[Click eStock] Maintenance Costs Rise and COVID-19... 'Cheopcheopsanjung' Jin Air

Consumer Travel Sentiment Hits Lowest Point... Possible Rebound from Second Half?

[Asia Economy Reporter Minwoo Lee] Jin Air is struggling due to a significant increase in maintenance costs beyond expectations, the aftermath of the Japanese boycott movement, and adverse factors such as the novel coronavirus infection (Wuhan pneumonia).

On the 5th, Hi Investment & Securities cited the unexpected rise in maintenance costs as the biggest reason why Jin Air's fourth-quarter sales last year fell short of market expectations. In the fourth quarter of last year, Jin Air recorded sales of 182.2 billion KRW and an operating loss of 60.4 billion KRW. Sales decreased compared to the same period last year, and losses continued. The performance even fell below the lowered market expectations.

The main reason for this performance was that maintenance costs amounted to 48.5 billion KRW, far exceeding the expected 26.1 billion KRW. This is interpreted as being due to the renewal of the outsourced maintenance contract in the fourth quarter of last year, which retroactively applied a one-year increase in maintenance costs. Accordingly, the annual maintenance costs also increased by 23.8% from the previous year, reaching 125.9 billion KRW. However, since the increase was preemptive, additional rises in maintenance costs are expected to be limited unless the number of aircraft operated increases this year.

A decrease in international sales was also a factor. Due to the impact of the Japanese boycott movement, international sales in the fourth quarter of last year amounted to 123.9 billion KRW, down 29.4% compared to the same period last year. On the other hand, domestic sales enjoyed a spillover effect, increasing by 24.1% year-on-year to 45.5 billion KRW.

With travel sentiment significantly dampened by the outbreak of the novel coronavirus last month, the current situation is analyzed as unfavorable. Junyoung Ha, a researcher at Hi Investment & Securities, said, "In past cases of Severe Acute Respiratory Syndrome (SARS) and Middle East Respiratory Syndrome (MERS), it took about four months for air passenger demand to recover," adding, "Based on this, the recovery period for the airline industry’s performance is expected to be in the second half of this year."

There is also room for a rebound. The Tokyo Olympics scheduled for the second half of this year could improve Korea-Japan relations, and with Chinese President Xi Jinping’s visit to Korea, there is a possibility that the ban on Korean cultural content in China (Hallyu ban) could be lifted. Additionally, there is a high likelihood that the suppressed air passenger demand since the second half of last year will explode. Low-cost carriers (LCCs), which experienced oversupply, have been hesitant to introduce new aircraft, resulting in almost no increase in aircraft supply. Ha explained, "Stock prices, which reflect performance in advance, have already bottomed out, so the risk of further decline is lower than the risk of a rise at the time of rebound." Hi Investment & Securities gave Jin Air a 'Buy' investment rating with a target price of 18,000 KRW. The closing price the previous day was 15,000 KRW.

This content was produced with the assistance of AI translation services.