By John Larkin/SEOUL
Issue cover-dated October 19, 2000
Far East Economic ReviewTHEY'RE CALLING IT "The Winged City." Occupying a huge swath of reclaimed land between two islands, Inchon International Airport is due to open in March next year, a new gateway to South Korea. As one of the biggest infrastructure projects in Korean history, its debut will be marked by a nationwide shindig the like of which was last seen at the 1988 Seoul Olympics.
But can it live up to the hype? Construction costs, originally set at $5 billion, have nearly doubled, creating a growing debt problem and setting the stage for a dispute with international airlines. The carriers, many of which only recently resumed services to Korea following a lull during the economic crisis, are threatening to pull out unless agreement is reached.
On top of that, trends within the aviation industry also put at risk Korea's lofty aims of turning Inchon into Asia's aviation and air-cargo hub.
Still, the airport is impressive. When completed, it will sprawl across 5,600 hectares of reclaimed land between Yongjong and Yongyu Islands on Korea's west coast, 52 kilometres from Seoul and just 15 kilometres from North Korean airspace.
The plan is for its two runways to carry 170,000 flights annually. The government reckons 27 million passengers a year will use the airport--an expected boom in Chinese travellers pushing that to 100 million when the much-revised master plan is completed in 2020. Compare that to the 18 million handled by Kimpo Airport, the beige concrete slab that has served South Korea for 42 years.
And there's room to expand. The blueprint calls for five runways by 2020, and planners have allowed space for the mega-aircraft of the future, which will transport up to 1,000 people at a time. It will even have its own seaport. "It's not just an airport, it's a small city focused on an airport," says Kang Dong Suk, chairman of Inchon International Airport Corp., or IIAC.
More than just head foreman, Kang is chief trouble-shooter. He is under pressure to ensure a successful opening--which could help President Kim Dae Jung's party secure victory in the 2002 presidential election--and to make sure the government gets a return on its investment. The state-owned airport is 40% funded by the government, with the remaining 60% coming from bank loans and bonds.
Lately Kang must have had a few sleepless nights. The near-doubling of the construction budget was due mainly to the addition of a second runway and a larger terminal than was envisaged when ground was broken in 1992. The airport may face the prospect of using most of its early revenue to pay loan interest, which will delay its ability to break even by several years. This would deter foreign and domestic capital, a real concern given the plan to privatize the airport by 2002.
The financial blowout could also threaten the airport's goal of becoming the world's top cargo handler within 10 years and a major hub for transit passengers. These goals were based largely on projections that Inchon would be cheaper to build than its main rivals in Japan and Hong Kong, but its rising costs are now likely to put it in almost the same league. Smaller construction overheads would mean lower charges for airlines and freight companies, translating into more cargo and passengers.
The financial strains have ignited a tug-of-war with foreign carriers over how much they will be charged to use the airport. There are myriad charges for airlines, from landing and parking fees to check-in counter rental. A dozen large international airlines and the International Air Transport Association are negotiating with Kang's IIAC. But middle ground remains elusive. Airlines accuse the bureaucrats of trying to tap them for bloated construction costs. They says they're willing to see charges rise over three years, ultimately to 18.8% more than they pay at Kimpo. But the IIAC proposes setting fees at 45% higher on average.
Kang plays down the issue, predicting a resolution by the end of this month. "Having different opinions on this issue is quite a natural thing," he says.
But foreign carriers aren't so sanguine. Peter Torralbas, the country manager for United Airlines and a key member of the negotiating group, says he will consider recommending to his Chicago head office that United withdraw from Korea if charges are set too high. Other airlines, he adds, may do the same as profit margins in Korea are already thin.
United maintained its Korea service when other airlines suspended theirs during the Asian economic crisis. Torralbas says its average load factor on flights is 85%, when it needs 89% to break even. The new fees, he claims, would make it 60% more expensive for United to fly into Korea from the United States and Japan. "It's going to force us to downsize here. We don't operate in a place unless we're making money. Airlines pulled out of here during the crisis. If Inchon turns out to be too expensive, it would be very difficult for them to come back."
Park Sung Mee, an aviation analyst for Good Morning Securities in Seoul, warns that the airport's profitability will suffer if the situation isn't resolved. "If it can't attract foreign carriers, it can't break even," he says.
There may be some flexibility in the positions of both sides, but even Kang admits that the airport's financial situation isn't ideal. He says more government support is needed to reduce the airport's reliance on loans, which at an average interest of 9% are burdensome.
"In normal business conditions it's going to be very difficult for us to pay them back in the given period of time," says Kang. "The government clearly understands the situation." Industry observers say the IIAC needs the government to boost its commitment to at least 50% of the total cost if the airport is to avoid spiralling debts that could cripple its profitability.
And there have been other problems. In July a former inspector with Hanjin Construction, one of the four big companies contracted to build the airport, alleged that construction was substandard at some facilities. Jung Tae Won alleges that site managers covered up haphazard construction, skimped on fireproofing and waterproofing materials, and patched up mistakes with shortcuts.
CASHING IN ON A CARGO BOOM
Kang, though, plays down the allegations. "In a project this size you might have a few cracks in the concrete," he says. He has convened a panel of experts to comb the facilities for faults.Inchon International Airport was conceived during an economic boom. Were it in the planning stages now, nearly three years after a crippling economic crisis, it would probably be much smaller. United's Torralbas believes the airport is too big, the facilities having been expanded in major revisions to the master plan that have also pushed up costs.
Another potential problem is the fact that there will be no rail link to the airport until 2005. And trains won't run to central Seoul until 2007, though an Airport Expressway to and from Seoul will open in November next year. In addition, there's speculation in industry circles that the mega-aircraft of the future might bypass Seoul altogether, robbing it of its transit bonanza.
But Kang and his team are upbeat. They hope to cash in on a regional cargo market that is growing by 10% annually. Kimpo moved only 1.8 million tonnes of cargo last year; Inchon hopes to increase this to almost 6 million tonnes by 2020 by capitalizing on the developing Chinese market in light industrial goods. An area near the freight terminal will be converted into a duty-free zone for the storage and assembly of imported cargo.
Inchon's strategic location between China and Japan, and close to Russia's Far East region, may go some way to helping the airport realize its ambitions. Passenger loads could soar. Chinese passengers are expected to follow the trend set by Japanese tourists, who stop over in Seoul before flying on to Europe or the United States. Kimpo was hamstrung by an early-morning curfew, but Inchon will operate 24 hours a day.
Inchon's backers hope to increase its ratio of transit traffic to 40% of total passengers within 10 years, compared to the 14% that Kimpo handles now. The IIAC foresees a booming transit market, with transit passengers rising to nearly 80 million in 2020 from around 25 million this year.
Kang says Korea's 1998 Open Skies Agreement with the U.S. will be another competitive advantage. "The Chinese and Japanese governments have limitations on their number of flights to the U.S., but Korea and the U.S. have no such limits," he says.
David Ruch, a 20-year veteran of Northwest Airlines who now heads the Seoul office of the Lacek Group, a U.S-based consultancy, is more cautious. He says Korea must balance its outbound traffic with its inbound traffic before carriers will consider it a hub. He concedes, though, that Inchon has a geographic advantage over other airports in the region. "When you look, it is at the crossroads between Europe and the U.S."
Kang believes Inchon will steal passengers and cargo from Japanese and Chinese airports, and capture a big slice of the expected market growth. He reasons that Japan has lots of cash but no space, whereas China has lots of space but no cash to build new airports. On paper, Inchon looks well placed to carve out a lucrative niche. That's one master plan Korea won't want to see changed.
To
Page; To Korea
Page