LCCs With No Financial Hedging Capacity Left Exposed by Surging Oil Prices [U.S.-Iran War]

Unlike major full service carriers (FSC) such as Korean Air, low-cost carriers (LCC) effectively have no concrete measures in place to cope with the recent spike in oil prices. While Korean Air and Asiana Airlines are using financial hedging through derivatives and other instruments, LCCs lack the capacity to do so and are struggling to come up with countermeasures.
A review by Financial News on the fuel price response strategies of nine domestic LCCs on the 11th found that none of them are hedging jet fuel prices in advance through futures or options, as FSCs do. Air Premia is instead engaging in physical hedging by placing advance orders for fuel and stockpiling it, while Air Busan is relying on natural hedging. In general, LCCs are trying to partially cushion the impact of oil price volatility by using industry-wide mechanisms such as the fuel surcharge system. A representative of Air Premia explained, "We place fuel orders with our contracted supplier twice a month," adding, "Although this is not a formal hedging program, we are effectively hedging by placing advance orders based on oil price trends and stockpiling the fuel in storage tanks."
This stands in sharp contrast to the approach taken by FSCs. Korean Air is currently hedging up to 50% of its annual fuel consumption through derivatives and similar products. Asiana Airlines has also signed hedging contracts that cover about 30% of its fuel needs.
An official at an LCC said, "We are holding daily task force meetings, but unlike the major carriers, our options are very limited," and continued, "We are discussing hedging transactions, but because LCCs operate smaller fleets and consume less jet fuel annually, such deals could actually increase our cost burden or create additional risks, so we are proceeding very cautiously." The official added, "Even if we raise fuel surcharges starting in April, there is a high chance that overall consumer sentiment will weaken, so we are reluctant to take aggressive measures."
Fuel surcharges are calculated based on the average price of Singapore jet fuel, or Mean of Platts Singapore (MOPS). The reference period is the average from the 16th of the month before last to the 15th of the previous month. For March, the surcharge was set using an average price of about 86 dollars per barrel, but after the escalation in the Middle East, MOPS prices at one point soared to 225 dollars per barrel.
Another LCC industry official noted, "When calculating the average price, the single highest price is excluded, but if elevated oil prices persist, there is talk that the April average could climb to around 160 dollars per barrel," and added, "Fuel typically accounts for about 20–30% of an airline's operating costs, and if oil prices rise sharply, that portion of the cost could effectively double."
Even so, observers do not expect extreme scenarios such as foreign carriers suspending operations. Scandinavian Airlines System (SAS) said on the 10th local time, "Recently, jet fuel prices in Europe have risen to their highest level since 2022 due to global supply disruptions," announcing that it would temporarily adjust airfares. Qantas Airways and Air New Zealand also stated that they would raise ticket prices because of higher fuel costs. Hong Kong Airlines has decided to increase its fuel surcharge by up to 35.2% starting on the 12th.
An LCC industry representative said, "Fuel surcharge hikes are much larger on long-haul routes to the Americas and Europe, but for Japan and Southeast Asia, which are the main markets for LCCs, the increase is not expected to exceed about 10,000 won per ticket," and added, "Since the recent surge in oil prices is showing some signs of easing, we will monitor developments and then formulate our response."
hoya0222@fnnews.com Reporter Kim Dong-ho Reporter