LCCs on the Flight to Profitability Hit 'Turbulence' Again Amid High Oil Prices

Jet fuel prices climb again amid Middle East turmoil
Demand concerns persist despite fuel surcharge hikes
"Oil prices are unlikely to fall in November, either"

As South Korean low-cost carriers (LCCs) head toward improved third-quarter results, a sharp renewed rise in jet fuel prices has raised concerns that it could put the brakes on a year-end rebound.

Fuel surcharges on domestic and international flights operated by Korean airlines will rise again starting in September. International surcharges are set to increase as aviation fuel prices, which had been on a downward trend, have risen again. The photo shows the apron at Terminal 2 of Incheon International Airport on the 1st. Yonhap News Agency.

According to the aviation industry on Oct. 21, the average Singapore jet fuel price (MOPS), which South Korean airlines use as a benchmark for fuel purchases, has continued to climb. The average MOPS price used to calculate November international flight fuel surcharges was $173.89 per barrel, up 46.1% from the benchmark of $119.06 applied in August.

Jet fuel prices are also rising worldwide. According to the International Air Transport Association (IATA), the global average jet fuel price in the third week of October was $192.44 per barrel, up 4.3% from the previous month's average. The crack spread, which indicates the price difference between crude oil and jet fuel, also widened to $65.47 per barrel, compared with $60.25 the previous week. The crack spread averaged $17.60 per barrel over the past 10 years and was about $19.80 even in January and February this year, before the U.S.-Iran war broke out.

The recent rise in jet fuel prices is driven by disruptions to crude oil supplies amid geopolitical instability in the Middle East. Uncertainty persists over production facilities in major oil-producing countries and crude oil transportation networks as the war in the Middle East drags on. With international oil prices expected to remain high, airlines are unlikely to see relief from their fuel cost burden anytime soon.

Fuel costs typically account for 30% to 40% of airlines' operating expenses, making them sensitive to changes in jet fuel prices. LCCs, in particular, face intense price competition on routes that are primarily short-haul and have limited ability to pass increased fuel costs on to ticket prices, making the burden especially heavy. If the cost of jet fuel purchases continues to rise, the extent of any improvement in profitability will inevitably be limited.

This high-fuel-price burden comes as LCCs are showing a long-awaited recovery in results. According to reports from major securities firms, South Korean LCCs are expected to have improved their results year over year in the third quarter, buoyed by the peak-season effect of the summer vacation period coinciding with the Chuseok holiday. Jeju Air was expected to swing to operating profit from an operating loss both quarter over quarter and year over year, while Jin Air and Trinity Airlines were also expected to narrow their losses.

The recent decline in the won-dollar exchange rate has eased some of the burden, in won terms, of jet fuel and aircraft lease payments made in dollars, which is a positive development. Airlines can also recoup some of the increased fuel costs by raising fuel surcharges.

Lee Hwiyeong, a professor in the Department of Aviation Management at Inha Technical College, said, "With oil prices expected to remain high in November, large airlines can use hedging strategies to prepare for fluctuations in oil prices and exchange rates, but LCCs have limited room to respond because of their weak financial positions and cash liquidity." He added, "Even if some of the increase in oil prices is offset through fuel surcharges, higher ticket prices could dampen demand, making it difficult to be optimistic about fourth-quarter results."

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