Tariffs for airline parts could rise in 2025

[Photo by MK DB]

The tariff reduction rate for South Korean companies’ aircraft parts will gradually decrease starting in 2025, putting the aviation industry on alert. Carriers will have to bear costs of at least tens of billions of won if the tariff reduction benefits diminish, leading the government to pursue a plan to extend the legislation’s sunset period.

Maeil Business Newspaper learned on Wednesday that the government is planning to propose an extension of the sunset clause for Section 89 of the Customs Law during the first half of 2025 to the 22nd National Assembly, which begins its term on May 30th, 2024.

“We have officially received suggestions from the business sector to extend the exemption of tariffs on imported aircraft parts,” a finance ministry officer said, adding, “We plan to analyze the impact on Korea’s economy and make a decision on whether to revise the tax laws in 2024.”

Section 89 of the Customs Law stipulates a 100 percent tariff exemption for aircraft parts, repair materials, and raw materials. The tariff reduction rates for items covered under the Agreement on Trade in Civil Aircraft will decrease by 20 percent annually starting from January 1st, 2025, until the benefits are entirely phased out by 2029.

As tariff reduction rates decline, Korean aviation companies are expected to bear additional costs amounting to at least hundreds of billions of won, which in turn is highly likely to damage to the Korean aviation industry’s competitiveness. Some within the industry are advocating for Korea’s accession to the World Trade Organization’s Agreement on Trade in Civil Aircraft, but the relevant government ministries, including the Ministry of Industry, Trade, and Energy, oppose this move, citing potential adverse effects on the Korean aviation ecosystem.

Meanwhile, the aviation industry, which had hoped for a ‘second boom’ with the complete recovery of demand, are now facing high exchange rates and fuel prices.

According to industry sources, ongoing depreciation of the Korean won is increasing industry concerns. As aircraft leasing fees and aviation fuel payments are made in dollars, a depreciating won could lead to significant exchange losses.

Airlines regularly assess foreign exchange risks and actively manage exchange rate fluctuations, but sudden changes in the foreign exchange market could mean inevitable losses. Korean Air incurs about 27 billion won ($20 million) in foreign exchange valuation losses for every 10-won fluctuation in the exchange rate. For its part, Asiana Airlines estimates that a 10 percent fluctuation in the exchange rate affects its net profit by up to 460 billion won and Jeju Air anticipates a decrease of 22.6 billion won in pre-tax net profit with a 5 percent increase in the exchange rate.

Rising fuel prices are also adding to airlines’ burdens. The price of West Texas Intermediate (WTI) crude oil, which was $71.6 per barrel at the end of 2023, surged by nearly 20 percent to $86.4 per barrel on April 8th, 2024.