Liquidity Risks Increasing
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com. -- Ed.
In February, passenger demand plunged due to the global spread of Covid-19, a trend that is expected to continue in March. The recent cargo demand improvement is set to prove temporary, and it is unlikely to cover fixed costs due to falling fleet utilization. We recommend taking a conservative approach towards the domestic air transportation industry.
March data to deteriorate further, deepening liquidity crisis
In February, international passenger traffic plunged 47% y-y. In March, passenger demand for US, Europe, and Japan routes will likely fall further as the number of mid/long-term routes serviced by FSCs is set to decline due to the spread of Covid-19 and Japan has imposed restrictions on South Korean visitors owing to Covid-19 fears.
In February, domestic airlines benefited temporarily in terms of passenger and cargo volume due to low-base effect, increased emergency cargo volume, and US airlines’ shut down of China routes. However, the scale of benefit will be reduced in March due to lower operations of passenger fleets.
As fleet utilization has plummeted, it has become difficult for domestic airlines to cover fixed costs. Liquidity risks are increasing as airlines’ cash and cash-equivalent assets are declining. LCCs will inevitably face liquidity risks within 2~3 months without government support, and FSCs, which have high debt ratios and will be required to roll over bonds, will face heavier financial burden.
Although the market expected industry restructuring due to supply cuts and M&As, given that there was a supply glut before the spread of Covid-19, it will be difficult to describe the current supply decline as industrial restructuring unless the number of operating aircrafts is reduced. As the spread of Covid-19 continues, we recommend taking a conservative approach to the sector for now.
February results: International passenger traffic down 47% y-y; cargo traffic up 20% y-y
In February, international passenger traffic slid 47% y-y. On short haul routes, passenger traffic growth divided as: Japan -55% y-y, China -77% y-y, and Southeast Asia -40% y-y. By long haul route, traffic growth came in as: US +5.6% y-y and Europe -9.4% y-y.
By carrier, international passenger growth divided as: Korean Air (KAL) -37% y-y, Asiana -39% y-y, Jeju Air -47% y-y, Jin Air -63% y-y, T’way Air -50% y-y, Air Busan -66% y-y, and Eastar Jet -64% y-y.
In February, international cargo traffic totaled 219,719 tons (+20.2% y-y) thanks to increased demand for emergency cargo due to global supply chain disruptions and low-base effect due to the timing of the Lunar New Year holiday. However, we expect the increase to prove temporary, with fleet operations set to decline in March.