"I Can't Fly" Jeju Air Disaster Shakes LCC Stocks... No Bottom in Sight [Business & Issues]

Refunds and Cancellations Flood Jeju Air
Sharp Rise in USD-KRW Exchange Rate Drives Jet Fuel Prices Up
Passenger Demand Drops, Legal Disputes Expected to Prolong

On the 2nd, military and police special forces deployed at the site of the Jeju Air passenger plane disaster at Muan International Airport are searching the surrounding area. Photo by Yonhap News

Following the Jeju Air passenger plane disaster, travelers' perception of low-cost carriers (LCCs) has worsened, leading to mixed fortunes for airline stocks. As Jeju Air's flight reservations are being massively canceled and demand shifts to other airlines, some stocks are showing an upward trend. However, there is concern that the shock from this incident could lead to an overall decline in passenger demand, and the surge in aviation fuel prices due to the sharp rise in the won-dollar exchange rate is acting as a negative factor, suggesting that airline stocks may experience a turbulent period for some time.

Airline Stocks Show Divergent Prices Amid Jeju Air Reservation Cancellations

Immediately after the Jeju Air passenger plane disaster, Jeju Air experienced a massive cancellation of previously booked tickets, causing airline stocks to show mixed results. On the 3rd, Jeju Air's stock price stood at 7,400 won, down 9.86% from 8,210 won on the 27th, before the disaster on the 29th. During the same period, Jin Air (-0.64%) showed a downward trend, while T'way Air (7.86%) and Air Busan (2.24%) showed upward trends, reflecting a divergence in LCC companies' stock performance. Major airlines such as Korean Air (0.64%) and Asiana Airlines (2.26%) also showed slight gains.

The reason for the divergent stock trends is presumed to be that some airlines benefited from the spillover effect of Jeju Air's ticket cancellations and demand shifts, leading to stock price increases, while others that did not benefit experienced declines. It is known that Jeju Air had received advance payments amounting to approximately 260.6 billion won from ticket sales, the largest scale among LCC airlines.

Jeju Air announced that about 68,000 tickets were canceled within a day after the disaster. The airline promised unconditional refunds by waiving cancellation fees for all domestic and international flights departing before March 29, and cancellations have continued since. Travel packages using Jeju Air have also been canceled, with major travel agencies such as Hana Tour and Interpark Tour waiving cancellation fees for products using Jeju Air.

Political Instability and Soaring Won-Dollar Exchange Rate... Growing Burden of Aviation Fuel Prices

Yonhap News

In the short term, airline stocks are showing mixed trends due to the Jeju Air passenger plane disaster issue, but in the mid to long term, there are concerns that the exchange rate will act as a major negative factor for the entire airline industry. The ongoing political instability amid the impeachment crisis has caused the won-dollar exchange rate to soar, increasing the burden of aviation fuel costs for airlines.

According to the International Air Transport Association (IATA), the average global price of aviation fuel in the last week of last month was $89.45 per barrel, up about 2% from $87.62 per barrel in the first week of the month. However, due to fluctuations in the won-dollar exchange rate, the price increase felt by domestic airlines is much greater. On the 3rd, the won-dollar exchange rate in the Seoul foreign exchange market was 1,468.4 won, a 4.4% surge from 1,406.5 won at the beginning of last month.

Additionally, with the European Union (EU) implementing mandatory policies for the use of sustainable aviation fuel (SAF), the burden of aviation fuel prices is expected to increase further. The EU announced that starting January 2025, all aircraft departing from airports in EU member countries must blend at least 2% of sustainable aviation fuel (SAF), an eco-friendly fuel. SAF can reduce carbon emissions by 80% compared to conventional fuel but costs nearly twice as much. The EU plans to gradually increase the SAF blending ratio from the current 2% to 6% by 2030, 20% by 2035, and ultimately 70% by 2050.

Concerns Over Declining Air Travel Demand and Prolonged Legal Battles

Yonhap News

The spread of travelers' fear following the shocking disaster and the growing aversion to LCCs are pointed out as challenges that the industry must overcome to return to normal. Analysis of the main causes of the disaster and legal disputes are expected to take at least six months to over a year, raising concerns about long-term negative impacts.

The Ministry of Land, Infrastructure and Transport's Aviation and Railway Accident Investigation Board announced on the 3rd that it is preparing the cockpit voice recorder (CVR) transcript after decoding the black box of the accident aircraft. The flight data recorder (FDR), which was found partially damaged and deemed undecodable domestically, has been sent to Washington DC, where the U.S. National Transportation Safety Board (NTSB) is located, to begin analysis. As a result, the entire black box decoding process is expected to take at least six months.

Choi Go-woon, a researcher at Korea Investment & Securities, stated, "The unstable domestic political situation and economy inevitably impact air passenger demand. No airline is free from safety concerns and consumer anxiety. It is expected to take at least six months, realistically close to a year, for authorities to accurately determine the cause of the accident. It may take even longer for social unease to subside."