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[NEWS FOCUS]Korean Air bracing for turbulence Korean Air Co.`s soaring cargo profits, already under pressure from high oil prices, are heading for turbulence generated by new U.S. antiterrorist regulations. The measures, which begin in August, will require all carriers to submit detailed descriptions of all cargo entering or leaving the United States at least four hours before takeoff. With the required data in hand, U.S. authorities hope to identify potentially risky shipments faster. "The new rules will be quite burdensome for us. More administrative work requires more manpower," said a Korean Air official on the carrier`s task force handling the new U.S. rules. The official, who spoke on condition of anonymity, declined to provide estimates of potential extra operating costs but said customers will be spared from covering the expenditure entirely. "We do not plan to pass on our extra cost burden entirely to our customers. But it seems to be inevitable to charge them extra cost in the future," said the official. "This is going to be a big problem. Not only Korean Air but also airlines worldwide will be affected," said Kim Suk-min, an assistant manager of the carrier`s Cargo Strategy and Alliance Team. While ocean freight is not particularly time-sensitive, air transportation is critical to just-in-time manufacturing operations, industry experts say. The production scheme, widely used around the world, calls for low inventory to reduce storage costs and fast, dependable delivery of parts. Korean Air, the No. 3 cargo carrier in the world, excluding exclusive air shippers, will thus have to balance the toughened U.S. procedures with the needs of customers, who include high-tech and electronics suppliers. The paperwork cannot be taken lightly. Those who fail to provide correct information on each shipment in advance will penalized between $5,000 and $10,000 per shipping order. Besides the additional manpower and record keeping required, shippers may also need to upgrade with computer systems to facilitate electronic delivery of the shipping data to U.S. customs inspectors. Major global carriers such as Air France Corp. and Japan Airlines Corp. already have introduced surcharges for the bills of lading, along with penalties for any data corrections, industry insiders said. Over the near term, industry analysts do not believe the revamped U.S. procedures will harm Korean Air substantially. They point to the surging volume of air cargo from Korea`s exporters - the nation`s economic drivers. "It wouldn`t seriously affect the company`s booming business carrying Korean exports," said Nam Kwon-oh, aviation analyst at Goodmorning Shinhan Securities Co. Ltd. "For now, it`s a sellers` market. I wouldn`t too much worry about the extra cost burden," said Shin Ji-yoon who covers the aviation industry at Daewoo Securities Co. Ltd. Korea`s airline companies have seen strong growth in their cargo traffic since the second half of last year, mainly due to rising demand for carrying local mobile phones, liquid crystal displays and semiconductors to the United States and Europe. Although the pace of growth may be slower later this year, analysts expect the rising trend of cargo traffic will remain strong throughout the year, with Shin believing it will remain strong enough to mitigate the greater cost burden. In the first quarter of the year, Korea`s information-technology-related exports, which make up the bulk of cargo shipments, are estimated to reach around $36.5 billion, 47 percent up from a year ago, according to the Ministry of Information and Communication. Oil, currency worries Higher oil prices and currency fluctuations also highlight the airline`s vulnerability to external shocks. The price of jet fuel, which surged to a 14-year high of $48.65 a barrel in May has eaten up its earnings. Concerns about terrorism and reduced production by refiners have driven oil prices to stay above the first-quarter level. Jet fuel traded at an average of $43.18 a barrel in the second quarter, against $28.40 a barrel a year ago. The world`s airlines may lose as much as $3 billion on international routes this year if oil prices hover $45 a barrel, the highest since Iraq`s invasion of Kuwait in 1990, according to the International Air Transportation Association. On average, fuel accounts for 16 percent of airline operating costs. Fuel prices are 55 percent higher than one year ago which could add between $8 billion and $12 billion to airlines` annual fuel bill and threatens to strangle the modest projected return to profitability, according to the association. Analysts estimate Korean Air`s costs rise by about 30 billion won for every dollar increase in the price of jet fuel. A weak won also increases the size of its foreign debt when converted into won. Analysts estimate the value of Korean Air`s overseas overseas debt increase by 48 billion won for every 10 won the Korean won weakens against the dollar. Security has become another major concern of the local airlines. On July 12, Incheon Airport went into a state of alert and tightened security checks on passengers as well as cargo and luggage after receiving threat email that terrorists would be on inbound and outbound flights. The e-mail was the second threat in two days against Korea`s aviation security. Booming business The International Air Transport Association reported that all major regions of the world have seen traffic levels above those of 2000, the last year before global terrorist threats gripped the aviation industry. Between January and May, freight traffic jumped 12.2 percent from a year ago. It`s also noticeable that cargo traffic rose 13.6 percent compared to 2000 traffic levels for the same period. In the second quarter, Korean airports handled 640,000 tons of cargo, a 25 percent increase from a year earlier, fueled by the demand for more semiconductors, mobile phones and other IT products to the U.S. and other countries, according to the Ministry of Construction and Transportation. Korean Air handled 296,000 tons of cargo, 19 percent more than a year ago while Asiana Airlines saw an 18 percent increase in cargo traffic to 131,000 tons for the same period. Korean Air plans to invest in modernizing freighter fleet and upgrading facilities including cargo terminals and IT systems. It hopes to become the worlds` largest cargo airline company by the end of 2007. "Years of our bold investment in the cargo business have finally begun to be paid off," said Song Moon-ho, General Manager at the company`s Cargo Strategy and Alliance Team. Despite the higher oil prices, the operating profit of Korean Air is expected to surpass 50 billion won for the second quarter thanks to the brisk air passengers and cargo traffic, Kyobo Securities Co. predicted. "With stable oil prices, we could have got better figures," said analyst Chang Keun-ho who has a "buy" recommendation on the stock. He expects the operating profit will reach 200 billion won in the third quarter when the air traffic demand peaks. He predicted the company`s shares would rise 36 percent to 18,700 won over the next six months. Industry experts and company officials including Song, however, foresee some challenges ahead of the business. U.S. cargo carriers - FedEx Corp. and United Parcel Service Inc. have begun jockeying to secure lucrative rights to offer service to China after negotiators reached an agreement to open China`s skies to more U.S. passenger and cargo airlines last month. China is considered the fastest growing market and has the most potential. American cargo carriers will be allowed 21 additional flights this year, access to all mainland cities and the right to establish hubs. If it receives permission for more flights, FedEx said it plans to offer service into more Chinese cities. The company said it is also considering moving its current Philippines hub to the southern Chinese city of Guangzhou. UPS said it also plans to expand service there. "Our back door is open," said Song. (jungmin@heraldm.com) By Kim Jung-min