🚨 High Exchange Rate Impact
Today Korean Economic News for Beginners | 2025.11.22
0️⃣ Oil & Airlines "No Profit Despite Sales" - Exchange Losses Surge
📌 Dollar Payment Structure Meets 1470 Won Exchange Rate... SK Innovation Forecasts 150 Billion Won Net Profit Decrease
💬 As the won-dollar exchange rate broke through the 1470 won level, oil refining and airline industries are taking serious hits. These industries have a structure where all core costs like crude oil, aircraft lease fees, and fuel are paid in dollars, so rising exchange rates directly lead to rising costs. SK Innovation announced that when the exchange rate rises 10%, net profit decreases by more than 150 billion won, and the average gasoline price in Seoul has exceeded 1,800 won per liter for the first time in 9 months. The airline industry is also suffering from worsening profitability despite increased passenger demand due to surging dollar-denominated fixed costs. Low-cost carriers in particular are facing double pain as they bear exchange losses while price competition is fierce. Experts worry that "uncertainty in the industry will grow even more as there's a possibility the exchange rate could exceed 1,500 won next year."
1️⃣ Easy to Understand
When the exchange rate rises, the value of our money falls and the value of the dollar rises. Oil companies and airlines pay most of their business costs in dollars, so when the exchange rate rises, they have to pay much more Korean won even to buy the same things.
Let's first look at the situation in the oil refining industry. Oil companies import crude oil from the Middle East, refine it, and then make and sell gasoline and diesel. The problem is that they have to pay in dollars when buying this crude oil.
Let me explain with an example. Let's say SK Innovation wants to buy 1 million barrels of crude oil. If it's $80 per barrel, they need a total of $80 million. When the exchange rate is 1,400 won, they need 112 billion won, but when the exchange rate rises to 1,470 won, they need 117.6 billion won. That's 5.6 billion won more. This is an exchange loss.
SK Innovation stated that "if the exchange rate rises 10%, net profit decreases by more than 150 billion won." 10% means rising from 1,400 won to 1,540 won. From the company's perspective, sales stay the same but costs increase by 150 billion won, so profit decreases by that much.
This cost increase is eventually passed on to consumers. In fact, the average gasoline price in Seoul has exceeded 1,800 won per liter, which is the highest level in 9 months. This is why you get less gas for 50,000 won at the gas station than before.
What oil companies can do in response is limited. If international oil prices fall, they can breathe a bit easier, but oil prices are a variable that oil companies cannot control. They can hedge exchange rates, but this also costs money and cannot be 100% perfect. In the end, it's a structure where complaints like "no profit despite sales" are inevitable.
The airline industry's situation is even more complex. Airlines have three major dollar costs.
First, aircraft lease fees. Most airlines don't own planes directly but lease (rent) them. They have to pay this lease fee in dollars. For example, let's say Korean Air leases one Boeing 787 for $1 million per month. When the exchange rate is 1,400 won, it's 1.4 billion won per month, but when it becomes 1,470 won, it's 1.47 billion won. That's 70 million won more per plane per month. Considering that airlines have dozens to hundreds of planes, the burden is enormous.
Second, fuel costs. Aviation fuel is also purchased in dollars. Airplanes use huge amounts of fuel. A Boeing 777 flying from Seoul to New York uses about 100,000 liters of aviation fuel, and this cost also rises when the exchange rate goes up.
Third, overseas airport usage fees and various charges. All costs for landing at foreign airports, parking, and using boarding gates are charged in dollars.
The problem is that these costs are 'fixed costs.' Fixed costs means costs that must be paid regardless of whether there are many or few passengers. The moment a plane takes off, costs of hundreds of millions of won are already fixed.
Recently, aviation demand has increased and passenger numbers have grown. As the desire to travel exploded after COVID-19, airplane seats are selling well. However, as cost increases due to high exchange rates offset sales increases, the paradoxical situation of actually worsening profitability is occurring.
Low-cost carriers (LCC) in particular face great difficulties. They face fierce price competition, making it hard to easily raise ticket prices. Full-service carriers (FSC) like Korean Air or Asiana Airlines can earn additional revenue through premium seats or mileage programs, but LCCs lack such capacity. In the end, they have to bear exchange losses as they are.
