Uncertainties Linger

The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.

 

In October, international passenger traffic upped 58% y-y, continuing on a recovery track. Cargo traffic volume hit an all-time high. International flights have been gradually resuming since November. Despite some lingering uncertainties, an investment strategy centering upon Korean Air is still valid in our view.

Uncertainties linger, but anticipate further gradual resumption of flights

In October, amid an ongoing recovery in international passenger traffic, domestic passenger traffic demand showed a rapid rebound thanks to the October holiday season effects. Defying concerns towards a peak-out, cargo volume stayed healthy, again (following September) setting a new all-time high. Cargo freight rates are still clocking strong. Given this backdrop, FSCs should see robust earnings in 4Q21 as well.

International flights are also gradually resuming. In November, routes to Thailand (Bangkok), Singapore, Australia (Sydney), New Zealand (Auckland) and Japan (Fukuoka) are all slated to resume. While flight operations are expected to resume gradually by end-year, centering on major tourist destinations, Japan (a core route) is to resume allowing entry for international students on Nov 8, ending a suspension that started in Jan 2021. Given ample pent-up overseas travel demand, future passenger traffic will likely be determined by the scale of flight route resumption.

In 2022, annual international passenger demand should recover by 50% versus the 2019 mark. However, some uncertainties remain in play due to the rising numbers of confirmed Covid-19 cases in Korea and Europe. Given the possibility of a prolonging in the Covid-19 crisis, we continue to offer Korean Air as our top pick, noting the profit generating power of its cargo business, and believing that it will benefit from both strengthening demand for mid/long-distance routes and an increasing preference for premium seats.

October results: International passenger traffic +58% y-y; domestic passenger traffic +20% y-y; cargo traffic +12% y-y

In October, the number of passengers on international routes upped to 313,106 (+58% y-y). The figure is only 4% of that in Oct 2019, but nevertheless a gradual recovery appears underway. The number of passengers on domestic routes showed brisk growth, climbing 20% y-y on both an ongoing (since September) demand recovery and October holiday season effects. By route, demand recovery centered upon mid/long-distance routes such as the US and Europe, and even Oceania (Guam, Saipan, Hawaii, etc) has begun responding to the resumption of flight operations in October.

In October, international cargo traffic totaled 289,541 tons (+11.8% y-y, +1.4% m-m), resetting the all-time high recorded the previous month. By airline, the figure upped 11.2% y-y at Korean Air and 1.9% at Asiana Airlines. As of Nov 1, the Baltic Air Freight Index (BAI) stood at 4,247p, trending upwards for a fourth consecutive week.

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