Asian jet fuel under more downward pressure as S Korean airlines halt flights

Singapore — The near-term outlook for the Asian jet fuel market is set to remain bleak as South Korean carriers join other Asian airlines in halting all flights to the country's fourth-largest city of Daegu where COVID-19 infections are rising sharply.

South Korea's flagship carrier Korean Airlines said Monday it has suspended two existing routes linking Daegu to Incheon, the country's main gateway, and to the southern resort island of Jeju.

The country's second-largest carrier Asiana Airlines also said it will suspend the Daegu-Jeju route -- its sole domestic route connecting to Daegu -- through March 9.

The country's biggest low-cost airline, Jeju Air, said Monday it will suspend its sole domestic service to/from Daegu through February 29.

Air Busan -- a budget carrier unit of Asiana Airlines -- took similar steps, and has canceled its Daegu-Jeju and Daegu-Taipei routes from Monday.

The move came as Daegu, 300 km southeast of Seoul, emerged as a hotbed of the coronavirus spread in South Korea.

With local airlines paring back domestic and international flights on dwindling demand, industry sources warned that FOB Korea jet fuel cash differentials could plunge deeper into negative territory, off-setting support from cross-regional flows seen in recent weeks.

On a FOB basis, the cash differential for spot cargoes loading from main ports in South Korea tumbled 10 cents/b on the day Tuesday to minus 15 cents to the Mean of Platts Singapore jet fuel/kerosene assessment. Earlier in the month, viable arbitrage economics to divert surplus barrels from the country to the US west coast pushed the cash differential to as high as plus 10 cents/b on February 10, S&P Global Platts data showed.

"We can foresee more jet fuel being exported [out of South Korea] than planned," a northeast Asian refinery source said Monday.

The derivatives market has also started to reflect the weakness, with the front-month March jet fuel/kerosene swap falling to $62.58/b at the Asian close Tuesday, down $17.14/b since the beginning of the year. This marked the lowest level in the front-month swap since August 23, 2017, when it was assessed at $62.04/b, Platts data showed.

Further down the curve, the Q2/Q3 quarterly outlook remained embedded in negative territory at minus $1.16/b Tuesday, as the coronavirus outbreak continued to paint a bearish outlook for the aviation sector.

"Unless the situation improves, Korean barrels will be under more pressure as Japan will be exporting more soon [following the end of the peak winter season for kerosene]," the northeast Asian refinery source said.

On Sunday, South Korea escalated the national disaster alert response level to Disease Outbreak Response System Condition Red, the highest in its four-tier system.

"The COVID-19 incident has been confronted by a grave watershed," President Moon Jae-in said in an emergency meeting Monday.

Daegu, a city with a population of 2.5 million, saw its confirmed cases jump to 457 over the weekend, accounting for 60% of the country's total infections of 763 as of Monday morning, according to the Korea Centers for Disease Control and Prevention (KCDC). The number of confirmed cases has been on the rise since late last week -- 100 cases on Friday, 204 cases on Saturday, 169 cases on Sunday and 161 cases on Monday morning.

More flight suspensions

In addition to suspending domestic routes, Korean Air has halted operations of its Incheon-Tel Aviv route from Monday through March 28. The move came two days after Israel barred nearly 180 foreigners, including 130 South Koreans, aboard a Korean Air flight from entering the country without any prior notice after they landed in Tel Aviv. Some 30 South Koreans who recently made a group pilgrimage to Israel have been found to be infected with coronavirus.

Earlier this month, in response to lower air travel demand, the carrier canceled its flights from Incheon to Wuhan until March 27, and will further reduce flights to China. Meanwhile, Asiana Airlines temporarily cut services and routes to China -- Beijing, Guangzhou, Shanghai, Tianjin and Shenyang -- and Hong Kong. Flights to China account for 20% of its sales.