Airports Are Overflowing, But Airlines See Losses Despite More Passengers — Why? [Weekend Money]

International Passenger Numbers Rise, But Second Quarter Disappoints
Higher Fares Offset by Strong Exchange Rate
Sharp Decline in Exchange Rate in Q3 Eases Pressure
Persistently High Oil Prices, Cargo Offers Limited Relief

The number of international airline passengers in July and August reached approximately 18.02 million, an increase of 8.9% compared to a year ago. Growth was driven by a 21.3% surge in foreign arrivals. In addition, transfer demand at Incheon Airport grew nearly 20% year-on-year, benefiting as a consequence of instability in the Middle East.

While photos of crowded airports might suggest that airlines are enjoying strong results, the actual second-quarter performance fell short of market expectations. All low-cost carriers (LCCs) posted operating losses, and even Korean Air, which posted an operating profit of around 260 billion won on a separate basis, reported an operating loss of nearly 210 billion won on a consolidated basis.

The main factors explaining the mismatch between strong passenger demand and airline performance are fluctuations in exchange rates and oil prices. Youngho Kim, a researcher at Samsung Securities, analyzed that "the sharp decline in the exchange rate has alleviated some burdens, but the trend of high oil prices continues, so the pressure remains significant."

Why Were Airlines in Deficit Despite Higher Transport Fares?

In the second quarter, international transport fares per passenger kilometer (the fare an airline charges to carry one passenger for one kilometer) increased substantially for domestic airlines. Full-service carriers (FSCs) saw a rise of over 10%, while low-cost carriers experienced an increase of more than 25%. With fares rising to this extent, it would ordinarily be difficult for airlines to fall into deficit.

The major drag came from the KRW–USD exchange rate. The average exchange rate in the second quarter soared to 1,502 won, the year's highest level. Airlines pay fuel costs and aircraft lease charges in U.S. dollars. When the exchange rate rises, the burden of costs converted into won also increases, no matter how much fares climb. Essentially, gains from higher fares were offset by the adverse currency movements.

The situation flipped dramatically in the third quarter. The exchange rate, which was 1,502 won at the end of the second quarter, dropped to 1,370 won recently, a decrease of 8.7%. According to the exchange rate sensitivities disclosed by each airline, such a drop in the exchange rate results in an improvement in net profit of about 750 billion won for Korean Air, 78 billion won for Jeju Air, and 34 billion won for Jin Air. While the KOSPI fell nearly 18% since the end of June, airline stocks covered by Samsung Securities actually rose by 2–5% during the same period.

Oil Prices Remain a Burden...Cargo Holds Up Better

However, oil prices moved in the opposite direction. The average price of Dubai crude oil in the third quarter dropped to 81 dollars per barrel from 88.2 dollars in the second quarter, but the recent spot price has risen again to over 100 dollars. The crack spread (refining margin), which is the price difference between crude oil and jet fuel, has become even more burdensome.

The average crack spread over the past 10 years was 17.6 dollars per barrel, and even as recently as January–February this year, before the U.S.–Iran war broke out, it was around 19.8 dollars. However, the cumulative average from March to September soared to 74.2 dollars—far surpassing the previous historic record of 50 dollars.

This means that even if crude oil prices rise by a certain margin, the price of jet fuel is rising much more steeply. According to Kim's estimates, as of the current exchange rate, a one-dollar increase in Dubai crude increases Korean Air’s jet fuel costs by about 130 billion won and Jeju Air’s by 14 billion won.

While the passenger segment continues to struggle between exchange rate and oil price pressures, the cargo segment has offered relatively stable support to earnings. As of cumulative July, semiconductor air export volumes reached 237.3 billion dollars, up 161% from a year earlier, accounting for 74% of total air exports. Although this accounts for just over 8% of total air cargo by weight, these are high-value, lightweight items, making them a substantial driver in supporting freight rates.

Due to the nature of these products, which are difficult to substitute with sea transport, there are expectations that even if sea freight rates decline as Middle East risks ease, air cargo rates may remain largely unaffected. In fact, during the second quarter, Korean Air’s cargo transport fare reached a record high of 703 won per ton-kilometer, the highest since 2022.

Kim commented, “While we expect solid cargo segment performance to continue, we see the real turning point arriving when substantial improvement in passenger transport fares is confirmed,” maintaining a NEUTRAL outlook for the airline sector.

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