Passenger Earnings Growth to Kick in
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
KAL delivered an earnings surprise for 3Q21, helped by both strong yield for its cargo business and an eased fixed cost burden for its passenger business (on a rise in load factor). Despite some higher costs, KAL should see sound earnings in 4Q21 on ongoing robust cargo yield and recovering passenger demand (centering on tourist routes). We maintain KAL as our top pick among transportation players.
Boost OP estimates on strong cargo yield and increased passenger load factor
Korea Air (KAL) should continue to enjoy robust cargo yield in 1Q22. Passenger demand is also recovering, centering on mid/long-haul routes. Reflecting upward adjustments to our passenger load factor and cargo yield forecasts, we boost our 2021 and 2022 OP estimates by 30% and 18%, respectively.
Given worries towards a potential peak-out, we believe that the favorable cargo earnings alone are insufficient to sustain earnings growth. Uncertainties towards a passenger demand recovery remain in play due to Covid-19 re-proliferation. But, we view KAL as possessing the stamina to withstand a prolonging in the pandemic. Once the Covid-19 effects ease, KAL’s profit generating power should be greater than before the pandemic crisis as the firm’s market share will be larger thanks to its acquisition of Asiana Airlines. Anticipating a gradual passenger demand recovery through 2023, we believe that KAL has entered an earnings expansion stage.
3Q21 review: Strong cargo earnings and eased fixed cost burden at passenger side to sustain in 4Q21
KAL delivered an earnings surprise for 3Q21, recording consolidated sales of W2.3tn (+48.9% y-y) and OP of W4.2bn (TTP y-y, OPM 18.2%). Despite forex losses due to dollar depreciation, the firm showed NP (excluding minority interests) of W106bn (TTP y-y), continuing a positive trend started last quarter thanks to lessened interest expenses (on a reduction in borrowings) and the booking of derivatives gains (W75bn).
International passenger and cargo key indicators for 3Q21 showed the following changes (y-y): Passenger: sales +25%, ASK -3.0%, PRK +34.5%, yield (won basis) -7.0%; Cargo: sales +62.4%, AFTK +20.5%, FTK +23.6%, and yield (won basis) +31.4%.
Passenger yield in 3Q21 upped 12.8% q-q, with both yield and number of passengers rising. Even load factor improved from 27% in 2Q21 to 39% in 3Q21. This increase in load factor should ease fixed cost burden and translate into earnings improvement. Cargo yield for 3Q21 set a new quarterly record of W603/km, with the figure estimated to have further soared to W700/km in October. Strong earnings look to be sustaining in 4Q21 thanks to both ongoing favorable cargo earnings and improved passenger load factor.