Due to Soaring Won/Dollar Exchange Rate
A strong dollar is threatening to push Asiana Airlines into complete capital erosion. As the struggling airline has a huge dollar-denominated debt, it is suffering a large foreign exchange loss due to the rising value of the U.S. greenback.
Asiana Airlines posted record-breaking operating profit this year thanks to its brisk air cargo business. Yet, large-scale foreign exchange losses due to the steep rise in the won-dollar exchange rate may push the company into complete capital erosion at the end of the third quarter.
Asiana Airlines’ capital and total equity stood at 372 billion won and 204.6 billion won, respectively, as of the end of June. When a company’s total equity turns negative, it is in a state of complete capital erosion. As of the end of June, Asiana Airlines’ foreign currency debt stood at 4.87 trillion won, with U.S. dollar debt accounting for the lion’s share at 4.45 trillion won.
The won-dollar exchange rate rose more than 10 percent to 1,439 won on Sept. 30 from 1,298 won on July 1. If the exchange rate rises 10 percent, Asiana Airlines’ pre-tax net profit will slide by 358.5 billion won. Even though the 10 percent increase did not take place all at once but steadily in the third quarter, the airline’s pre-tax net profit would decrease by hundreds of billions of won only due to exchange rate effects.
A rise in the won-dollar exchange rate is bad news to Korean airlines that have to pay their aircraft lease fees and fuel costs in U.S. dollars. The won-dollar exchange rate is forecast to rise to 1,500 won and the air cargo business, which has enjoyed a special boom due to the pandemic for the past two years, is beginning to wane.
Asiana Airlines is not in a situation to increase capital because it is in the process of being acquired by Korean Air. It has no choice but to look to Korea Development Bank (KDB) for support. However, if KDB supports Asiana Airlines, foreign competition authorities may take it as a government subsidy aimed at facilitating Korean Air's acquisition of Asiana Airlines.
A company is subject to delisting if it is in a state of complete capital erosion as of the end of the fiscal year or partial capital erosion of 50 percent or more continues for more than two years. Unless Asiana Airlines seizes an opportunity for a rebound by the end of the year, it may be subject to delisting.
If Asiana Airlines’ marriage with Korean Air falls apart due to rejection by foreign competition authorities, it may stand at the crossroads of existence again.