High Oil and Dollar Prices Hit South Korean LCCs; Some Face Closure

South Korea's low-cost carriers (LCCs) are grappling with an intensifying financial crisis, driven by a prolonged period of high oil prices and a significantly strengthened dollar.

The surge in the dollar, which saw the won-dollar exchange rate hit a 17-year high, directly increases costs for airlines that pay for fuel, aircraft leases, and maintenance in dollars. While full-service carriers like Korean Air and Asiana Airlines can mitigate some of these impacts through fuel hedging contracts and their cargo businesses, LCCs lack such buffers. Industry insiders note that LCCs are directly exposed to the rising costs, leading to worsening profitability.

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Unlike large carriers, low-cost carriers have limited means to cushion cost increases and inevitably bear the full brunt of rising oil prices and exchange rates.

Compounding the issue, LCCs are experiencing a decline in passenger numbers. Data shows that while major airlines maintain load factors above 80%, some new LCCs, like Aero K based in Cheongju, have seen their load factors drop below 70%. This decrease in passengers, attributed to rising ticket prices and the overall economic pressure, means that operating flights becomes increasingly unprofitable due to empty seats. The situation has led to concerns that some financially vulnerable LCCs might not survive the current economic climate, with one industry official stating that some could close within the next month without further government support.

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We are somehow enduring, but airlines with poor financial conditions may not find it strange if they close down next month if there is no continued government support.