Airlines Already in Emergency Management

The price of crude oil surpassed $50 a barrel for the first time, and a serious hit to Korean industry is expected. In order to minimize the upcoming impact, companies are hurriedly coming up with countermeasures for energy conservation, but most analysts agree that any solution will not be enough to halt the rise in the production cost. Large oil consumers, including airlines, have already launched “emergency management” programs, and soon, similar actions are expected to be seen in other industrial sectors.

Korean Air and Asiana Airlines had based their business plans on the price of a barrel of West Texas Intermediate (WTI) as $30, but thanks to record-high oil prices, their plans are now useless. Every one-dollar increase in the price of oil results in $25 million in additional annual costs for Korean Air and $13 million for Asiana Airlines. As a result, Korean Air has set its “Oil Crisis Risk Management Program” in motion, aiming to reduce its fuel usage by more than 10 percent.

Shipping companies are not excluded from the effects of higher oil prices either, and this may soon affect their businesses. Hanjin Shipping is known to have incurred $3 million in additional annual costs, when the oil price increases by 1 dollar. Chemical fiber companies are also worried that their output will shrink due to the rise in the price of raw materials. They have already increased the price for nylon and polyester products by 20 percent this year, but another 30~40 percent increase in raw material prices might act as a serious obstacle to production. Some chemical fiber companies have started to control their capacity and lowered it down to 70~80 percent.

Electricity and electronics companies are worried about the increase in the cost of transportation. Samsung Electronics, whose flagships are semiconductor products and mobile phones exported by air, are burdened by the increase in the cost of air transportation. LG Electronics estimated that every 10-dollar increase in Dubai crude from $35 a barrel could result in an additional two percent increase in the cost of materials used to make home electric appliances. Automobile companies, whose costs tend to seriously affect domestic demand, are also keeping their eyes on the price fluctuation. Hyundai Securities said a 10 percent rise in gasoline price would cost owners more money to run their vehicles, leading to an 8.3 percent decrease in automobile consumption.

The shipbuilding and steel industries have launched plans for energy conservation and cost reduction as well. In order to save electricity, Daewoo Shipbuilding and Marine Engineering announced emergency management measures last May and has carried out a program requiring workers who need to work on Saturday to only come in to work on specific Saturdays designated by the company in advance. Pohang Iron and Steel Company also plans to reduce the electricity production cost of one ton of crude steel from the current 5.2 million Cal to four million Cal by 2006.

Ki-Jeong Ko Tae-Han Kim koh@donga.com freewill@donga.com