly, there's also been U.S. tariffs in recent years which have affected Malaysia, as well as most other Southeast Asian countries. However, Malaysia's tariff rates have generally been lower than in China. So actually, it's kind of not really been as big an issue as it may have been. OK, so a lot is going right for Malaysia. But what are some of the challenges that the country is facing? Well, there's been a huge amount of development of data centers, certainly in the southern state of Johor. There's been a bit of a backlash locally in terms of people protesting about energy consumption and water consumption.

9:13Malaysia also is often accused by U.S. politicians of being a backdoor for the illicit trade of U.S. chips entering the Chinese market, chip smuggling essentially. So this is a real vulnerability for Malaysia because it really plays this role of having close relations or at least good relationships with both the US and China. But in doing so, if it's accused of facilitating this trade of US chips into China through smuggling networks and isn't being seen as doing enough to crack down on them, that could really be a point of vulnerability if the US really looks to crack down on Malaysia. So that's really something they're going to need to keep an eye on.

9:57Owen, what is next, do you think, for Malaysia's AI-related industries? Well, because Malaysia is very much at the lower value end of the supply chain, naturally it wants to move higher up that supply chain and extract more value from it. It wants to develop and design chips in the country. It's really been trying to invite more companies in, international companies, to set up designing and higher-scale manufacturing operations. That's always going to be a challenge for Malaysia, especially when it's near neighbor Singapore. It is already one of the real hubs for high-end manufacturing. You know, it could look to use its lower cost of labor, its tax breaks, all those sorts of things to bring in more companies.

10:42But that's really going to be an area we're going to have to watch to see how Malaysia is able to move up that value chain when it comes to chip manufacturing. Owen Walker is the FT's Singapore correspondent. Thanks, Owen. Thanks very much.

11:01You can read more on all these stories for free when you click the links in our show notes. This has been your daily FT News Briefing. Check back tomorrow for the latest business news.

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