Even Buffett Cuts Losses, Aviation Industry Faces Turbulence in Q2

Korean Air Faces Biggest Crisis Since Inception... Q1 Operating Loss Expected at 248 Billion KRW
Government Support Including Emergency Funds and Airport Fee Reductions Insufficient
'Investment Genius' Warren Buffett Also Cuts Airline Stocks, Losing $5 Billion

[Asia Economy Reporter Minwoo Lee] The expected first-quarter earnings of major domestic airlines have sharply declined compared to the same period last year. This is analyzed as a direct hit caused by the sharp drop in travel demand due to the spread of the novel coronavirus infection (COVID-19). Despite the drop in oil prices and government support, the prevailing outlook is that it will be difficult to recover earnings in the short term.

◆Consecutive losses... "The greatest crisis"= On the 6th, Daishin Securities forecast that Korean Air would record consolidated first-quarter sales of 2.5153 trillion won and an operating loss of 248 billion won. Sales decreased by 19.9% compared to the same period last year, and operating profit turned to a loss. This is far below the market consensus forecast of sales of 2.884 trillion won and an operating loss of 4 billion won. Yang Jihwan, a researcher at Daishin Securities, explained, "This is the most difficult level since the company's founding," adding, "Due to COVID-19, passenger flights worldwide have been suspended, increasing air cargo freight revenue, and the Ministry of Land, Infrastructure and Transport waived airport usage fees, parking fees, and landing fees for airlines, but this was insufficient to offset losses in the passenger sector."

Asiana Airlines is in a similar situation. Sales are expected to fall 6.9% year-on-year to 1.603 trillion won. Operating profit of about 7 billion won in the first quarter of last year is expected to turn into an operating loss of 60 billion won in the first quarter of this year. The schedule for a paid-in capital increase has also been postponed, and the acquisition promoted by HDC Industrial Development is facing difficulties.

The situation for low-cost carriers (LCCs) is even worse. Jeju Air, the number one LCC, is expected to have first-quarter sales of 294 billion won, down 47.8% from the same period last year. The operating loss, which turned to a deficit, amounts to 66.7 billion won. Jin Air is estimated to have sales of 103.9 billion won and an operating loss of 68.4 billion won. Compared to the first quarter of last year, sales decreased by 64.2%, and it recorded a larger operating loss than the operating profit of 57 billion won. T'way Air is also expected to have sales of 124.4 billion won and an operating loss of 40.8 billion won. Sales decreased by 48.4% compared to the first quarter of last year, and it turned to a deficit as well.

◆Second quarter outlook uncertain due to COVID-19 spread= As the spread of COVID-19 continues, the recovery of second-quarter earnings is also uncertain. According to the Korea Air Transport Association, the number of international passengers in the fourth week of last month (March 23?29) was 78,599, a 95.5% decrease compared to the same period last year. The airline industry expects sales losses from February to June this year to reach 6.54 trillion won.

Although various government support measures have been introduced, demand recovery is unlikely before COVID-19 is controlled. In February, the government decided to inject up to 300 billion won in emergency funds into LCCs. At the end of last month, additional support measures such as guaranteeing transport rights for suspended routes and expanding airport fee reductions were announced. However, fixed costs such as labor costs and aircraft lease fees alone amount to 900 billion won, and these measures are insufficient to prevent the sharp decline in passengers due to COVID-19. With almost no sales generated, domestic airlines have debts of 5.3 trillion won to repay within the year.

Researcher Yang said, "It is expected to be difficult to normalize international route operations at least until the second quarter," adding, "Even if the COVID-19 situation calms down in the peak season of the third quarter, domestic airlines will inevitably be affected by the reduction in vacation days due to school reopening delays."

Meanwhile, even Warren Buffett, the global investor and chairman of Berkshire Hathaway, has significantly cut his airline stock holdings. Berkshire Hathaway sold about 13 million shares of Delta Air Lines at an average price of $24.19 per share on the 1st and 2nd of this month. The total sale amounted to $314.2 million (386 billion won). It also sold 2.3 million shares of Southwest Airlines at $32.22 per share, totaling $74.3 million (91.8 billion won). This massive sale, which resulted in a loss of about $5 billion (6.17 trillion won) just three weeks after announcing a long-term investment policy in airline stocks, shocked the market.

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