Jet fuel prices could send airline profits up in smoke

Industry

Published: 10 Mar. 2022, 18:46

Jet fuel prices could send airline profits up in smoke

Planes are stationed at Incheon International Airport. [NEWS1]

Jet fuel prices are skyrocketing after Russia's invasion of Ukraine, and ticket prices and fuel surcharges are already rising. For Korea's airlines, cargo may not be enough to keep them profitable, as it was during the pandemic.

According to the International Air Transport Association, the average price of jet fuel as of March 4 was $141.7 per barrel, up 27.5 percent on week and 96.2 percent on year. Fuel prices vary by region, and Asia and Oceania was $126.65 per barrel, the lowest compared to other continents. However, it was up 14.6 percent on week and 81.7 percent on year.

"There has never been an instance when a supply shortage in the fuel market, which was driven by the pandemic to begin with, and geopolitical conflict happened at the same time, and it is hard to predict future fuel prices," said Korea Petroleum Association spokesperson Cho Sang-bum. "International fuel prices will continue to rise for the time being, but no one can guess where the ceiling would be."

With rising fuel prices, profits of carriers will take a huge hit as fuel costs make account for around 25 percent of their operating costs.

"Companies tend to have jet fuel stocks for 10 to 15 days, and if fuel costs continue to remain high then it will inevitably hurt profitability," said a spokesperson for an airline. "The only thing we can do is wait for fuel costs to stabilize."

Ticket prices will inevitably rise due to fuel surcharges, which are included in the ticket price. Fuel surcharges for flights between Incheon and Atlanta were 138,000 won ($112.40) in February, up 74 percent from the last rise in January. Fuel surcharges are determined every month, although airlines can choose not to change them even if jet fuel prices rise.

Cargo is the profitable area that helped airlines survive the pandemic when they couldn't fill seats with humans. But that business may be less dependable in the future due to falling air freight rates.

Korean Air Lines' revenue from cargo flights was 6.7 trillion won in 2021, up 57.5 percent on year. Asiana Airlines' rose 47 percent on year to 3.15 trillion won during the same period.

According to market tracker TAC Index, air cargo freight rates from Asia have been falling recently. Rates from Hong Kong to North America were $9.68 per kilogram in February, down 10.4 percent on month. The Hong Kong-Europe air freight rate was $5.80, down 14 percent on month.

"The fuel price hike is going to be hard on carriers, but sanctions placed by Russia and Europe on each other could be an opportunity for Korean Air Lines and other companies to get orders for more cargo transport," said Yang Ji-hwan of Daishin Securities.

BY KANG KI-HEON, LEE TAE-HEE [lee.taehee2@joongang.co.kr]