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Airline Industry: June Results: Demand Recovery Continues, But Anxiety Factors Rise

The author is an analyst at NH Investment & Securities. He can be contacted at [email protected] — Ed.

The recovery in passenger demand continued in June. Despite the rebound in near-term demand, fears of a medium/long-term slowdown in demand are putting downward pressure on equity prices. With demand recovery appearing to be slower than expected, risk management is needed for low-cost airlines with fragile financial structures.

Recovery in short-term demand underway, but medium/long-term concerns are increasing; risk management required

While international demand continued to recover in June, we expect transport volume growth (year-on-year) to continue to increase in July, with the number of flights increasing in line with peak seasonality. Meanwhile, with demand for major consumer goods slowing amid an economic slowdown, the downward trend in air cargo volume has intensified.

Falling domestic airline stock prices were driven by fears that medium/long term passenger demand may be below expectations both in terms of peak cargo volume and stagnating consumption despite a reduction in operating losses from the passenger business on the back of the ongoing passenger demand recovery and healthy fares. The improvement in short-term profits is evident thanks to the high freight rates and the increase in transport volume, but this positive factor is probably insufficient to dispel the medium/long-term concerns about demand. Concerns about a re-spread of Covid-19 should also dampen expectations of stronger demand.

In this context, we believe it is necessary to manage risks by taking into account the possibility of a lukewarm demand recovery in the airline investment process. If the demand recovery proves sluggish, airlines with weak financial structures are likely to face risks such as difficulties in refinancing debt and possible capital erosion. Thus, we advise taking a selective approach by focusing only on airlines (Korean Air, Jin Air) that have sufficient financial capacity and can expand their market shares under restructuring in a competitive landscape.

June: International passengers +418% yy; domestic +6% yy; freight transport -11% aa

Looking at the June 2022 figures, international passengers at domestic airports recorded 1,287,000, a 418% year-on-year jump. The number of domestic passengers reached 3.23 million, up 6% year-on-year. Total passenger traffic increased by 17% compared to the 2019 average. By road, passenger traffic increased by 63%, 31% and 21% compared to 2019 levels for routes in the United States, in Europe and Southeast Asia, respectively. Regarding transportation performance, Jin Air’s transportation volume (42,000 passengers) was higher than that of competing low-cost carriers. Regardless of the number of aircraft, it is estimated that Jin Air’s transport volume was higher than that of competitors Jeju Air (32,000 passengers) and T’way Air (29,000) in the sense that the route portfolio was more diverse compared to competitors in the Southeast. Asian routes.

The volume of international freight transport in June amounted to 246,078 tons, down 10.9 percent year-on-year. Cargo volume for domestic airlines fell 13.1% YoY for Korean Air and 12.4% YoY for Asiana Airlines, confirming the achievement of a peak due to the reduction in transport volume . However, due to a slow resumption of supply from Asia to the United States, the rate of decline in freight rates for domestic airlines is slower than that of the global airfare index. According to Korean Air, freight rates in 2Q22 are expected to be similar to those in 1Q22.