Korean Air
The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
With increased passenger traffic and higher fares to offset the impact of lower cargo revenue on KAL’s earnings, we believe that KAL’s 2H23 earnings will prove better than currently expected. Profitability is to strengthen steadily over the mid/long term in line with both an improved balance sheet and the benefits of the Asiana Airlines acquisition.
Boost expectations for 2H23 earnings; profitability to be higher than before pandemic
We maintain a Buy rating and a TP of W33,000 on Korean Air (KAL). While we upwardly adjust our FY2023 OP estimate by 7% to reflect lower fuel costs, changes made to our mid/long-term earnings estimates are limited.
KAL’s supply is to increase from 2Q23, helped by an expansion of Chinese and mid/long-haul routes. International passenger fares should resume rising from 3Q23 on robust demand and favorable premium seat demand. The firm’s net debt continues to shrink and its non-operating income looks to have stabilized despite forex market fluctuations. Once the Asiana Airlines acquisition is finalized, consolidated OP levels should increase further through market share expansion and economies of scale.
1Q23 review: OP roughly satisfies expectations
On a non-consolidated basis, KAL posted 1Q23 sales of W3.19tn (+13.9% y-y) and OP of W415bn (-47.4% y-y; OPM 13.0%). Given the results of Jin Air (1Q23E OP; W65.2bn), which are to be contained in consolidated earnings, KAL’s 1Q23 consolidated results likely met consensus. International flight metrics (non-consolidated basis) were as follows: supply +183% y-y, demand 485% y-y, fare W127 (+1.1% y-y), detailed indicators for cargo: supply -11% y-y, demand -22% y-y, fare W520 (-38% y-y). Of note, passenger supply has now returned to 68% of the 2019 level.
Looking at 2Q23, international flight supply should recover to 77% of the 2Q19 level thanks to the ongoing expansion of long-haul routes. International fares are to decline slightly to W124/km on a higher number of mid/long-haul routes carrying relatively lower ASPs. We expect 2Q23 consolidated OP to total W280bn, outshining the company’s typical performance during past 2Q off-season periods.