February results: Expect higher supply for Chinese and European routes from 2Q23

A bird's-eye view of Incheon International Airport
A bird’s-eye view of Incheon International Airport

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

International passenger demand remained on a solid recovery track in February. LCCs are showing robust flight fares, but these prices will likely stabilize after 1Q23. With more flights to China and Europe to begin in 2Q23, FSCs should start displaying differentiated performance from 2H23.

Expect mid/long-term decline in fares; volume growth to focus on FSCs from 2Q23 onwards

Given both a reduced number of business days (m-m) and the impact of the timing of Lunar New Year holidays in January, international passenger traffic showed a solid recovery trend in February.

But, we remain Neutral for now toward the mid/long-term prospects for the airline industry. International fares are currently more than 70% higher than the average levels during the pandemic. Tight supply, especially for short-haul routes (due to slow supply growth from large carriers and strong short-haul demand), has led to today’s lofty fares. However, we do not believe these high fares are sustainable, expecting competition to resume heating up once again alongside the gradual new aircraft introduction and flight operation expansion. Also, we need to see to what degree fares decrease during low seasonality (which starts in March).

In terms of capacity, low-cost carriers (LCCs) recovered to the 90% mark in January, while FSC recovered to the 57% level. Since 4Q22, LCCs have been aggressively expanding their flight operations. A quickening demand recovery, especially for Japanese and Southeast Asian routes, has also contributed to increasing capacity for LCCs. Moving ahead, the supply recovery is to center upon FSCs in Europe and China. Resumption of European and Chinese routes is expected to begin in 2Q23. In terms of earnings, we expect LCCs to peak in 1Q23, with FSCs starting to differentiate from LCCs from 2H23.

February: International passenger traffic +1,314% y-y, -1.4% m-m; cargo traffic -13% y-y

International passenger traffic at national airports in February upped to 4.57mn (+1,314% y-y, -1.4% m-m). Average daily passenger traffic rose to 163,000 (+9.2% m-m), suggesting that the growth in passenger demand continued (following January) into February.

Overall passenger traffic recovered to 60% of the 2019 average—by route, Japan 87%, Americas 75%, Europe 45%, and Southeast Asia 78%. February saw a significant drop in traffic in the Americas amid a post-holiday seasonal slowdown. Demand continues to grow on Japanese and other short-haul routes where supply has risen.

International cargo traffic at IIA climbed 13% y-y and 2% m-m to 206,570 tons in February. The m-m expansion is attributable to a y-y increase in the number of business days following the Lunar New Year holidays. Having started in 2H22, trade volume and freight rate declines extended further. By airline, cargo traffic fell 16% y-y at Korean Air and 15% y-y at Asiana.

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