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Low-cost carriers

Korean LCCs continue to face worst market conditions in 2021

The LCCs are now facing the fast spread of COVID-19 delta variant, rise in oil price and gradual cut in tax benefits

By Jul 22, 2021 (Gmt+09:00)

Korean LCCs continue to face worst market conditions in 2021

Korea’s low-cost carriers (LCCs) are projected to post another period of financial loss in the second quarter of 2021.

According to analyst estimates on July 21, Jeju Air Co. is projected to post a loss of 75.3 billion won ($65.4 million) in the second quarter, Jin Air 55.7 billion won ($48.3 million) and T'Way Air Co. 39.0 billion won ($33.8 million).  

Unlike major airlines such as Korean Air Lines Co., which has been making profits over the last four quarters from its air cargo business, LCCs must rely on revenues from passenger flights. But the LCCs are still facing unfavorable market conditions with the ongoing international travel restrictions, as well as the over-supply of flights in the domestic market.

“It will be impossible for the LCCs to come out of the red until the number of international flights recovers to the level prior to the pandemic,” said an industry official.

Despite the South Korean government’s recent achievement in signing a travel bubble accord with Saipan for vaccinated tourists, the demand for international travel has shown little signs of recovery in Korea. The travel bubble refers to allowing free travel within agreed countries or regions by waiving quarantine measures among them.

South Korea has reported 1,842 new COVID-19 cases on July 22, the highest daily number so far. Experts highlight that the South Korea-Saipan travel bubble accord has a circuit breaker clause, which can temporarily halt the agreement if the pandemic worsens significantly.

“If Saipan implements the circuit breaker clause, it will put a great burden on our government and the LCCs alike. We project that it is highly unlikely for Korea to sign a travel bubble agreement with another country or region,” said an airline industry official.

The rising oil price is also an extra financial burden for the LCCs. The price of crude oil, which was around $52 per barrel in January, surpassed $72 on July 19.

Moreover, the airline industry players are about to face reduced tax benefits in importing aircraft components. Korea’s customs law currently grants a 100% deduction on tariffs, but the figure will be reduced to 80% in 2022, 60% in 2023 and 0% in 2026.

“Such cut in tax benefits will aggravate the market conditions for us facing the COVID-19 now,” said an LCC company official.  

Write to Jeong-min Nam at peux@hankyung.com

Daniel Cho edited this article.

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