October surcharge set at tier 23

MOPS average price at $158.57 per barrel, up 6%

Easing won-dollar rate offers airlines some relief

A Korean Air Boeing 747-8i aircraft [Korean Air]
A Korean Air Boeing 747-8i aircraft [Korean Air]

International fuel surcharges on Korean Air flights have risen for two consecutive months as renewed volatility in global oil prices pushed up the linked levy, the airline said Wednesday.

Korean Air said the fuel surcharge for international flights departing South Korea and ticketed from Oct. 1 through Oct. 31 has been set at tier 23. As a result, passengers on the longest routes — including New York, Dallas and Boston — will pay a one-way surcharge of 362,600 won ($268). That marks a modest increase from September's tier 21 level, which carried a surcharge of 354,000 won.

The October surcharge was calculated based on the average price of Singapore jet fuel (MOPS) from Aug. 16 to Sept. 15, which came in at $158.57 per barrel — up 6.22 percent from the previous period's $149.29. The rise in MOPS prices prompted the Ministry of Land, Infrastructure and Transport to move the applicable surcharge tier higher.

The international fuel surcharge system allows airlines to pass on a portion of rising fuel costs through ticket prices. Surcharges are divided into 33 tiers. The level hit a peak of tier 33 in May in the wake of the Iran war, before easing to tier 27 in June and tier 19 in July, then falling further to tier 14 in August.

A renewed climb in oil prices would add to the financial burden on carriers. Fuel costs account for roughly 30 percent of an airline's total operating expenses, making them the single largest cost item. According to Korean Air's business report, the carrier's estimated annual fuel consumption for this year, based on first-quarter projections, stands at approximately 30.5 million barrels. That means every $1-per-barrel change in the MOPS price translates to a $30.5 million swing in profit or loss.

Airlines can offset some of the increase by raising fuel surcharges, but there is a lag between a rise in jet fuel prices and its reflection in the surcharge, and carriers cannot pass the full cost on to passengers.

The surge in global oil prices reflects overlapping supply disruptions around the Strait of Hormuz and the Bab el-Mandeb Strait. Major oil producers in the Persian Gulf have already been struggling to move crude through the Strait of Hormuz amid the fallout from the US-Iran war. Concerns about shipping disruptions widened Thursday, when Houthi forces seized Mocha, tightening their grip on the Bab el-Mandeb Strait — the southern gateway to the Red Sea.

However, the won-dollar exchange rate falling back into the 1,300-won range has offered airlines some relief from the double burden of high oil prices and a weak currency. Airlines pay for fuel and aircraft leases in dollars, so a stronger dollar raises their costs. According to Korean Air's business report, a 10-won shift in the exchange rate produces roughly 56 billion won in foreign-currency valuation gains or losses and about 16 billion won in cash flow changes.


eyre@heraldcorp.com