Korean Air: Air Fares Still High 

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

The earnings outlook for 1Q22 is favorable thanks to strong freight rates. Also, we note that passenger demand is recovering and fares remain high. Starting from 4Q22, profit leverage effects at the passenger business should expand. We expect rising fuel costs and a slowdown at the cargo business to be offset by the strengthening passenger business.

Leverage effects to expand on passenger demand recovery and high air fares

We maintain a Buy rating and TP of W43,500 on Korean Air (KAL). Given the continued strong freight rates in 1Q22, we raise our 2022 OP estimate by 20% to W1.11tn. Over the mid/long term, freight rates should stabilize downwards, but the pace may be slower than expected due to the lockdown in Shanghai.

The main mid/long-term investment point for KAL is recovering passenger demand. After 2010~2011, passenger traffic rebounded despite high fares. Similarly, in light of strong potential demand, consumers should accept the current high fares. As a result, it should be possible to pass on rising costs related to oil prices and exchange rates.

KAL should capitalize on demand for premium services, which is picking up, similar to the case for luxury goods. As such, fares should climb for major airlines (FSCs) that can differentiate their services. Passenger yield for 2023 is estimated at W113.2/km versus W96.4/km in 2018. We predict that passenger yield hikes will offset the effects of reduced sales stemming from a possible decline in cargo freight rates.

Despite adverse external factors, 1Q22 outlook bright thanks to robust freight rates

We forecast 1Q22 sales of W2.8tn (+57% y-y) and OP of W508.7bn (+401%  y-y), in line with consensus. ASK and RPK for the passenger business should rise 12.4% y-y and 94.2% y-y, respectively, while AFTK and FTK for the cargo business are likely to grow 5.8% y-y and 4.1% y-y.

Passenger yield remained high at W133/km (+16.2% y-y, +0.8% q-q) in 1Q22, and cargo yield further increased to W834/TKM (+50.8% y-y, +7.1% q-q). The average jet fuel price rose 71% y-y to US$107/bbl, but earnings results are likely to be strong thanks to robust cargo demand.

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