Passing the Trough
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Amid little recovery in international passenger demand, even domestic passenger demand fell (-38% y-y) in December. We believe the industry is passing the trough. In terms of cargo, cargo volume reached its highest level since the opening of IIA. In our view, a selective approach centering on airlines capable of expanding M/S remains valid.
Passenger demand turns sluggish again: The last corner to round
In Dec 2020, domestic passenger demand, which had been recovering, contracted significantly due to the re-spreading of Covid-19 and resultant escalation of social distancing measures. In the short term, LCCs’ earnings are to deteriorate and the pace of their cash outflow is to accelerate. However, for the long term, expectations remain valid towards passenger demand recovery stemming from an end to Covid-19 (driven by vaccine supply).
Although significant uncertainty remains regarding investment in airlines, we believe this latest contraction in domestic passenger demand due to the re-spread of Covid-19 represents the last corner to turn. From an investment perspective, we believe that a selective approach remains valid, centering on airlines which: 1) are capable of expanding M/S amid air transportation industry restructuring; 2) have limited potential for dilution of shareholders’ value; and 3) can secure additional liquidity from their parent company. We suggest focusing on Korean Air (KAL) among FSCs and Jin Air among LCCs.
December results: International passenger traffic -97% y-y; domestic passenger traffic -38% y-y; cargo traffic +13% y-y
In December, international passenger traffic fell 97% y-y. Even domestic passenger traffic declined (-38% y-y) due to the escalation of social distancing measures in response to the re-spread of Covid-19.
Due to the drop in domestic passenger demand, yield competition intensified. Accordingly, domestic airlines’ earnings losses are to expand, and the pace of their cash outflow is to accelerate. In December, domestic passenger traffic decrease broke down by airline as: KAL -60% y-y, Asiana Airlines -58% y-y, Jeju Air -19% y-y, and Air Busan -32% y-y. However, Jin Air and T’way Air saw positive growth of 6% and 8% y-y, respectively. Relatively, Jin Air and T’way Air look better than other LCCs in terms of the scale of cash outflow.
Turning to cargo, international cargo traffic increased in December by 12.7% y-y to 271,036 tons, reaching the highest level since the opening of Incheon International Airport (IIA). Cargo volume by route came to: US +29% y-y, Japan +34% y-y, and China +9% y-y, with all figures showing m-m improvement. Positive growth was even seen on Europe routes (+4% y-y) for the first time since 2019. By airline, the figures came to KAL +23.3% y-y and Asiana Airlines +10.1% y-y. We believe that such solid cargo trading volume despite the global re-spread of Covid-19 will help to support domestic FSCs in withstanding the difficulties of Covid-19.