But Cargo Remains Steady
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
Due to the recent resurgence in Covid-19, expectations towards a passenger demand recovery are being somewhat dampened. But, the mid/long-term direction for the recovery remains intact. Passenger demand is still set to recover, centering first on mid/long-distance routes. We advise focusing upon FSCs capable of withstanding the financial pressure thanks to their ongoing steady cargo businesses.
Covid-19 resurgence stoking short-term uncertainties, but focus on airlines capable of toughing it out
Due to the recent domestic resurgence in Covid-19, expectations towards a passenger demand recovery are weakening. Despite an expansion of travel bubbles for routes other than Saipan, a delay in the passenger demand recovery in 2H21 now appears inevitable.
In terms of an investment strategy for the air transportation sector, we suggest concentrating on Korean Air, which is situated to expand its profit leverage (via market share expansion), and which can tough out the Covid-19 phase thanks to its robust cargo business. Although a recent Delta variant outbreak is stoking short-term uncertainties, it should carry the positive of leading to higher public acceptance of vaccines. We expect Korean Air’s share price to rebound in 2H21 once vaccine penetration begins in earnest.
From a mid/long-term perspective, a passenger demand recovery should appear first for long-distance routes, for which the portion of vaccinated passengers should expand quickly. In June, both US and Europe routes showed higher passenger demand (m-m). Once the pandemic crisis fades, earnings at FSCs (which offer long-distanced routes) should recover at a faster pace than at LCCs.
June results: International passenger traffic +36% y-y; domestic passenger traffic +41% y-y; cargo traffic +29% y-y
In June, the number of passengers on international routes upped 36% y-y. The number of passengers on domestic routes increased 41% y-y; However, this figure is 2.5% lower than the figure in the previous month. Gimpo-Jeju routes look strong, but other routes showed more anemic passenger demand.
A look at international routes shows a slight rise in passenger demand. The number of passengers for international routes climbed 36% y-y and 19% m-m. Versus the previous month, long-distance routes (such as US and Europe routes) are displaying stronger passenger demand. As a result, FSCs such as Korean Air and Asiana Airlines are enjoying stronger passenger demand than LCCs.
In June, international cargo traffic widened 29% y-y to 276,152 tons. By route: US +39% y-y, Japan +40% y-y, China +17% y-y, and Europe +18% y-y. By airline, Korean Air and Asiana Airlines recorded expansions of 25.8% y-y and 15.8%, respectively. In 3Q21, cargo yield should strengthen on both increased car production and emergency cargo demand (due to container shipping disruptions). Currently, it is believed that the utilization of cargo jets is at its maximum point. Cargo business earnings in 3Q21 will likely be strongly backed by higher yield.