Singapore Jet Fuel (MOPS) Price Trends in 2023DatePrice (USD/barrel) February 27 93.45, March 4 225.44, March 5 231.42 (peak), March 7 155.82 (Source: Refining Industry)
Unlike full-service carriers (FSCs) such as Korean Air, it has been confirmed that low-cost carriers (LCCs) have virtually no countermeasures against soaring oil prices. While Korean Air and Asiana Airlines leverage financial hedging through derivatives and other means to mitigate risk, LCCs are struggling to come up with solutions amid limited resources.
A Financial News investigation on March 11 revealed that none of the nine domestic LCCs have implemented sophisticated hedging mechanisms like futures or options contracts to lock in fuel prices. However, Air Premia has adopted a physical hedging approach by stockpiling fuel, while Air Busan relies on natural hedging. Most LCCs are left to depend on industry-wide measures such as fuel surcharges to partially offset the impact of volatile oil prices.
An Air Premia spokesperson explained, “We order fuel twice monthly from contracted suppliers. While it is not a formal hedging program, we pre-order based on price trends and store reserves as a form of hedging.”
This approach diverges significantly from major carriers’ tactics. Korean Air, for instance, hedges up to 50% of its annual fuel consumption through derivatives, with Asiana Airlines covering about 30% through similar contracts.
An LCC industry official expressed that although they hold daily countermeasure meetings, their options are far more limited compared to large airlines. The official noted that while they are discussing hedging, they are carefully reviewing the matter as it could rather lead to increased cost burdens or risks, especially since LCCs have a smaller fleet size and lower annual aviation fuel consumption. The official added that even if they raise fuel surcharges in April, there is a high possibility that consumer sentiment itself will shrink, making it burdensome to respond proactively. Fuel surcharges are calculated based on the average Singapore jet fuel (MOPS) price from the 16th of the month before last to the 15th of the previous month. March surcharges were based on an average of about 86 USD per barrel. However, following Middle East tensions, MOPS prices spiked to a staggering 225 USD per barrel at one point.
Another LCC representative noted, “While the highest price is typically excluded when calculating averages, if this upward trend continues, we could see April’s average hit 160 USD per barrel. Fuel typically accounts for 20-30% of an airline’s operating costs, so this surge could effectively double that expense.”
Despite these challenges, the industry doesn’t anticipate extreme measures like operational suspensions by foreign carriers. Scandinavian Airlines (SAS) announced on March 10 that European jet fuel prices had reached their highest levels since 2022 due to global supply disruptions, prompting temporary fare adjustments. Similarly, Qantas and Air New Zealand have signaled intentions to raise ticket prices, while Hong Kong Airlines plans to increase fuel surcharges by up to 35.2% starting March 12.
An LCC spokesperson stated, “While long-haul routes to the U.S. and Europe will see significant surcharge increases, we expect the bump for our primary routes to Japan and Southeast Asia to stay under 10,000 won. As fuel prices have shown signs of stabilizing, we will continue to monitor the situation closely and adjust our strategies accordingly.”
