Airline Industry Faces Mounting Profitability Concerns Amid High Oil Prices and Strong Dollar... Loans Rise 16% in One Year

Less Than 0.3% of Total Corporate Loans
Rising Exchange Rates and Oil Prices Increase Management Burden for LCCs
Banks Strengthen Risk Management

Amid growing concerns over deteriorating profitability in the airline industry due to the rise in the KRW-USD exchange rate and soaring oil prices, it has been revealed that major commercial banks have actually increased their loans to the air transport sector. Banks believe that, given the small proportion of airline industry loans relative to their total corporate lending, the immediate impact on their financial soundness is limited. However, as the risk of declining profitability is being raised—especially among low-cost carriers (LCCs)—banks are closely monitoring related trends.

According to the financial sector on June 11, the outstanding balance of airline industry loans at major commercial banks—namely KB Kookmin, Woori, Hana, and Shinhan—rose by about 16%, from 1.913 trillion won at the end of the first quarter last year to 2.2145 trillion won at the end of the first quarter this year. This increase is attributed to growing funding demand, driven by the recovery in international travel demand and improvements in the industry since the COVID-19 pandemic. Among the five major commercial banks, NH Nonghyup Bank has little direct exposure to exchange rate fluctuations, as most of its aircraft finance loans have already been repaid and it currently has no transactions with domestic airlines.

The financial sector expects that, since airline industry loans account for a negligible portion of total corporate lending, the adverse impact of a weak won and high oil prices on banks' asset quality will remain limited. As of April, the total outstanding corporate loans at the five major banks stood at 868 trillion won, with loans to the airline sector making up less than 0.3% of the total. Furthermore, some sea freight has shifted to air transport due to recent geopolitical conflicts in the Middle East, and the continued increase in foreign tourists visiting Korea has partially offset the burden of the weak won and high oil prices.

However, there are concerns that if the trend of a weak won and high oil prices continues for an extended period, profitability among low-cost carriers could deteriorate further. Recently, the KRW-USD exchange rate broke through the 1,560 won level, reaching its highest point in 17 years and three months. Unlike major airlines, which have low lease ratios and strong in-house maintenance capabilities, low-cost carriers are facing a dual burden from both the currency and oil prices, intensifying concerns about declining profitability. This is because payments for aviation fuel, aircraft leases, and maintenance costs are made in US dollars. In addition, as fuel taxes rise, airfare is expected to increase, and the added exchange rate burden may dampen demand for overseas travel. With the added pressure of higher interest rates, some companies may also see their ability to service debt weaken.

In response, banks have implemented continuous monitoring systems for sectors heavily affected by the weak won and high oil prices. If the risk of industry deterioration increases, banks plan to strengthen their exposure management by increasing loan-loss provisions, tightening the review process for new loans, and approaching loan extensions more conservatively.

A commercial bank official stated, "Given that the airline industry is highly sensitive to changes in exchange rates and oil prices, we are continuously monitoring the situation. However, at present, rather than applying industry-wide management standards, we are managing loans based on the financial soundness and profitability of individual companies."

The supervisory authorities currently judge that the scale of airline industry lending does not pose a threat to the financial soundness of the banking sector. As such, instead of imposing separate supervisory measures, they are allowing banks to autonomously manage risks within the existing regulatory framework.

An official from the Financial Supervisory Service explained, "Banks can manage exposure by accumulating provisions that reflect future outlook information within the expected credit loss (ECL) framework. If a downturn is expected in the airline industry, the probability of default (PD) and loss given default (LGD) estimates are reflected, which naturally increases the amount of provisions."

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