Lotte Duty Free may pull out of Incheon Airport

South Korea’s largest duty-free operator, Lotte Duty Free, is considering withdrawing from Incheon International Airport, a company source said Monday.

The move comes as the Korean duty-free industry is struggling to cope with the impact of a diplomatic row between Seoul and Beijing over the deployment of a US missile defense system there. That row could worsen with news overnight that more defendor missiles will be located there in response to North Korea’s ramping up of its nuclear weapons testing program.

Lotte’s potential decision to pull out of the main gateway to South Korea, west of Seoul, is feared to spark a domino effect as other operators demand the airport operator cut rent to help them tide over a tumble in the number of Chinese tourists, their main customers.

In mid-March, China imposed a ban on selling package tours to South Korea in an apparent retaliation over the deployment of a Terminal High Altitude Area Defense (THAAD) battery. The ban dealt a harsh blow to the local duty-free industry, which has heavily relied on Chinese customers. Chinese tourists accounted for nearly 47 per cent of all tourists coming to South Korea last year.

“Lotte Duty Free is carefully weighing an option to drop its business at Incheon International Airport unless Incheon International Airport Corp slashes rent substantially,” a senior company official said. “We have been consistently demanding a rent cut.”

The official said Lotte Duty Free cannot pay rent for the remaining period of a five-year contract due to drastic changes in the business climate, including a plunge in the number of Chinese tourists.

It is the first time that Lotte Duty Free has disclosed the possibility of its withdrawal from Incheon International Airport. In 2015, Lotte Duty Free won the five-year deal with the total rent reaching more than 4 trillion won (US$3.54 billion). Under the contract, Lotte Duty Free should fork out 75 per cent of the rent between September this year and August 2020.

Lotte has been operating a duty-free shop at Incheon International Airport because of its symbolic status as the nation’s main gateway, though it has been unprofitable.

But the situation has changed drastically as its duty-free shop in the South Korean capital of Seoul has been stung by the nosedive in the number of Chinese visitors. In the April-June quarter, Lotte Duty Free posted an operating loss of 29.8 billion won.

Industry watchers said other industry players may follow suit should Lotte Duty Free decide to withdraw from Incheon International Airport.

Hanwha Galleria, a retail unit of Hanwha Group, has already decided to shutter its duty-free shop at Jeju International Airport on the southern resort island of the same name, mirroring the difficulties facing local duty-free operators.

Duty-free shop operators demand Incheon International Airport Corp lower the rent in a bid to help them tackle the fallout from tumbling Chinese tourists as it posted an operating profit of some 1.3 trillion won last year. Nearly 66 per cent of the operating profit came from rent.

Last week, CEOs of the local duty-free operators met with the chief of the airport authority to call for a temporary reduction in rent, but a corporation official said Monday it is not considering any direct cut in rent.

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