A bigger concern is that the exchange rate could rise even more. Some experts suggest the possibility that the exchange rate could exceed 1,500 won next year. If that happens, the difficulties of the oil refining and airline industries will intensify further.
The government is also aware of this problem. However, the exchange rate is a price determined by the market, so it's difficult for the government to adjust it at will. They can intervene in the foreign exchange market, but that also has limits and side effects. In the end, companies have no choice but to manage their own exchange rate risks and endure.
In the end, high exchange rates deal fatal blows to industries with high import dependence. The difficulties experienced by the oil refining and airline industries are not just problems for these industries alone, but are directly connected to price increases that affect our entire lives.
2️⃣ Economic Terms
📕 Exchange Loss
Exchange loss means losses that occur due to exchange rate changes.
- If you have debt in dollars or need to buy things in dollars, when the exchange rate rises, you need more Korean won to repay or buy the same dollars, resulting in losses.
- Industries with many dollar payments like oil refining and airlines see exchange losses greatly increase when exchange rates rise.
- Conversely, when the exchange rate falls, exchange gains can occur.
📕 Exchange Rate Hedge
Exchange rate hedging is a financial strategy to reduce exchange rate change risk.
- It's a method of fixing future exchange rates in advance using derivatives like forward exchange contracts or currency options.
- For example, if a company needs $1 million in 3 months and makes a contract at the current exchange rate now, they can reduce losses even if the exchange rate rises.
- However, hedging also has costs, and if the exchange rate falls instead, hedging losses can occur.
📕 Fixed Costs
Fixed costs are costs that always occur regardless of sales or production volume.
- For airlines, aircraft lease fees, airport usage fees, maintenance costs, etc. are fixed costs.
- Whether there are many or few passengers, these costs definitely occur the moment a plane takes off.
- Industries with high fixed cost ratios are vulnerable to external variables like exchange rates or oil prices.
📕 Low-Cost Carrier (LCC)
Low-cost carriers are airlines that sell cheap tickets by providing only basic services and maximizing operational efficiency.
- Jeju Air, Jin Air, and T'way Air are representative Korean LCCs.
- They reduce costs by charging for in-flight meals and baggage services and reducing seat spacing.
- Price competition is fierce, making it hard to raise ticket prices, and they take big hits when exchange rates rise.
3️⃣ Principles and Economic Outlook
✅ Impact of Rising Exchange Rates on Import Industries
Rising exchange rates directly raise import costs and worsen profitability.
First, the higher the proportion of dollar payments, the bigger the hit. The oil refining industry pays 100% of crude oil imports, and the airline industry pays 70-80% of core costs like lease fees, fuel costs, and airport usage fees in dollars. When the exchange rate rises 10%, these costs also increase by almost 10%. SK Innovation's disclosed 150 billion won net profit decrease is not an exaggeration but a realistic estimate. There was a precedent where oil companies and airlines suffered big losses when the exchange rate exceeded 1,500 won during the 2008 financial crisis.
Second, impact differs by industry depending on price pass-through ability. Oil companies can raise gas station prices when oil prices rise, but there's a time lag and they must consider consumer backlash. Airlines face more difficulty. Full-service carriers can respond to some extent with premium products like business class or first class, but low-cost carriers don't have such options. In a situation where price competition is already fierce, if they raise ticket prices, passengers will switch to other airlines. In the end, they have to bear the cost increase as is.
Third, if prolonged, it can lead to industry restructuring. If high exchange rates continue not for 1-2 months but for 1-2 years, companies with low profitability may not endure and collapse. Just as many airlines and oil companies underwent restructuring during the 1997 foreign exchange crisis, exchange rate shocks have the power to change industry landscapes beyond short-term performance deterioration.
Exchange rates are external variables that companies cannot control, but their impact is strong enough to determine company survival.
✅ Limits and Necessity of Hedging Strategies
The most common way to manage exchange rate risk is hedging, but it's not a perfect solution.
