International passenger traffic +45% y-y
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
In August, domestic passenger demand decreased. On the other hand, an uptrend in long haul international passenger demand (centering upon US routes) is proving resilient. Backed by strong air cargo yield, FSCs are expected to continue generating positive operating cash flows and to reduce their borrowings. We continue to suggest an air transportation industry investment strategy of focusing on FSCs.
Domestic air passengers decrease; US routes passenger recovery stands out; cargo yield continues to rise
In August, domestic passenger demand turned to negative territory (y-y) amid the Korean government’s continued implementation of Stage 4 social distancing restrictions. With summer vacation effects to dissipate in September, worries are heightening towards earnings deterioration at LCCs (which rely mainly on domestic routes).
On the other hand, FSCs should continue to generate positive earnings in 3Q21 thanks to an ongoing rise in cargo yields amid recovering passenger demand for mid/long-haul international routes (centering upon US routes). Based on positive operating cash flows, FSCs are steadily trimming down their interest payments by reducing borrowings, and they are also preparing for the ‘post-pandemic’ phase by introducing new aircrafts and hiring pilots. Once the Covid-19 phase passes, the domestic air transportation industry should be led by integrated Korean Air (KAL and Asiana Airlines), with the integrated entity seeing continual market share expansion.
August results: International passenger traffic +45% y-y; domestic passenger traffic -5% y-y; cargo traffic +18% y-y
In August, the number of passengers on international routes upped to 340,000 (+45% y-y). The number of passengers for domestic routes decreased to 2.72mn (-5% y-y), falling for a third month in a row amid the prolonging of Stage 4 social distancing rules. With the summer vacation season having now passed, domestic passenger demand is to be sluggish. Accordingly, domestic route yields should continue narrowing for now.
Looking at international passenger traffic by route in August, passenger demand is rebounding more quickly for US routes than for other routes. The number of passengers on US routes totaled around 138,000, a level equivalent to 30% of the corresponding figure in 2019 (464,000). In comparison, the average number of passengers for Europe routes was only around 10% of the 2019 figure, with other routes showing less than 5%. Moving ahead, we believe that the passenger demand recovery will continue to be led by long haul routes (including DEs with rapidly rising vaccine penetration rates), in turn benefiting Korean Air and Asiana Airlines.
International cargo traffic in August rose 18.3% y-y to 272,384 tons. Despite a slight m-m decrease in an overall volume, the volume carried by domestic airlines showed steady y-y improvement, with the figures for KAL and Asiana widening 18.2% y-y and 8.3% y-y, respectively. Amid ongoing port congestion issues, air cargo yields expanded further in response to operation disruptions at airports in both Vietnam and Shanghai. Given this backdrop, FSCs are expected to continue enjoying surplus earnings in 3Q21.