Japan, South Korea airlines keep jet fuel surcharge steady, wary of upside oil price risks

Japanese and South Korean airlines have been keeping their fuel surcharge relatively steady for several months to reflect rangebound jet fuel prices, but the carriers would watch out for upside risks in oil prices amid geopolitical tensions in the Middle East and OPEC's production cuts, airline sources said.

South Korea's Korean Air kept its surcharge on short-haul and medium-haul flight bookings in April at Won 35,000 ($26.4) and Won 60,200 ($45.4) respectively, unchanged for the fourth consecutive month, the airline said March 21.

Japan's All Nippon Airways, or ANA, has set fuel surcharge on short-haul international flights for May ticketing at Yen 10,000 ($66.5), steady from April and slightly lower than Yen 11,000 for March.

Rangebound oil prices allowed stability in surcharge and ticket prices as well as minimal fuel price hedging costs, sources with close knowledge of the airlines' ticket sales revenue and balance sheet said over March 19-22.

The Platts FOB Singapore Jet fuel outright price has been rangebound over the past several months, staying mostly within the $98-$108/b range since November 2023, S&P Global data showed. The Platts jet fuel outright price averaged $102.44/b to date in first quarter, compared to the fourth-quarter 2023 average of $107.38 and Q3 average of $112.7/b.

ANA and Korean Air closely monitor and adopt Platts FOB Singapore jet fuel cargo outright price assessments into their monthly surcharge calculation, officials at the Japanese and South Korean flag carriers told S&P Global Commodity Insights earlier this month.

ANA's fuel surcharge is revised based on the two-month average of Singapore jet fuel/kerosene price. The fuel surcharge will be converted to Yen, by using the average exchange rate of each evaluating period for itineraries originating in Japan, the Japanese carrier stated in its official website notice.

Korean Air's fuel surcharge is calculated in Korean Won which is converted from the US dollar based on the most recent average Platts Singapore jet fuel price, a source at the airline said.

Upside oil price risks

Stable jet fuel price contributed to robust travel demand and passenger flight numbers in early first quarter, but the recent uptick in oil prices may pose a threat to airline earnings and refiners' jet fuel sales, according to a source at ANA and middle distillate traders at South Korean and Japanese refiners.

ANA said number of international flight passengers in January more than doubled year on year to 597,091. The robust January traffic came after the airline recorded an operating income of Yen 210.1 billion over April-December 2023, marking a record high for the nine month fiscal year period.

In South Korea, aviation fuel demand rose 25% year on year to 3.32 million barrels in January, latest data from Korea National Oil Corp. showed. Meanwhile, South Korea's inbound and outbound passenger flights in February from Incheon International Airport jumped 51.4% year on year to 32,158, data from the country's biggest airport showed.

However, airlines are cautiously monitoring OPEC's production policies, as well as Russia and the Middle East's geopolitical issues because any fresh uptrend in oil prices would be detrimental for 2024 earnings and jet fuel demand, aviation industry sources said.

Platts assessed sour crude benchmark Cash Dubai at $86.49/b March 20, marking the highest level since $86.9/b on Nov. 6, 2023, S&P Global data showed.

"We closely watch global oil markets and key industry news as we are highly sensitive to oil prices," said a finance manager at low cost carrier Air Japan.

Korean Air typically purchases around 2.5-2.8 million barrels of jet fuel annually and fuel costs can eat up to around 30%-35% of the company's sales revenue, a Seoul-based aviation industry source with close knowledge of the airline's' fuel consumption said.

"There are internal analysts who specialize in oil market analysis and [jet fuel price] hedging strategies ... the team closely tracks oil industry fundamentals like OPEC crude oil output," a source at South Korea's Asiana Airlines said.

For refiners, higher jet fuel and oil prices are positive in terms of inventory gains and sales margins. However, a decline in flight traffic amid weak consumer sentiment bodes ill for jet fuel sales, said a product inventory manager at Japan's top refiner ENEOS.

In Japan, jet fuel/kerosene sales rose 1.2% year on year to 66,443 b/d in January, latest data from the Ministry of Economy, Trade and Industry showed.