The author is an analyst for NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Delivered strong 4Q23 results on early start to peak season and rising demand for Southeast Asian routes
We maintain a Buy rating and TP of W17,000 on Jin Air. Korea’s leading LCC posted 4Q23 sales of W343.2bn (+52.5%, +6.4% q-q) and OP of W46.2bn (+298.3% y-y, +41.7% q-q; OPM of 13.5%), beating our forecasts and consensus by a wide margin. With details on air fares, traffic, and operating expense yet to be disclosed, we plan to update our earnings estimates once more information becomes available.
We attribute the earnings surprise not only to solid demand but also to changing travel patterns. 1) Compared to the pre-Covid-19 era, the winter peak-season arrived earlier from the start of December. We note that the earlier arrival of the peak season was also observed in Jul 2023. 2) Demand for Southeast Asian routes rebounded strongly in 4Q23 on deferred travel demand from 3Q23—in 3Q23, demand for flights to Southeast Asia was sluggish due to high temperatures in the region. Jin Air’s total air passenger traffic (including local airports) for 4Q23 rose by 3.3% q-q. Like other LCCs, Jin Air’s sales have high exposure to Southeast Asian routes, and changing demand patterns for these routes resulted in different 4Q earnings from the past. We foresee that strong demand for short-distance routes will sustain into 1Q24.
While operating expense (labor cost and repair/maintenance cost) rose in 4Q23 for major global airlines including Korean Air, Jin Air’s operating cost fell q-q. It appears necessary to check on changes in detailed operating expense items (labor cost, repair/maintenance cost) for the firm.
Airfares to decline over mid/long term, but pace to be slower than expected
Domestic airlines are once again to enjoy sound earnings in 1Q24. In 2024, airfares are likely to decline gradually on aggressive supply expansion. That said, stronger-than-expected demand growth is helping to slow the pace of decline. Though heightening oil price volatility remains a concern, our earnings forecasts for Jin Air could be revised up upon a hike in our 2024 airfare estimates.
In addition, depending on the results of KAL’s acquisition of Asiana, the competitive landscape of the domestic aviation industry is projected to be reshaped—eg, Asiana’s handing over of some of its routes to Europe and the Americas, Asiana’s disposal of its air transport business, and Air Busan-Jin Air integration. As multiple players plan to expand their operating fleets, heavier supply burden is expected over the long term, making things difficult for valuation expansion. But, in the case of Jin Air, undervaluation merit should shine, backed by upward earnings revisions.