Korean Air, Asiana Airlines grapple with triple whammy

Korean Air President Walter Cho, left, and Asiana Airlines CEO Kim Soo-cheon / Korea Times file

By Park Jae-hyuk

Korean Air and Asiana Airlines are expected to face worsening profitability in the forthcoming quarter, due to rising oil prices, higher exchange rates and the government decision to stop giving benefits to airlines, analysts said Monday.

Korean Air closed at 27,100 won ($24.20) on the country's main stock market that day, while Asiana Airlines closed at 4,025 won. Their stock prices a month earlier were 32,000 won and 4,910 won, respectively.

On the same day, Mirae Asset Daewoo lowered Korean Air's target price to 39,000 won from 42,000 won, expecting the flagship carrier's operating profit in the second quarter to be 151.9 billion won, down 12.1 percent year-on-year.

Eugene Investment & Securities analyst Bang Min-jin, who lowered Korean Air's target price to 41,000 won from 46,000 won last Thursday, said: “The won-dollar exchange rate and international oil prices have gone up faster than expected. These factors will influence Korean Air's performance this year.”

The won-dollar exchange rate surpassed 1,100 won last month. The global oil prices have continued to go up, since U.S. President Donald Trump withdrew his country from the Iran nuclear deal and restored wide-ranging sanctions against the Middle Eastern country.

Analysts cast a negative outlook on Asiana Airlines as well.

KB Securities analyst Kang Sung-jin lowered the target price of the nation's No. 2 flagship carrier to 6,500 won from 7,000 won on June 14, citing the exchange rate and oil prices.

“The depreciation of the won results in higher fixed costs and fewer outbound tourists,” the analyst said. “The rising international oil prices raise fuel expenses of air carriers.”

An Asiana Airlines spokesman said his company has no countermeasures against the rising oil prices and exchange rates, adding, “The increase in oil prices will influence our performance next month.”

The government has also reduced benefits to airlines, including tariff exemptions on aircraft parts.

The Ministry of Strategy and Finance plans to impose tariffs next year. The domestic air carriers, which have been exempted from tariffs worth 212.3 billion won over the past three years, are expected to face tariffs worth 400 billion won between 2019 and 2023.

Against this backdrop, the airlines have called on the government to comply with the customs duties exemptions on imported aircraft parts as laid out in the Agreement on Trade in Civil Aircraft (TCA) of the World Trade Organization. The TCA has 32 member countries, including the U.S., Britain, France, Germany, Italy and Japan.

Another unfavorable factor for air carriers includes the Korea Meteorological Administration's decision to raise the fee for using aviation weather services. The domestic airlines, which paid 930 million won for the service last year, will have to pay 1.71 billion won this year.

The Korea Civil Aviation Association has been preparing for an administrative litigation.