[Into the Stocks] Korean Air, Continued Uncertainty Despite Strong Q2 Earnings

[Asia Economy Reporter Song Hwajeong] Korean Air recorded earnings that exceeded expectations in the second quarter of this year, but uncertainties remain in the second half. Due to the spread of the Delta variant virus, improvement in the passenger sector is unlikely in the near term, and while the strong performance of the cargo sector is driving earnings, forecasts suggest that the cargo market will gradually slow down starting in the second half.

As of 9:20 a.m. on the 17th, Korean Air was trading at 29,050 KRW, down 750 KRW (2.52%) from the previous day. The stock has been declining for three consecutive days. The stock price, which had risen to 310,000 KRW earlier this month, has fallen below the 300,000 KRW level amid continuous weakness.

Recorded Q2 Earnings Surprise but...

Korean Air posted results that exceeded market expectations in the second quarter. Korean Air’s Q2 revenue and operating profit were 2.0126 trillion KRW and 193.6 billion KRW, respectively, representing increases of 16.4% and 75.7% compared to the same period last year. The operating profit surpassed the market consensus of 112.2 billion KRW by 72.4%. Researcher Eom Kyunga from Shin Young Securities said, "This is the first time since the second quarter of last year, when international flights were suspended due to the COVID-19 pandemic, that quarterly revenue has exceeded 2 trillion KRW," adding, "Cargo transport revenue, which remained around 1.3 trillion KRW in Q4 last year and Q1 this year, increased to 1.5 trillion KRW."

The cargo sector led the earnings surprise. Korean Air’s Q2 cargo business revenue reached 1.5108 trillion KRW, achieving the highest quarterly performance in history. Researcher Kang Sungjin from KB Securities explained, "Korean Air’s cargo transport volume (FTK) in Q2 increased by 29.2% year-on-year, resulting in a revenue increase of 357.6 billion KRW," and added, "Cargo transport capacity (AFTK) rose by 21.3%, reflecting increased fuel and other costs, but because cargo rates are at an absolutely high level, even passenger aircraft, which are inefficient for cargo, were deployed as freighters, resulting in an operating profit increase effect of 264.4 billion KRW."

The financial structure is also improving. According to NH Investment & Securities, Korean Air’s standalone financial liabilities decreased by 2.2 trillion KRW from 15.3 trillion KRW at the end of last year to 13.1 trillion KRW at the end of Q2 this year. Researcher Jeong Yeonseung from NH Investment & Securities said, "This year, the reduction in borrowings is significant due to a capital increase, and in the mid to long term, borrowings are expected to decrease by 500 billion to 1 trillion KRW annually," adding, "Even during the COVID-19 phase, the financial structure is improving, and based on this, market share expansion is expected during the demand recovery process."

Delayed Passenger Recovery and Cargo Market Slowdown... Persistent Uncertainty

Despite the Q2 earnings surprise, the situation remains challenging. Despite expanded vaccination, recovery in the passenger sector is distant due to the spread of the Delta variant virus. Researcher Kang said, "Compared to Q2 2019 before the pandemic, international passenger transport volume (RPK) in Q2 this year was only 6.5%, and international passenger revenue was at 8.0%," adding, "Due to the emergence of variant viruses, the effect of vaccine distribution is falling short of expectations, and it is difficult to expect a full lifting of travel restrictions within this year."

The cargo sector, which has driven performance so far, cannot be viewed optimistically. Researcher Kim Pyeongmo from DB Financial Investment explained, "In Q2 this year, automobile and IT companies increased their use of air transport due to shipping congestion and increased urgent delivery volumes caused by semiconductor supply shortages," but added, "In the second half, as urgent delivery volumes decrease, the air cargo transport share of major domestic companies such as IT and automobile sectors is expected to decline, so Korean Air’s air cargo transport volume and freight rates will gradually decrease after peaking in Q2."

Considering short-term earnings advantages and long-term benefits from structural adjustments, some opinions suggest that the recent stock price correction is temporary. Researcher Choi Gooun from Korea Investment & Securities said, "While low-cost carriers (LCCs) are expected to continue hundreds of billions of KRW in losses in the second half, Korean Air is expected to achieve its highest operating profit in three years this year," adding, "The recent stock price adjustment due to the increase in confirmed cases is considered temporary." Researcher Choi added, "Given the long-term effects of structural adjustments in the aviation market and expectations for deferred overseas travel demand remain unchanged, interest in bottoming out the airline sector is increasing, and Korean Air, with solid short-term profitability and financials, is the starting point for airline stock investment."

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