As Asia heads into its peak summer holiday season, the coming together of rising energy costs and strains on the aviation sector caused both by limited flight options through the Persian Gulf and increased fuel costs is beginning to cast a shadow over one of the region’s leading economic engines: tourism.

The ongoing disruption linked to tensions in the Middle East and subsequent oil and gas supply constraints has pushed up prices significantly. The result is a sustained increase in energy costs across the region, from industrial production to transport, and aviation fuel, and this is set to cut profits across the sector regardless of the numbers travelling either within Asia or from around the world.

Coupled to this, as a result of US tariff pressure and the war in Iran, exports of American LNG making its way to Asia have risen sharply in recent months though, underlining just how exposed Asian economies remain to imported energy shocks. At the same time, the International Monetary Fund (IMF) from their offices in Washington, has urged governments across the region to avoid broad-based subsidies aimed at appeasing hundreds of millions, and instead to maintain fiscal discipline, warning that higher energy prices ultimately risk undermining both growth and inflation stability if policy responses become overly expansive.

The transmission mechanism of these moves into the real economy is already visible. Airlines, as one of the most energy-sensitive sectors, are experiencing a direct hit to operating costs as jet fuel prices follow higher crude benchmarks brought about by supply issues through the Strait of Hormuz. Carriers across the region, including long-haul and low-cost operators, are adjusting capacity, slashing routes in some cases and moving to trim the less profitable services they operate. This has been most noticeable of late with Air India cutting at least seven of its long haul routes for now and limiting frequency on around 10 others – most of which head west or to Australia and Singapore.

At the same time, airlines are also attempting to accommodate demand through aggressive fare promotions, particularly on heavily trafficked intra-Asian routes linking Japan, Singapore, Thailand and other major tourism spots. The result is a definite squeeze from both sides with rising input costs on the one hand and downward pressure on ticket yields on the other.

As such, for tourism-dependent economies in Southeast Asia in particular, the implications are evident. Destinations across the region and even parts of Northeast Asia including Japan that rely heavily on inbound travel face the prospect of limited numbers of arrivals or the potential follow-on of reduced spending per arriving visitor if costs rise further.

Airlines themselves are thus being exposed to a narrowing margin environment, with higher fuel costs that are structurally difficult to pass through in full, especially so in the competitive short-haul budget markets where pricing power is already limited. In Europe there are already predictions that this will lead some airlines to fail. No such authoritative claims have yet been made publicly in Asia although it has been suggested that governments may need to step in, in some cases.

In this regard, the knock-on effects across Asia extend beyond aviation as tourism is a key contributor to GDP in a number of Asian economies with spillovers into retail, transport, real estate and the local employment sector. To this end, any slowdown in travel flows during the peak season would represent not just a sector-specific issue, but a broader dragnet on domestic demand at a time policymakers are already struggling to contend with fiscal issues related to the higher global energy prices.

On the currency front similar concerns exist. Tourism based income is an important source of foreign exchange for many Asian economies – read: Thailand, the Philippines, Indonesia, Malaysia, Sri Lanka and Vietnam in particular. Any weakening in inbound travel would therefore add a degree of pressure to current account balances.

But what makes the current environment even more challenging for Asia is the simultaneous presence of cost inflation and policy restraint demands. With the IMF urging fiscal caution, regional governments have limited scope in the first place to cushion households or firms through subsidies without exacerbating longer-term vulnerabilities. This in turn places the onus of burden more firmly on end consumers and private-sector operators, particularly the airlines and tourism-related sectors.

Taken together, the combination of elevated energy prices and a constrained aviation sector is creating a much more fragile backdrop for Asia’s summer travel season. And while demand for travel remains structurally strong, the friction of higher costs is increasingly shaping behaviour at the margin, meaning that there will be no real winners in traditional tourism this summer – only airlines, tourist destinations and central banks left counting the cost.