• Thu. Aug 4th, 2022

South Korea’s airline industry at risk of being trapped in the ‘three peaks’

ByKimberly A. Brochu

Jun 27, 2022

This file photo taken on July 29, 2020 shows planes parked at Incheon International Airport, west of Seoul. (Yonhap)

SEOUL, June 27 (Korea Bizwire)Once firmly on the road to recovery from the disruption caused by the coronavirus pandemic, the South Korean airline industry is now facing a crisis of being trapped in the “three peaks”, a term describing high inflation, high exchange rates and high interest rates.

Jet fuel prices stood at $177.08 a barrel on June 17, up 128.9% from a year ago and 20.8% from a month ago, according to the International Air Transport Association (IATA).

In the first quarter of this year, fuel costs for Korean Air Lines Co. and Asiana Airlines Inc., the country’s two full-service carriers, were 663.3 billion won ($513 million) and 291 .9 billion won, respectively, with the fuel cost share of their operating expenses estimated at 33% and 30%.

For every dollar of increase in the price of crude oil per barrel, the cost of fuel for Korean Air and Asiana increases by about 36.3 billion won and 12.8 billion won, respectively.

Airlines, in general, minimize the risk arising from fluctuating crude oil prices by using fuel hedging, a practice in which fuel is purchased in advance when crude oil prices are low, and contracts futures are signed for oil.

However, as the period of high oil prices drags on, their response to the crisis is reaching its limits.

The high exchange rate is another burden on airlines, which typically make fuel and aircraft payments in foreign currencies. The won-dollar exchange rate broke through 1,300 won last Thursday for the first time since mid-July 2009.

For Korean Air, which has about $4.1 billion in net debt denominated in foreign currencies, the rise in the US dollar exchange rate from 1,200 won to 1,300 won creates an additional accounting loss of 410 billion won.

Low-cost carriers (LCCs) that operate aircraft by leasing rather than buying are more affected by the weak Korean won than major airlines.

High interest rates also add a financial burden to airlines. A 1% increase in the average interest rate creates an additional interest expense of about 45 billion won for Korean Air and about 32.8 billion won for Asiana.

Ashley Song ([email protected])