The author is an analyst of NH Investment & Securities. He can be reached at firstname.lastname@example.org. -- Ed.
March air transportation results: Advent of demand cliff
With international passenger traffic having plunged 91% y-y in March, a demand cliff is now starting to appear in earnest. Given the weak chances of a rebound in demand over the near term, severe cost-cutting efforts are the only way for domestic airlines to overcome the demand crisis. Expectations towards government support are in play, but we suggest paying attention to potential share price volatility risk amid the process of securing short-term liquidity. Thus, we adhere to a conservative view towards the sector for now.
Potential diluting of shareholder value cannot be ruled out
Domestic airlines are now facing a full-scale demand cliff. In March, international passenger traffic plunged 91% y-y. It is difficult to expect a demand recovery within 2Q20. For now, domestic airlines have no way to deal with the crisis other than extreme cost savings, including reducing labor forces.
Although expectations towards government liquidity support should positively influence domestic airlines’ share prices, there are uncertainties towards the scale and targets of such support. With the Korean government having said that airlines will need to engage in self-rescue efforts prior to the providing of liquidity support, various methods for raising capital at individual airlines are inevitably to be on the discussion table. Amid this process, the possibility of a diluting of shareholder value cannot be excluded.
Against this backdrop, bottom-end support for valuations remains low. In our view, it is too early at this juncture for proactive reflection in valuations of expectations towards a recovery in demand once the Covid-19 crisis passes. Rather, we suggest paying attention to potential share price volatility risk amid the process of securing short-term liquidity. We maintain a conservative investment rating on the air transportation industry.
March results: International passenger traffic -91% y-y; cargo traffic -5% y-y
In March, international passenger traffic and domestic passenger traffic plunged 91% y-y and 57% y-y, respectively. Severe decreases in passenger traffic were recorded regardless of routes.
By carrier, international passenger growth divided as: Korean Air (KAL) -87% y-y, Asiana -88% y-y, Jeju Air -95% y-y, Jin Air -97% y-y, T’way Air -97% y-y, Air Busan -99% y-y, and Eastar Jet -99% y-y.
Also in March, international cargo traffic fell y-y to 237,106 tons (-5% y-y), but showed an 8% m-m rise. Cargo traffic at Korean Air upped 2.2% y-y, and China route cargo traffic increased 10% y-y. However, with this improvement in cargo demand being attributable to global supply chain disruptions, it cannot be interpreted as signaling an economic recovery. In addition, the degree of cargo demand improvement was insufficient to make any notable contribution to domestic airlines’ earnings.