Passenger Demand to Turn Upward
The authors are analysts of Shinhan Investment Corp. They can be reached at eoyeon.hwang@shinhan.com and younghoon.song@shinhan.com, respectively. – Ed.
3Q21 OP of KRW420.2bn (+117% QoQ) tops consensus by 61%
Korean Air Lines posted operating profit of KRW420.2bn (+117.1% QoQ) on sales of KRW2.3tr (+14.5% QoQ) for 3Q21, topping the consensus estimate of KRW260.5bn by 61.3%. Stellar results were driven by an increase in cargo yield and an upturn in passenger earnings. Cargo sales climbed 9.2% QoQ to KRW1.7tr. Available freight tonne kilometers (AFTK) edged up only 3.4% QoQ due to reinforcement of COVID-19 preventive measures at airports and shortage of ground handling workers. Cargo yield rose 7.6% QoQ on limited supply growth and USD/KRW rate hike (+3.5% QoQ).
International passenger sales reached KRW261.2bn (+16.0% QoQ), equal to 13.2% of sales seen in 2019 but a meaningful improvement. Growth was fueled by demand from international students ahead of the fall semester and the Tokyo Olympics, as well as a partial rebound in travel demand. Passenger load factor and yield were up 12.4%p and 12.8% QoQ, respectively, on recovery of demand. The airline plans to gradually expand supply in line with rising demand for travel going forward.
Air cargo demand to remain solid, passenger demand to turn upward
For 4Q21, we forecast operating profit at KRW347.2bn (-17.4% QoQ). Air cargo earnings should continue on an uptrend driven by peak seasonal demand, global economic recovery, and congestion at major container ports. Cargo yield came in around KRW730 in October, up 21.1% from the 3Q21 average. Operating profit is projected to decline only slightly, despite oil price hikes and the end of the government’s employment retention subsidy scheme (KRW20bn).
Korean Air Lines will likely report operating profit of KRW1.4tr (+36.4% YoY) for 2022. While cargo yield should fall on an increase in belly cargo volume, we expect passenger yield to remain high and demand to rise. The number of commercial aircraft in Korea has decreased by 6.7% compared to 4Q19. The airline will be able to respond flexibly to demand for air cargo and passenger services amid limited supply.
Retain HOLD, transportation sector top pick
Korean Air Lines shares are trading at 2022F EV/EBITDA of 9.0x, similar to the valuation of global peers. The airline deserves a premium in view of stronger cargo performance, but we retain our HOLD rating due to uncertainty over the fair trade regulator’s review of the Korean Air-Asiana Airlines merger. We suggest Korean Air Lines as our top pick in the transportation sector given that recovery of passenger traffic in 2022 will bolster operating profit.