With the escalating violence between Israel and Iran driving international oil prices sharply higher, the burden of expenditures for airlines, which have large fuel costs, has increased. If the situation in the Middle East extends, the fuel surcharge paid by passengers may also rise starting in August.
On the 22nd (local time), the Iranian parliament voted to blockade the Strait of Hormuz, a critical hub for energy transport in the Middle East. This decision is a response to the bombing of U.S. nuclear facilities. The final decision on the blockade is made by the Supreme National Security Council (SNSC) of Iran.
The Strait of Hormuz is a narrow waterway connecting the Persian Gulf and the Gulf of Oman in the Middle East. About 25% of the world's crude oil consumption and approximately 20% of liquefied natural gas (LNG) consumption pass through here. Major oil-producing countries such as Saudi Arabia, the United Arab Emirates (UAE), and Iraq export oil to Asia through this route.
As Iran mentioned the blockade of the Strait of Hormuz, concerns arose that oil transport would be hindered, causing international oil prices to rise. As of 2 p.m. on the 23rd, the price of West Texas Intermediate (WTI) for July delivery was trading at $75 per barrel, while Brent crude for August delivery was around $76. Brent crude briefly rose to $81 during trading before reducing its gains.
When international oil prices increase, the airline industry takes a direct hit. Fuel costs account for 30% to 35% of operating expenses for airlines. Korean Air consumes about 30.5 million barrels of fuel annually. Korean Air stated that if oil prices rise by $1 per barrel, it incurs an additional expense of approximately $31 million (about 43 billion won).
Airline ticket prices are also expected to rise. Tickets include a fuel surcharge, which is calculated based on the price of Singapore jet fuel (MOPS). The average price of international oil over the past two months is calculated and reflected in the next month's prices after a one-month notice period.
The average MOPS value, which is the basis for the July fuel surcharge, was 188.62 cents per gallon (3.785L), placing it at a low level of 4 out of a total of 33 levels. Since it takes time for recent changes in oil prices to be reflected in the surcharge, these fluctuations will be seen in August.
If the situation in the Middle East stabilizes in the short term, international oil prices are expected to quickly find their footing. Iran has threatened to blockade the Strait of Hormuz several times in the past but has never done so directly. Since about 90% of Iran’s trade is conducted via maritime routes, a blockade of the strait would also inflict significant damage on Iran.
Blocking energy transport could provoke backlash from China, a major customer of Iranian oil, along with Iran's ally countries, Iraq and Qatar.