Expectations Rising for Passenger Business
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
We hike our earnings estimates for KAL in reflection of brisk cargo earnings. Integrated KAL is expected to see 2023 passenger sales of W12~14tn. Believing that KAL possesses sufficient stamina to withstand the prolonged Covid-19 crisis, we suggest focusing on an anticipated mid/long-term rise in yields and favorable effects from increased profit leverage.
Standing strong on healthy cargo business; expectations rising for passenger business
We hike our 2021 OP estimate for Korean Air (KAL) by 77% from W127.5bn to W225.3bn to reflect expected cargo revenue of W5.3tn (+7% vs our previous estimate on an upward revision in forecasted cargo volume by 6% and yield by 2%). Of note, based on 2023F earnings, our TP of W39,000 remains intact despite the rise in 2021 earnings estimates.
Due to the spread of Delta mutations, concerns exist towards the prolonging of Covid-19. However, as we had already assumed that passenger demand recovery would be limited in 2021 given the state of vaccine distribution, our 2021 earnings estimates are relatively unaffected. Meanwhile, brisk air cargo market conditions are favorably impacting KAL’s earnings. Although uncertainty has increased due to the Delta variants, the mid/long-term direction of demand recovery remains unchanged, as the mutation is likely to act as an accelerant for both mid/long-term vaccine dissemination and vaccine acceptance.
The KAL-Asiana Airlines integration is now in progress. While the FTC has yet to officially weigh in, the movement towards integration is clear, in our view. For 2023, we expect integrated KAL-Asiana Airlines to log passenger sales of W12~14tn, with sharp profit improvement a possibility depending on the extent of yield hikes. Moving ahead, yields should rise on the back of easing competition, lower ticket discount rates thanks to an increase in direct sales, and a reduction in low-margin routes. We believe the firm has entered an earnings recovery cycle that will sustain through 2023.
Extended cargo cycle drives upward revision in 2Q21 earnings estimates
KAL is expected to record consensus-topping 2Q21 earnings with sales of W2.65bn (+16.1% y-y) and OP of W169.4bn (+53.8% y-y; OPM of 8.4%). On a y-y basis, passenger and cargo business indicators likely changed as follows: ASK +62%, RPK +16%, passenger yield (won based) -5%, AFTK +22%, FTK +29%, cargo yield (won based) -7%. In 2Q21, while passenger and cargo yield growth likely decelerated on a y-y basis due to high-base effect, actual earnings likely improved on expanded cargo and passenger volume. Considering the currently strong container freight rates, KAL should continue to log strong earnings at the cargo business in 3Q21.