Airline, duty-free industries faring poorly amid high exchange rates

Travelers wait to get checked in at Incheon International Airport on Sunday. [NEWS1]

Airline and duty-free industries were expected to bounce back as the pandemic waned, but are instead being ambushed by high exchange rates and faring poorly.

The closing price of the won-dollar exchange rate exceeded 1,300 won for the first time in 13 years on June 23. Although edging down slightly, it stayed in the vicinity Monday, recording 1,286.5 won.

Airlines in particular have to pay aircraft lease fees in U.S. dollars, and therefore have to pay more when the exchange rate rises. In the case of Korean Air Lines, if the exchange rate rises by 100 won, it has to book 410 billion won in foreign currency exchange losses.

Low-cost carriers (LCCs) struggle even more due to high exchange rates. Large airlines made a profit even during the Covid-19 pandemic due to the boom in cargo transport. But LCCs, which had to suspend passenger-oriented international flights, were unable to turn in a profit.

The airline industry also faces problems due to high oil prices.

According to the International Air Transport Association (IATA), the price of jet fuel exceeded $175 a barrel on June 22. Jet fuel has continued to rise sharply after exceeding $100 per barrel in January.

Jet fuel prices especially are rising faster than international oil prices. Prices have been soaring due to the rapid recovery of travel demand in major countries such as Europe and the United States.

Fuel surcharges rise when jet fuel prices rise, making air ticket prices surge. The fuel surcharge for international flights in July was at level 22, up 3 notches from June. This is the highest level since the distance proportional section system was applied to the calculation of fuel surcharges in July 2016.

For Korean Air Lines' one-way international flights in July, a fuel surcharge ranging between 42,900 won ($33) to 325,000 won will be levied. The upper range rose 16.28 percent on month.

Asiana Airlines set a fuel surcharge of 46,900 won to 267,300 won for international flights in July. Compared to the highest price of 229,600 won in June, it has risen 16.42 percent.

“Ticket prices have risen a lot already due to the lack of flights, and if the fuel surcharge keeps rising, it will not be easy to recover demand,” an airline industry insider said.

Some in the airline industry suspect that the speed of the recovery of demand will depend on overcoming high exchange rates and oil prices.

“The performance of local carriers in the second half of the year is expected to depend on the recovery of international flights,” an industry insider said. “LCCs are expanding their routes to Japan and Southeast Asia and offering more promotions for international flights to secure international customers as much as possible.”

The duty-free industry is also struggling with the high exchange rates.

In the duty-free business, all product transactions are made in dollars, except for labor and rental fees. If the won depreciates, stores have to pay more even if they import the same quantity of products.

Duty-free shops tend to have three months’ worth of products in their inventory, aiming to sell products at a higher price when the exchange rate is low. But if the high exchange rate continues, products become more expensive than at local stores, which makes consumers purchase less at the duty-free stores, reducing their profits.

The industry has started to come up with self-help measures to reduce the burden of consumer prices. If the store-based exchange rate exceeds 1,300 won, Lotte Duty Free gives customers a maximum 35,000 won in "LDF pay," a cash equivalent that can be used at the duty-free stores.

The government will allow overseas residents to purchase duty-free items online from next month, but it may not be a fundamental remedy as the target of sales is limited to domestic products made by small- and medium-sized enterprises.

All domestic duty-free companies posted losses in the first quarter with the exception of Shilla Duty Free; however, the duty-free chain’s operating profit fell 70 percent on year to 11.2 billion won in the first quarter.

Operating losses were at 75.3 billion won for Lotte Duty Free, 14 billion won for Hyundai Department Store Duty Free and 2.1 billion won for Shinsegae Duty Free. Last year during the same period, Lotte Duty Free recorded an operating profit of 3.8 billion won, Hyundai Department Store Duty Free lost a relatively low 11.2 billion won and Shinsegae Duty Free recorded 23.1 billion won in operating profit.

BY KANG KI-HEON, LEE SO-AH [lim.jeongwon@joongang.co.kr]