Unpaid leave is spreading across South Korea's low-cost carrier (LCC) industry as the fallout from the Middle East conflict drives international oil prices higher. Starting with T'way Air last month, Aero K and Jeju Air, Korea's No. 1 LCC, have followed suit with cost-cutting measures.
Jeju Air Joins T'way Air and Aero K
According to industry sources on Thursday, the unpaid leave movement among LCCs began with T'way Air last month.
T'way decided to accept applications for temporary unpaid leave from cabin crew for a two-month period in May and June. Aero K, a Cheongju-based LCC, later expanded the program to all employees. Jeju Air, the industry leader, completed the domino effect by deciding to accept unpaid leave applications from cabin crew for one month starting next month.
The backdrop is high oil prices. Since the outbreak of the Iran war in late February, international oil prices have risen sharply, increasing cost pressures on the aviation industry. Fuel costs typically account for around 30 percent of an airline's operating expenses, making them a critical expense item. When oil prices and exchange rates rise simultaneously, LCC profitability comes under even greater pressure.
The international fuel surcharge for May was applied at the highest level, tier 33, resulting in additional charges ranging from 75,000 won to 564,000 won depending on the route. The possibility of weakening travel demand due to higher fuel surcharges is another variable the industry is watching closely.
Q1 Turned Profitable, but Q2 Set for Full Impact
Jeju Air's decision to implement unpaid leave draws particular attention because of the earnings results released the same day.
Jeju Air's first-quarter revenue on a non-consolidated basis reached 498.2 billion won, up 36.5 percent from a year earlier. Operating profit came in at 64.4 billion won, swinging to a profit from an operating loss of 35.7 billion won in the first quarter of last year. It marks the second consecutive quarter of profit following the fourth quarter of last year. The company pulled out the unpaid leave card on the same day it reported strong earnings.
The industry expects the shock from high oil prices to be fully reflected in earnings starting in the second quarter. Jet fuel price increases affect earnings with a time lag, so the first-quarter figures alone are not reassuring.
The prevailing view in the industry is that the international fuel surcharge will remain at its highest level in June as well. Ahead of the summer holiday season, travelers face mounting cost burdens, while airlines bearing the full brunt of oil price increases are expected to see profitability pressures intensify further.
