Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Airlines on high alert over strengthening dollar, prolonged oil price hike
Airplanes are parked on the domestic apron at Gimpo International Airport in Seoul in this undated file photo. Yonhap
By Lee Min-hyung
Korean Air, Asiana, 3 LCCs forecast to suffer earnings shock in Q2
Korea’s aviation industry is facing severe headwinds, as a combination of high oil prices and a weakening Korean won is feared to slow down major airlines' earnings recovery.
According to estimates by market tracker, FnGuide, the nation’s five major listed airlines are forecast to report combined operating losses of around 823.6 billion won ($542 million) in the second quarter.
The weakening local currency and rising fuel costs have directly weighed on airlines' profitability, as fuel expenses typically account for about 30 percent of an airline's total operating costs.
For instance, Korean Air and Asiana Airlines consume an estimated 42.05 million barrels of jet fuel this year. This means a mere $1 fluctuation per barrel triggers a direct impact of approximately $42.05 million on their combined bottom lines.
The average price of Singapore kerosene, a benchmark for jet fuel, spiked from $89.03 per barrel in February to $151.73 per barrel in May. This is a surge of around 70 percent following the outbreak of armed conflicts in the Middle East in late February.
The won-dollar exchange rate is displayed at an electronic board of a bank's exchange counter at Incheon International Airport, Tuesday. Yonhap
The won-dollar exchange rate is disadvantageous for carriers, as they pay aircraft leases and fuel costs in dollar. As of Friday, the local currency has traded over 1,500 won against the U.S. dollar for the 19th consecutive trading session, far higher than the 1,450 won-level in January.
Airlines have been forced to hike fuel surcharges to minimize damage from external financial uncertainties, which ends up boosting air ticket prices. This triggers a vicious cycle of declining travel demand and earnings.
Even though surcharges have dipped slightly this month, after hitting record highs in May, they remain high enough to deter price-sensitive leisure travelers.
To mitigate the damage, carriers are aggressively pivoting toward robust short-haul routes to Japan and China, while lowering their reliance on volatile mid-to-long-haul routes. Demand for such short-haul routes are affected less by the ticket price hike, so they focus on attracting more travelers to closer destinations, rather than expand costs to increase sales for long-haul ones.
“Customers bear less price burden for routes to China or Japan, so travel demand remains robust, but they have to pay much more for routes to Southeast Asia, Europe and America due to the surcharge hike,” an official from the aviation industry said. “The earnings fall is inevitable, but the point lies in how to minimize the shock by adjusting routes.”
According to the market tracker, Asiana Airlines is forecast to post the largest operating loss of around 349 billion won between April and June, followed by Korean Air at 230.3 billion won. Low-cost carriers (LCCs), such as T’way Air, Jin Air and Jeju Air, are expected to report operating losses of 120 billion won, 70.3 billion won and 54 billion won, respectively, during the same period.
“A meaningful turnaround remains unlikely in the near term due to the lingering macroeconomic uncertainties,” the official said.