Airlines’ Earnings Drop Even in High Demand Season

The Korean aviation industry is still in a slump. Aviation companies are expected to announce a drop in earnings on year in the third quarter, peak season for them, as they did in the second quarter.

Korean Air is expected to post 35.8 billion won in operating income and 3,477 billion won in sales in the third quarter of this year, said FnGuide, a financial information provider, on Sept. 18. Its operating profit plunged 23.89 percent and its sales fell 1.16 percent over the same period of last year.

Low-cost carriers (LCC) performed more poorly. Jeju Air, the No. 1 LCC in Korea, is expected to record 387.4 billion won in revenues in the third quarter, up 10.65 percent on year, but its operating profit is expected to shrink 14.29 percent to 32.4 billion won.

During the same period, operating profits of Air Busan and T'way are expected to drop 83.48 percent and 19.67 percent, respectively, to 1.9 billion won and 9.8 billion won, respectively.

In general, the third quarter is peak season for the aviation industry as it has the summer vacation season and the Chuseok holiday. Industry watchers say that airlines' overall earnings estimates are below expectations.

Airlines’ sluggish earnings are attributable to a sharp drop in travel demand following Koreans’ nationwide boycott of Japanese products and tourism. In August, the number of international passengers reached 8.18 million, up 4.1 percent from the same month of last year, Korea Investment & Securities said. This growth was led by foreign carriers which posted a 13 percent increase, while eight Korean airlines stagnated.

Korean airlines suffered the first halt in growth in terms of the number of passengers since the MERS crisis in July 2015. Travel demand fell amid an overall economic downturn, which was coupled with the drop in Koreans’ travel to Japan, analysts say.

Japanese routes account for about 40 percent of Korean LCC's passengers. In August, they suffered a 24 percent drop on these routes. Their boarding rate is estimated to have fallen 22 percentage points.

Asiana Airlines is expected to be the only listed airline to post an increase in profits. Its operating profit is expected to rise by 29.7 percent to 31.3 billion won from the same period last year.

Market competition will intensify as the shadow of recession deepens over the airline industry. New airlines are ready to jump into the fray. Air Premia and Aero K, which received international air transportation business licenses in March of this year, are on track to service launch next year.

It is LCCs that will face cut throat competition. This is because unlike full service carriers (FSCs), LCCs operate mainly on short-haul routes so they will have more competitors without the growth of demand for their services. Aware of this point, current LCCs are distributing special airline tickets. Air Busan is offering round-trip tickets for international passengers by the end of September. Jeju Air is carrying out a promotion offering discounts of up to 70,000 won per ticket for “New Class,” a premium economy seat service, from September to the end of November. T'way Airlines began to attract customers by promoting a special weekend for autumn trips until Sept. 22.

“August is a peak season for the aviation industry, but an off-season comes back in September,” says Huh Hee-young, a professor of business administration at Hankuk Aviation University. “Although airlines will cut services to Japan and increase services to Southeast Asia and China as they have to operate airplanes, they will suffer a big drop in their profitability as their boarding rates will go down.”