[Click eStock] Korean Air Turns to Loss in 1Q... Dark Clouds Over 2Q

1Q Sales 2.6 Trillion KRW, Operating Loss Expected
Passenger Demand Plummets... Cargo Demand Increase Insufficient
Uncertain Demand Recovery in Q2 Due to Global COVID-19 Spread

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Korean Air has turned to an operating loss as global passenger flights sharply declined due to the spread of the novel coronavirus infection (COVID-19). Although demand for cargo transportation increased, it was insufficient to offset the plunge in passenger transportation. With COVID-19 rapidly spreading in the US, Europe, and other regions, the recovery of international passenger demand in the second quarter remains uncertain.

On the 31st, Hana Financial Investment estimated that Korean Air would record sales of 2.6 trillion KRW and an operating loss of 216.1 billion KRW in the first quarter of this year. Compared to the same period last year, sales are expected to decrease by 18.2%, and operating profit is expected to turn into an operating loss.

Korean Air's first-quarter international passenger transport (RPK) is estimated to have decreased by 28%. This is because COVID-19 spread in China last month, causing a sharp drop in demand for China and short-haul routes, and as the virus spread worldwide this month, demand for long-haul routes also plummeted. At the same time, last month, supply was reduced only on China routes, while supply on long-haul routes was rather expanded, so the first-quarter international flight load factor (L/F) is expected to be only 74%. Additionally, unlike other airlines, Korean Air was not proactive in reducing labor costs in the first quarter, which is also expected to be one of the causes of the large operating loss. However, as global passenger flights sharply declined, demand for transporting cargo using existing passenger aircraft shifted to cargo planes, increasing cargo transport (FTK) by 7.5% compared to the same period last year.

The recovery of international passenger demand in the second quarter is also expected to be difficult. Currently, out of the 145 passenger aircraft owned by Korean Air, 100 are grounded. Flight routes have also been reduced by 80-90%. Considering the rapid spread of COVID-19 worldwide, including the US and Europe, the recovery of demand in the second quarter is uncertain.

Seongbong Park, a researcher at Hana Financial Investment, said, "From the airline's perspective, securing liquidity is important," adding, "Following the recent shareholders' meeting of the holding company Hanjin KAL, Chairman Cho Won-tae of the Hanjin Group mentioned self-help efforts, and Korean Air is expected to begin full-scale cost-cutting while also expanding additional capital through the sale of idle assets, so the possibility of short-term exposure to liquidity risk is low."

Accordingly, Hana Financial Investment maintained a 'Buy' investment rating on Korean Air. However, the target stock price was lowered by 21% from 34,000 KRW to 27,000 KRW. The closing price the previous day was 18,700 KRW.