[Weekend Money] So How Much Will Airfare Prices Rise?

Fare Increases Unavoidable Amid Soaring Jet Fuel Prices
A 30% Hike Needed Theoretically to Offset Fuel Costs
Oversupply Pressures Expected to Challenge LCCs

View of the apron at Incheon International Airport as seen from the observation deck at Incheon Airport on the 16th of last month. Photo by Yonhap News Agency

Major global airlines are considering ways to pass on rising costs to customers, as they expect jet fuel prices to remain high for the time being. Theoretically, a 30% increase in airline ticket prices would be needed to fully offset these costs, but it is anticipated that fare hikes will be somewhat limited due to concerns about weakening demand.

On April 25, Hana Securities provided this analysis regarding airlines’ responses to higher jet fuel prices and their performance outlook for the second half of this year. Airlines are already responding to the prospect of sustained high jet fuel prices by passing on cost increases to consumers and reducing unprofitable routes. For example, major U.S. carriers such as Delta Air Lines, United Airlines, and Southwest Airlines are expected to see double-digit percentage increases in passenger fares in the second quarter. Even Delta Air Lines, which can offset 40–50% of oil price increases thanks to its own refinery, finds itself compelled to raise fares.

United Airlines announced in its earnings report that, to fully pass on the increased fuel costs, passenger fares would need to rise by about 15–20%. The airline also revealed that it sold 23% of seats for the second quarter and 8% of seats for the third quarter at pre-fuel hike prices, and it plans to fully offset rising fuel costs by increasing fares over the long term. For United Airlines, fuel accounts for 21% of its operating costs, and more than 60% of its revenue comes from domestic flights. Because the time gap between ticket sales and boarding is short, passing on costs to customers is relatively easy.

In contrast, for domestic airlines, fuel accounts for around 30% of costs, and more than 80% of revenue comes from international flights. To fully pass on fuel cost increases, a theoretical 30% ticket price hike would be needed. Some analysts predict that a full recovery in profits will not occur until after the fourth quarter of this year.

Nevertheless, airlines cannot freely raise prices. If fares were suddenly raised by 1.3 times, it could lead to a significant drop in demand. This is especially true for low-cost carriers (LCCs), whose main routes to Japan and Southeast Asia are experiencing an oversupply, leaving little room for price increases. This situation is particularly disadvantageous for LCCs.

As a result, demand is expected to shift in favor of full-service carriers (FSCs) that are perceived as more stable for the time being. Do-Hyun Ahn, a researcher at Hana Securities, explained, "While Korean Air is expected to post a deficit in the second quarter, it is likely to return to profit in the third quarter and increase its share of the international market. If restructuring among LCCs becomes more pronounced, it could serve as a trigger for the entire airline sector’s stock prices."

This content was produced with the assistance of AI translation services.