Airline Stocks Soar Early... "Excessive Reflection of Reopening Benefit Expectations"

Two Paid-in Capital Increases Since COVID Outbreak
66% Stock Dilution Factor but
Market Capitalization Actually Increased by 200%

[Asia Economy Reporter Ji Yeon-jin] Airline stocks, which have experienced sharp fluctuations this year, are being criticized for excessively reflecting expectations of a COVID-19 reopening.

According to the Korea Exchange on the 2nd, airline stocks surged whenever reopening issues such as government quarantine easing arose. Last year, the annual number of outbound travelers was around 1.22 million, a 96% decrease compared to about 28.71 million in 2019 before the COVID-19 outbreak, so the expectation was that if travel resumed, it would lead to improved performance and stock price increases.

However, except for Asiana Airlines, which decided on a capital reduction at the end of 2020 due to capital erosion, all airlines have conducted two rounds of paid-in capital increases since the COVID-19 outbreak. Including Korean Air, five airlines raised a total of 5.5 trillion KRW through paid-in capital increases, resulting in the total number of issued shares increasing threefold to 750 million shares compared to the end of 2019. Arithmetically, the stock price should have been diluted by about 66%, but instead, the combined market capitalization of the five companies rose 200% from 4.4 trillion KRW at the end of 2019 to over 13 trillion KRW.

Kim Young-ho, a researcher at Samsung Securities, pointed out, "Currently, major domestic low-cost carriers (LCCs) are trading at a price-to-book ratio (PBR) of over 4 times expected this year, which is difficult to explain solely by expectations of performance improvement due to the recovery of international passengers," adding, "I judge that the additional reflection of reopening expectations is excessive."

Moreover, looking at the entry measures of various countries worldwide by the Ministry of Foreign Affairs, there are currently 172 countries implementing entry bans or strengthened procedures for Koreans. Although this is 13 fewer countries compared to 185 countries at the beginning of last month, the number of countries allowing entry with vaccination conditions decreased by 4 to 28. This is due to the continued spread of COVID-19 domestically.

Researcher Kim said, "The core of reopening expectations is the recovery of international passengers, which requires a prior decrease in domestic confirmed cases and agreements with governments of various countries to lift travel restrictions," adding, "If the easing of restrictions with neighboring countries preferred by Koreans, such as Japan and China, is delayed, the improvement in load factors of full-service carriers (FSCs) may become steeper than that of short-haul route-focused LCCs, causing a concentration phenomenon."

For this reason, Kim advised focusing on Korean Air, which can defend its performance through the cargo sector. He explained, "Last year, Korean Air recorded its highest-ever sales of 9 trillion KRW and operating profit of 1.4 trillion KRW," adding, "This was due to the ultra-strong freight rates in the cargo sector that continued for two years after the pandemic outbreak." He continued, "Korean Air is expected to be able to defend its performance through the cargo sector, so it is judged to be the true beneficiary stock of reopening."