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

International passenger demand is recovering in earnest and cargo business remains strong. Given that the recovery in transport capacity (supply) is proving to be slower than the rebound in demand, freight rates are expected to remain high for some time. The qualitative changes of the major airlines differ from the conditions of the LCCs.

Slow recovery in supply + elastic rebound in demand = sustained high freight rates

Although overall costs are expected to increase (including fuel costs and variable costs) in a context of increasing transport volume, the increase in costs should be properly passed on to freight rates through conditions of tight supply and demand. Aided by a slow recovery in supply, fares for international passenger flights are expected to remain high at least through the end of 2022. Additionally, as the load factor increases rapidly in 2Q22, the fixed cost load decreases and profit margins improve.

In the medium/long term, airline stock prices are expected to be weighed primarily by concerns over the possible spread of the coronavirus and the risks that reserve demand will not materialize due to price increases. While these risks are unlikely to disappear in the near term, we believe the potential for pent-up demand is strong. We note that despite the pricing burden, sales of new travel products and booking rates continue to strengthen.

In the air passenger market, a transition towards high-end services seems to be taking shape in the medium/long term. Currently, the business class load factor exceeds the economy class load factor on most routes. Note that this change had already appeared before the Covid-19. For Korean Air (KAL), which is expected to benefit from market share growth thanks to the mid-to-long term acquisition of Asiana Airlines, earnings momentum continues to accelerate thanks to an increase in passenger services. premium. The improved financial structure and reduced exposure to foreign currencies also promise to lead to favorable qualitative changes in the future.

April results: international passenger traffic +264% yy, domestic passenger traffic +6% yy, cargo traffic -7% yy

In April, international passenger traffic at domestic airports jumped 264% year-on-year to 655,000, and domestic passenger traffic jumped 6% year-on-year to 318,500. Along with the rebound in demand Inland, the volume of transport recovered strongly, mainly on medium/long distance routes (Americas, Europe) and tourist destinations (South-East Asia, Oceania). Compared to the 2019 average, total passenger traffic returned to the level of 9%, which is broken down by route as follows: Americas 39%, Europe 15% and Oceania 13%. Compared to LCCs, major airlines enjoy relatively stronger passenger growth (KAL +294% yy, Asiana Airlines +272% yy).

The volume of international freight transport in April amounted to 261,081 tons, down 6.7% year-on-year and 7.3% in mm. Domestic airline cargo volume fell 5.8% year-on-year for KAL and 7.6% year-on-year for Asiana Airlines. Although freight volume is down slightly, freight rates remain high thanks to lower supply. In the long term, while the downward trend in freight rates is expected to continue, the pace of decline should be very slow.