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International Finance

27. South Korea's Korean Air Lines (KAL) is the world's 12th largest passenger airline and its second-largest cargo carrier. It has borrowed $5 billion (much of it denominated in dollars) to finance its fleet of planes.

a. In what ways is KAL affected by depreciation of the won against the dollar?

b. How can KAL use the financing to reduce its currency risk?

c. KAL argues that its jet fleet naturally hedges its currency exposure. Do you agree or disagree? Explain.

d. At the end of 1997, KAL decided to sell off its older planes, use the proceeds to pay down some of its debt, and replace the sold planes with aircraft it leases through a subsidiary in Ireland. Will this strategy lower KAL's high debt ratio?

Solution Preview

a. In what ways is KAL affected by depreciation of the won against the dollar?

ANSWER. The won's depreciation against the dollar harms KAL in three ways. (1) Its dollar-denominated debt service payments rise in won terms because more won are needed to buy the dollars to pay interest and principal on its loans. (2) Its won cost of fuel rises since fuel prices are set in dollars. (3) Its won revenue growth slows down and may even fall as Asian fliers try to conserve their falling incomes. There are other considerations as well in assessing KAL's currency risk. To the extent that KAL can replace Asian customers with U.S. and European customers attracted by the lower cost of visiting ...

Solution Summary

The following posting discusses airline related finances.

$2.19