Turbulence Hits Aviation Industry... T'way Air Stands Alone with Strong Performance

[Image source=Yonhap News]

[Asia Economy Reporter Minji Lee] Amid expectations of poor performance in the low-cost carrier (LCC) industry due to a decline in travel to Japan last year, T'way Air is judged to have recorded favorable results. However, recovery in performance is expected to be possible starting next year due to the outbreak of the novel coronavirus infection (Wuhan pneumonia).

T'way Air's fourth-quarter sales increased by 6.7% compared to the same period last year, reaching 185 billion KRW. Operating loss widened to 20.9 billion KRW from the 12.5 billion KRW operating loss recorded in the fourth quarter of the previous year.

Researcher Kyungah Eom of Shin Young Securities said, "There were fewer factors increasing aircraft operation costs compared to other low-cost carriers," adding, "The introduction of MAX models did not take place, so cost burdens were low, and there were no NG model aircraft requiring repairs."

The international passenger yield (price per 1 km) dropped about 17% from 58 KRW in the third quarter to 48 KRW in the fourth quarter. Although the downward trend in load factor due to poor performance on Japan routes in the third quarter was reversed, it is judged that the situation does not allow for price increases.

Performance recovery is expected to be possible from next year. The suspension and reduction of flights on China routes are expected to continue until the end of March, so the increase rate in operating volume during the winter peak season is likely to fall short of existing market expectations.

Researcher Eom explained, "The scheduled launch of the Incheon-Wuhan route was postponed due to the appearance of confirmed domestic cases of the novel coronavirus," adding, "The five existing China routes in operation were also suspended, so performance recovery will begin from the second half of the year." The expected operating loss rate for 2020 is 4.3%, and a rapid recovery is anticipated in 2021.

However, more time is expected to be needed for the aviation industry to recover. Researcher Eom said, "The outbreak of the coronavirus has increased the possibility of cash liquidity issues for low-cost carriers," adding, "This is a period where rapid industry restructuring through mergers and acquisitions is more important than the recovery of the aviation industry."

Finally, she explained, "T'way Air is free from concerns about capital erosion, liquidity shortages, and merger and acquisition issues, so it has the highest potential for recovery among low-cost carriers," and maintained a buy rating with a target price of 8,000 KRW.