The duty-free industry, which suffered weak results last year, has hit a new snag this year with a sharp rise in fuel surcharges. With a high exchange rate and high oil prices persisting, if higher overseas travel expense leads to softer demand, additional hits to earnings appear inevitable.
According to related industries on the 26th, airlines including Korean Air Lines have sharply raised international fuel surcharges, pushing up overall overseas travel expense. Korean Air Lines, Asiana Airlines, Jeju Air, T'way Air, Jin Air and Eastar Jet Co. raised April international fuel surcharges to about three times this month's level. Korean Air Lines charged 13,500 won to 99,000 won one way this month depending on distance, but will apply 40,200 won to 303,000 won next month. Asiana Airlines rises from 14,600 won to 78,600 won to 43,900 won to 251,900 won. For long-haul routes such as to the United States and Europe, fuel surcharges have climbed to as high as 300,000 won one way, significantly increasing consumers' burden.
A fuel surcharge is an amount added to airfare to offset airlines' increased fuel costs due to higher oil prices. Fuel surcharges fluctuate monthly based on international oil prices. International oil prices have surged in a short period recently due to the war involving the United States, Israel and Iran. The industry expects additional hikes in May if the current oil price trend continues.
The strong dollar trend is another factor adding pressure. As the won-dollar exchange rate has stayed above the 1,400-won range for an extended period and hit the highest level in 17 years on the 23rd, the duty-free industry is grappling with weakened price competitiveness and the expense of exchange-rate compensation promotions for foreigners. In the Seoul foreign exchange market on the 23rd, the weekly closing exchange rate of the won against the U.S. dollar at 3:30 p.m. rose 16.7 won from the previous day to 1,517.3 won. That is the highest since the 1,549.0-won close on Mar. 9, 2009, in 17 years. On the 25th, as global tensions eased somewhat, it closed at 1,499.7 won, dipping below the 1,500-won mark, but the strong dollar trend persisted.
The duty-free sector is on high alert for a possible slowdown in travel demand. Because duty-free sales are directly tied to the number of departures, a decline in long-haul travelers could lead to lower average spend per customer. In particular, passengers on Europe and U.S. routes are a key customer base with longer stays and larger spending, so a drop in that demand is expected to deal a bigger blow to sales.
The industry has already been suffering from deteriorating profitability since last year. The prolonged strong-dollar environment has increased cost burdens under the dollar direct-purchase structure. On top of that, a decline in Chinese resellers (daigong) has lowered average spend per customer, keeping topline intact but weakening fundamentals.
According to the Financial Supervisory Service's electronic disclosure system, The Shilla Duty Free (Hotel Shilla TR institutional sector) posted 3.4039 trillion won in sales last year but recorded an operating loss of 53.1 billion won. Shinsegae Duty Free (Shinsegae DF) also recorded 2.6305 trillion won in sales last year but an operating loss of 7.438 billion won. Hyundai Department Store's duty-free institutional sector posted 1.014 trillion won in sales last year and 213 million won in operating profit. Hotel Shilla has not yet disclosed its annual business report, but the duty-free division recorded 2.03 trillion won in cumulative sales through the third quarter last year, down 17% from 2.448 trillion won in the same period a year earlier.
A duty-free industry official said, "The fuel surcharge hike does not have a big impact immediately, but if high oil prices persist due to worsening global conditions, we expect it to lead to fewer travelers in two to three months and cause damage." The official added, "As the strong dollar continues, there is a perception that duty-free prices are expensive, weakening price competitiveness. For now, the duty-free industry is focused on strengthening fundamentals."