[Exchange Rate 1400 Won] After Overcoming High Oil Prices, Currency Shock... Airlines 'Scream'

Airlines Face Increased Foreign Currency Conversion Losses Due to Exchange Rate Fluctuations
"Risks Grow Amid High Exchange Rates Following COVID-19 Impact"

[Asia Economy Reporter Hyunseok Yoo] The won-dollar exchange rate surpassed 1,400 won, triggering an alarm in the aviation industry. Since a high proportion of payments for aviation fuel and lease fees are made in foreign currency, concerns over deteriorating profitability are growing.

According to the industry on the 22nd, the won-to-dollar exchange rate in the Seoul foreign exchange market exceeded 1,400 won shortly after opening. This is the first time in 13 years and 6 months since March 31, 2009, that the exchange rate has reached the 1,400 won level.

The exchange rate breaking through 1,400 won has put the aviation industry on alert. Airlines are generally sensitive to exchange rate fluctuations because a large portion of payments, such as for aviation fuel and lease fees, are made in foreign currency. Although they typically subscribe to foreign exchange hedging to mitigate risks, since foreign currency expenditures exceed foreign currency income and the proportion of foreign currency borrowings is high, an increase in the exchange rate can lead to deteriorating profitability.

Although the price of aviation fuel has been falling recently following a sharp rise in oil prices in the first half of this year, the effect is being offset by the rising exchange rate. Based on the second quarter, Korean Air is estimated to incur about 35 billion won in foreign exchange conversion losses for every 10 won increase in the exchange rate, and Asiana Airlines about 28.4 billion won.

The industry emphasizes that the larger the airline, the greater the burden from the rising exchange rate. Larger airlines have higher foreign currency borrowings, which increases the amounts they must pay. An aviation industry official explained, "Although low-cost carriers (LCCs) have become more prominent due to COVID-19, the impact of exchange rates is greater on large airlines," adding, "The larger the debt scale or the fleet size operated, the more foreign currency is used."

Furthermore, the ongoing impact of COVID-19 adds to the burden. Another industry official said, "Due to the nature of the aviation industry, it is inevitably affected by various external factors," and added, "Currently, with passenger flights not fully recovering, the combination of rising exchange rates and economic recession inevitably increases concerns."

Professor Yong-sik Hwang of the Department of Business Administration at Sejong University emphasized, "The high exchange rate amid a situation where airlines cannot properly operate flights is bad news for airlines," and stressed, "Since two adverse factors coincide, the risk is significant."