If Duty-Free Rent Issues Aren't Resolved... "Airport and Industry Face Mutual Destruction"

Duty-Free Industry Tug-of-War Over 'Operating Fee Rate'
Despite Proposal for Sales-Linked Fees at Incheon Airport Terminal 1,
Shilla and Lotte Respond Coldly, Saying "Withdrawal in Worst Case"

On the 18th, the duty-free shop at Terminal 1 of Incheon International Airport was quiet due to the impact of the novel coronavirus disease (COVID-19). Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Seungjin Lee] Airports around the world, including those in France and Dubai, which had been locked down due to the impact of the novel coronavirus infection (COVID-19), are gradually reopening, and duty-free shops in various countries are accelerating their return to normal operations. However, the domestic duty-free industry is still struggling to find a way out, held back by rental fees.

According to the duty-free industry on the 3rd, Shilla, Lotte Duty Free, and Incheon International Airport Corporation have been engaged in a tug-of-war over the level of the 'operating fee rate' for nearly a month. In mid-last month, Incheon Airport Corporation proposed a rental fee system linked to sales rather than a fixed rent to retain Shilla and Lotte Duty Free, whose operations at Terminal 1 are set to end next month. This is because the selection of successors for the business rights currently operated by Shilla and Lotte Duty Free has not been made due to the COVID-19 situation, raising immediate concerns about vacancies.

The industry's response has been cold. A duty-free industry official explained, "Even if the operating fee rate proposed by Incheon Airport Corporation is applied, if the COVID-19 situation prolongs, the rental burden will be very high, so adjustments are necessary," adding, "The most rational choice might be to simply withdraw from the airport." There are rumors within the duty-free industry about Shilla Duty Free's withdrawal from Incheon International Airport Terminal 1. Shilla Duty Free operates three duty-free zones (DF1, DF5, DF7) at Terminal 1 of Incheon Airport. The contract for the DF7 zone expires next month and will be handed over to the successor, Hyundai Department Store Duty Free.

The rumors of Shilla Duty Free's withdrawal also stem from rental fee issues. The contract period for the DF1 and DF5 zones runs until 2023. The annual rent that Shilla Duty Free must pay to Incheon Airport amounts to 432 billion KRW. Although Incheon Airport Corporation has been offering a 50% discount on rent to tenant duty-free shops, this benefit will end next month. Consequently, there is speculation that it might be better to pack up entirely due to the rental burden.

The duty-free industry is increasingly calling for a complete overhaul of the current fixed rent system to adopt a sales-linked rental fee system, but Incheon Airport Corporation remains silent. Last year, among the total Incheon Airport duty-free rent of 1.0761 trillion KRW, large corporations accounted for 91.5% (984.6 billion KRW). Since 65% of Incheon Airport Corporation's total revenue comes from rental income, changing the rent settlement method would lead to a sharp decline in revenue.

Meanwhile, during this prolonged tug-of-war, the Chinese government is redirecting the footsteps of big-spending duty-free customers known as "daigou" back to their own country. According to the 'Comprehensive Plan for the Construction of Hainan Free Trade Port' announced by the Chinese government last month, the duty-free purchase limit per domestic individual has been raised to 100,000 yuan, approximately 17 million KRW. This is more than three times the previous limit of 30,000 yuan (about 5 million KRW). This move is interpreted as an effort to expand domestic duty-free shops.

A duty-free industry official said, "While neighboring countries are providing various benefits to their domestic duty-free shops, South Korea is being held back by rental fees, increasing the sense of crisis across the entire duty-free business," adding, "If the long-standing rental fee issue is not resolved through this opportunity, both the airport corporation and the duty-free industry could face mutual destruction."