Jet Fuel Surcharges Drop for Third Consecutive Month... Travel Industry Warns of Rising Middle East Risks

Jet Fuel Surcharges Down for Third Month in a Row

But High Exchange Rates and Middle East Risks Cloud Outlook

Profitability Also at Risk as Short-Haul Travel to China and Japan Expands

As jet fuel surcharges, which had surged due to the aftermath of the Iran war, have been significantly lowered for three consecutive months, there is rising optimism that travel sentiment will recover. However, since high exchange rates and ongoing geopolitical tensions in the Middle East persist, some predict that the recovery will be slow due to external factors. With travel centered around short-haul destinations such as China and Japan increasing, there is also a growing risk that the travel industry's profitability will deteriorate.

Yonhap News Agency

According to the industry on July 17, the fourteenth-tier jet fuel surcharge will be applied to international airline tickets issued next month. This is a five-level decrease from the nineteenth-tier currently applied this month. The jet fuel surcharge had soared to a record-high thirty-third tier for tickets issued as of May, amid the aftermath of the Iran war. However, as international oil prices have declined, surcharges have dropped rapidly over the past three months, bringing them down to a lower tier than April, when most of the tickets after the war were issued.

As a result, Korean Air charged between KRW 46,400 and KRW 344,000 per ticket (one-way) this month, but is set to charge a minimum of KRW 35,200 and a maximum of KRW 259,200 next month. The minimum charge of KRW 35,200 will be applied to routes from Incheon to Shenyang, Qingdao, Dalian, Yanji, and Fukuoka, while the maximum of KRW 259,200 will be charged for routes to New York, Dallas, Boston, Atlanta, and others. For a family of four, this means jet fuel surcharges will be reduced by at least KRW 44,800 and up to KRW 339,200.

The travel industry is currently highly optimistic that travel sentiment will recover. This is because jet fuel surcharges are immediately reflected in airfare prices, becoming a factor that directly influences travel sentiment. In fact, Yellow Balloon Tour reported that, since the announcement of lower surcharges last month, bookings from June 16 to July 9 increased by 61.2% compared to the prior period (May 23 to June 15). Some travel agencies have already detected signs of renewed demand for travel to Southeast Asia, which had been declining this year.

However, market sentiment is that there are still many variables to consider besides the jet fuel surcharge. The high exchange rate, which recently exceeded KRW 1,500, is seen as a factor negatively impacting decisions on overseas travel. Meanwhile, with the United States and Iran clashing again over attacks on ships passing through the Strait of Hormuz, there are even mentions of the potential for further escalation. For these reasons, industry officials explain that a complex assessment is required to forecast travel demand for the second half of the year, including the Chuseok holidays and winter season.

Despite a significant increase in jet fuel surcharges in the first half of this year, the number of outbound travelers still rose. According to Korea Tourism Data Lab, the number of Korean nationals who traveled abroad from January to May this year reached 12,957,187, a 5% increase from the same period last year. Even though the surcharges soared following the outbreak of the war in February until May, the number of outbound travelers still surpassed last year’s figures for the corresponding period.

HanaTour, the number one travel company in South Korea, also recorded an increase in the number of travelers sent overseas during the first half of this year. The total number of outbound travelers by HanaTour in the first half reached 2,162,636, a 7.6% increase year-on-year. During the same period, the number of customers opting for free travel packages rose by 20.4% to 2,586,013, while those choosing package tours and other organized products increased by 5.9% to 1,098,266.

An official at HanaTour explained, "The effects of the war were most evident after May," and added, "While new bookings slowed after the outbreak of war, demand for short-haul travel to China and Japan, where the burden of jet fuel surcharges is lower, increased, offsetting declines in demand for travel to Southeast Asia and Europe."

By region, the share of Southeast Asia in package tour bookings at HanaTour dropped to 43.7% in the first quarter and 28.8% in the second quarter, decreases of 5.4 percentage points and 4.5 percentage points year-on-year, respectively. In contrast, the combined share for China and Japan rose to 43.8% in the first quarter and 56.2% in the second quarter, up 5.6 and 6.1 percentage points, respectively. For the first time since the second quarter of 2018, Japan surpassed Southeast Asia as the largest destination for HanaTour's package products in the second quarter of this year.

Modetour, the industry's second-largest player, saw its total outbound travelers drop by more than 11% year-on-year to approximately 590,000 in the first half. The company attributes the decline in total travelers to shrinking demand resulting from geopolitical uncertainty and the strong exchange rate. In particular, the number of people buying tickets through Modetour dropped sharply. Within the industry, it is interpreted that different factors are having complex effects, producing divergent results across companies.

Short-haul routes to China and Japan are less profitable for travel agencies because they have lower average transaction amounts and a lesser reliance on package products compared to long-haul routes. Reflecting these factors, share prices of travel agencies continue to decline. On July 16, HanaTour’s stock closed down 0.66% from the previous day at KRW 30,200. Modetour’s stock also closed down 0.12% from the previous day at KRW 8,290, marking a drop of more than 20% compared to the beginning of the year. The stock prices of both HanaTour and Modetour are now lower than they were in March 2020, during the COVID-19 crisis.

Jiinhae Ji, a research analyst at Shinhan Investment Corp., said, "An unfavorable business environment for overseas travel consumption is persisting, with sustained high exchange rates and rising jet fuel surcharges," adding, "While suppressed demand appears to have hit its lowest point in June, ongoing macroeconomic uncertainty means it remains difficult for the overall business environment to make a decisive turnaround."

According to market consensus (average securities firm forecasts), HanaTour’s annual revenue and operating profit for this year are expected to reach KRW 610.1 billion and KRW 56.5 billion, respectively. Revenue is forecast to grow 4.0% year-on-year, but operating profit is expected to decline by 2.0%. Modetour’s annual revenue consensus stands at KRW 191.2 billion, down 9.1% year-on-year, and the company is projected to record an operating loss of KRW 5.1 billion, returning to the red.

This content was produced with the assistance of AI translation services.