First, hedging has costs. Using forward exchanges or currency options allows you to fix future exchange rates in advance, but you have to pay fees and premiums to buy these products. For example, if an airline that needs $100 million in 3 months fixes the exchange rate at 1,400 won with a forward exchange, it may cost an additional 1-2%. This cost is not small, so rather than hedging 100%, they often hedge only about 50-70%.
Second, hedging is a double-edged sword. If you hedge expecting the exchange rate to rise but it actually falls, hedging losses occur. For example, if you fixed at 1,400 won but the actual exchange rate falls to 1,350 won, you end up buying dollars at 1,400 won that you could buy at 1,350 won in the market, resulting in a 50 won loss. Because of this risk, deciding the hedging ratio is a very difficult decision for companies.
Third, long-term hedging is even more difficult. The market for 1-3 month forward exchanges is active, but the market for 1-2 year long-term hedging is small and costs are much higher. However, since aircraft leases are often long-term contracts of 10 years or more, it's impossible to fully respond with hedging. In the end, it's a structure where they have to accept some exchange rate changes.
Hedging is an important risk management tool, but the key is maintaining an appropriate level considering costs and limitations.
✅ Price Spillover Effects of the High Exchange Rate Era
Cost increases in the oil refining and airline industries eventually lead to consumer price increases.
First, rising gasoline and diesel prices have direct impact. Seoul gasoline exceeding 1,800 won per liter is an immediate burden on consumers. People who drive cars see increased gas costs, and public transportation fares like taxis and buses can also rise. Also, when logistics costs increase, transportation costs for all goods rise, creating overall price increase pressure.
Second, airline fare increases raise travel expenses. When airlines can no longer bear costs, they have no choice but to raise ticket prices. This acts as a direct burden on consumers planning overseas travel. Especially during peak seasons like holidays or vacation periods, the price increase margin can be even larger. In the long term, travel demand itself may shrink.
Third, inflation expectations can form. When prices of core items like gasoline and airline tickets rise, consumers develop the perception that "prices are rising." When this perception spreads, an inflation spiral can occur where prices of other goods actually rise too. What central banks are most wary of is precisely this entrenchment of inflation expectations.
High exchange rates are not just a variable affecting corporate performance, but also an important variable for overall price stability and consumer welfare.
4️⃣ In Conclusion
The won-dollar exchange rate breaking through 1,470 won is dealing serious blows to the oil refining and airline industries. These industries have a structure where core costs are paid in dollars, so rising exchange rates directly lead to worsening profitability.
SK Innovation's forecast that "net profit decreases 150 billion won when exchange rates rise 10%" is by no means an exaggeration. In fact, as crude oil import costs increased, gasoline prices exceeded 1,800 won per liter for the first time in 9 months, and this is directly connected to consumers' living cost burdens.
The airline industry's situation is even more complex. Passenger demand has increased, but profitability has actually worsened in the paradoxical situation where dollar-denominated fixed costs like aircraft lease fees, fuel costs, and airport usage fees have surged. Low-cost carriers in particular face double pain as fierce price competition makes it difficult to pass cost increases on to consumers.
A bigger problem is the possibility that exchange rates could rise further. Some experts forecast that it could break through 1,500 won next year. If that happens, the difficulties of the oil refining and airline industries will intensify further, and this could lead to price increases and consumption shrinkage, having adverse effects on the overall economy.
The government tries to prevent rapid exchange rate increases through foreign exchange market intervention, but there are limits as market forces are so strong. Companies must strengthen risk management strategies like exchange rate hedging, but hedging also has costs and limitations, so it's not a perfect solution.
In the end, what's most important is creating an economic constitution less vulnerable to exchange rate changes. In the long term, efforts are needed to increase energy independence, increase the proportion of won-based payments, and diversify industrial structure. In the short term, companies must work on cost reduction and efficiency improvement, and consumers also need efforts to reduce price burdens through energy conservation and rational consumption.
The high exchange rate era is not simply a change in exchange rate numbers, but an important economic variable that directly affects industrial competitiveness and consumer life. It's time for government, companies, and consumers all to pay attention to this problem and respond.
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