International Passengers +418% y-y; Domestic +6% y-y
The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com -- Ed.
A passenger demand recovery continued in June. Despite the near-term demand rebound, concerns toward a mid/long-term slowing in demand are placing downward pressure on share prices. With the demand recovery looking slower than expected, risk management is needed for low-cost airlines with weak financial structures.
Short-term demand recovery underway, but mid/long-term concerns mounting; risk management required
While international demand continued to recover in June, we expect transport volume growth (y-y) to rise further in July, as the number of flights being climbing in line with peak seasonality. Meanwhile, with demand for major consumer goods slowing amid an economic downturn, a decrease trend for air cargo volume deepened.
The decline in domestic airline stock prices was driven by concerns that mid/long-term passenger demand could fall short of expectations on both the cargo volume peak-out and stagnating consumption despite a narrowing in passenger business operating losses on the back of the ongoing passenger demand recovery and sound fares. Short-term earnings improvement is clear thanks to high freight rates and increased transportation volume, but this positive is likely insufficient to dispel mid/long-term concerns toward demand. Concerns over a re-spreading of Covid-19 are also to dampen expectations for a strengthening in demand.
Given this backdrop, we believe that it is necessary to manage risks in consideration of the possibility of tepid-paced demand recovery in the airline investment process. If demand recovery proves languid, airlines with shaky financial structures will likely face risks such as difficulties in debt rollover and possible capital erosion. Thus, we advise taking a selective approach focusing only on airlines (Korean Air, Jin Air) that have sufficient financial capacity and which can widen their market shares in the process of restructuring amid a competitive landscape.
June: International passengers +418% y-y; domestic +6% y-y; cargo transport -11% y-y
Looking at Jun 2022 figures, international passengers at national airports recorded 1,287,000, a 418% y-y jump. Domestic passengers reached 3.23mn, up 6% y-y. Total passenger traffic upped by 17% compared to the 2019 average. By route, passenger traffic improved 63%, 31%, and 21% of the 2019 levels for US, Europe, and Southeast Asia rotes, respectively. Turning to transport performance, Jin Air’s transport volume (42,000 passengers) was higher than that for competitive low-cost carriers. Regardless of the number of aircraft, it is estimated that Jin Air’s transportation volume was higher than that of rival’s Jeju Air (32,000 passengers) and T’way Air (29,000) in the sense that the route portfolio was more diversified compared to competitors for Southeast Asian routes.
International cargo transport volume in June amounted to 246,078 tons, down 10.9% y-y. Domestic airline cargo volume slid 13.1% y-y for Korean Air and 12.4% y-y for Asiana Airlines, confirming the realization of peak-out due to reduced transportation volume. However, due to a slow recovery in supply from Asia to the US, the rate of decline in freight rates for domestic airlines is slower than that for the global air rate index. Based on Korean Air, cargo rates in 2Q22 are projected to be similar to those in 1Q22.