Strengthening dollar, yen weigh on Korean aviation players

Passenger jets from Korean Air and Asiana Airlines are seen at Incheon International Airport, Nov. 28, 2024. Yonhap

Korean airlines are facing a potential double whammy from the strengthening U.S. dollar and Japanese yen, as the macroeconomic uncertainty leaves them more vulnerable to risks on increased fuel costs and a decline in travel demand, data and market analysts said Thursday.

The exchange rate volatility was triggered by U.S. President Donald Trump’s wayward trade policy. With his tariff threat creating serious repercussions around the world, investors’ preference for the dollar has shown no signs of abating in recent months.

Reflecting on the escalating geopolitical uncertainty, the dollar is strengthening its valuation against the Korean won much faster than expected, as evidenced by the recent surge in the won-dollar exchange rate. The figure closed at 1,484.1 won per dollar on Wednesday, the highest closing price since March 2009. The dollar closed at 1,478.33 won on Dec. 31, 2024.

This comes as a challenge to Korean Air and a group of low-cost carriers (LCCs), which will have to increase their spending for fuel costs paid in dollars. Of particular concern is that there is no clear sign of Trump ending the global trade war anytime soon.

Analysts said Trump’s policy risks will deal a severe blow to earnings for Korean Air and LCCs.

“Korean Air will deal with the growing burden of the rising won-dollar exchange rate and falling cargo demand triggered by a tariff hike from the U.S.,” said Hwang Hyun-jung, an analyst at Korea Investment & Securities.

The brokerage house revised down the flag carrier’s estimated operating profit by 12 percent this year on the growing external risk factors.

LCCs here are faced with heightened risks from a gradual appreciation of the yen, as this may shrink travel demand to the country. Major LCCs, such as Jin Air and T’way Air, generated robust earnings performance last year on the popularity of their cash-cow passenger route to Japan.

One hundred yen was traded at less than 900 won in the first half of last year, but it started to gain ground rapidly this year. The rate soared to 1,025 won at one time on Wednesday.

Industry officials said it remains to be seen whether the appreciation of the yen will pull down the overall travel demand to Japan.

“This is a negative factor from the viewpoint of LCCs, but we still have to wait and see if the issue will actually drive down the number of tourists to Japan, as such short-haul routes are affected relatively less by the exchange rate volatility,” an industry official said.