Exchange Rate Surge Delivers 'Aviation' Shock... Companies Turn to Cost-Cutting and Hedging Strategies

Airlines Launch Emergency Management in Q1, Implement Unpaid Leave and Route Reductions

Automotive Sector Sees Favorable Exchange Rates but Faces Soaring Raw Material Procurement Costs

Refining, Petrochemical, and Steel Industries Concerned Over Exchange Rate Unpredictability

With the won-dollar exchange rate continuing to soar day after day, warning lights are flashing across the industrial sector. As each industry’s export and import structure varies, companies are experiencing mixed fortunes. In response, they are focusing on strengthening hedging strategies and cutting costs to minimize the impact of exchange rate fluctuations.

According to the industry on June 8, the aviation sector has been hit the hardest by the surge in the won-dollar exchange rate. Due to the structure in which most operating expenses, such as lease fees and fuel costs, must be paid in dollars, exchange losses are inevitable. For Korean Air, every 10-won increase in the won-dollar exchange rate leads to a fluctuation of 55 billion won in foreign currency valuation gains and losses, and approximately 16 billion won in additional cash outflows. Airlines have started emergency management measures and unpaid leave since the first quarter to reduce expenses. Route reductions, especially among low-cost carriers (LCCs), have also accelerated. Jeju Air reduced 187 roundtrip international flights, equivalent to 4% of its international operations, from last month through June, while Jin Air cut 176 roundtrip flights. Air Busan, Eastar Jet, Air Seoul, and Air Premia have also scaled back their international operations.

The home appliance industry is struggling to protect its profit margins amid rising pressures from increased raw material and logistics costs. While the cost of imported raw materials such as steel plates, copper, and plastics has risen due to the high exchange rate, a significant portion of finished goods are exported, so gains from the stronger dollar have partially offset these increased costs. An industry official said, "If the exchange rate surpasses the 1,600-won mark, countermeasures will be necessary, but the widening volatility itself is also a concern," adding that they are closely monitoring the situation.

The automotive industry, a leading export sector, is benefiting from favorable exchange rates but is also facing dual pressures from soaring raw material procurement costs. Hyundai Motor achieved its highest-ever quarterly sales in the first quarter (45.9388 trillion won), but its cost-to-sales ratio rose to 82.6%, up 2.7 percentage points from 79.8% in the same period last year. Its operating margin also fell from 8.2% in the first quarter of last year to 5.5%.

The power and cable industries, which import raw materials such as copper and aluminum, also remain on high alert. However, companies with a high proportion of global orders are less affected, as most overseas contracts reflect cost-linked pricing mechanisms. In contrast, companies focused on the domestic market, such as those supplying domestic power companies or construction firms, find it difficult to pass on rising costs to sales prices. An industry official said, "We are revising business plans in real time based on exchange rate trends," and added, "We are preparing by securing raw materials in advance and utilizing derivatives for currency hedging."

The refining, petrochemical, and steel industries, which import most of their raw materials, are concerned about the increasing unpredictability of the exchange rate. Since there is a time lag between the purchase of crude oil and the payment, large losses can occur if the exchange rate fluctuates significantly during that period. An industry official said, "We are minimizing direct impacts through hedging strategies, but if consumer spending slumps in earnest, the entire economy could be hit hard, regardless of industry or company size."

Semiconductor companies such as Samsung Electronics and SK hynix say that the short-term impact of the surging exchange rate is limited, but there are concerns that the burden could grow if the high exchange rate persists for an extended period. Most equipment purchases, raw material procurement, and product sales are based on long-term supply contracts spanning several years, and transactions are conducted in various currencies such as the dollar, yen, and yuan, which disperses foreign exchange risk. As such, they explain that there is little immediate impact. An industry official said, "Facility investments are also covered by long-term contracts, so the timing, amount, and volume are determined in advance, and a short-term spike in the exchange rate does not change investment plans." However, the official added, "If the high exchange rate continues, it could become a factor increasing costs."

This content was produced with the assistance of AI translation services.