UPDATE 2-S.Korea domestic airlines to raise fuel surcharge

(Updates with comments, share prices)

SEOUL, June 16 (Reuters) - South Korea will allow domestic airlines to raise fuel surcharges from July to cushion record-high fuel costs, Seoul's transportation ministry said on Monday, sparking a rally in airline shares such as Korean Air.

Shares in Korean Air (003490.KS), the country's largest carrier and the world's top cargo airline, soared after the ministry's announcement, climbing 4.41 percent to 52,100 won as of 0402 GMT. Smaller rival Asiana Airlines (020560.KS) rose 2.5 percent to 5,750 won, also outperforming the wider market's 0.97 percent gain.

"The expansion of the fuel surcharge will substantially lift the fuel cost burden off airlines," said Yang Ji-hwan, an analyst at Daishin Securities,in a note on Monday.

"Airlines' eanings are still likely to be weak through the second quarter this year, but we will see significant improvements from the third quarter thanks to the surcharge raise."

Last month, both airlines asked the government to raise the upper limit on the 16-stage fuel surcharge system for passenger flights to help them cope with rising fuel costs.

In December, the government allowed airlines to more than double fuel surcharges after crude oil prices rose above $99.00 a barrel. [ID:nSEO114540]

Crude oil prices have neared $140.00 a barrel in recent weeks, surging six-fold since 2002.

A two-way economy-class passenger flight is expected to cost 3.4 percent-5.7 percent more after the hike from July 1, the Ministry of Land, Transport and Maritime Affairs said.