[Click eStock] "Unexpected Cargo Demand... Korean Air Likely to Return to Profit in 2Q"

Cargo sales up 98% YoY... Operating profit likely to exceed 100 billion won

On the 18th, passengers wore masks at the Korean Air check-in counter in the domestic terminal of Gimpo Airport, Gangseo-gu, Seoul. Korean Air will enforce mandatory mask-wearing for domestic passengers starting today to prevent the spread of the novel coronavirus infection (COVID-19). Photo by Moon Honam munonam@

[Asia Economy Reporter Minwoo Lee] Korean Air is expected to achieve an operating profit of over 100 billion KRW in the second quarter of this year. Due to cargo demand exceeding expectations, it is analyzed that the company will record results far surpassing the previous forecasted operating loss of 170 billion KRW.

On the 29th, Eugene Investment & Securities predicted that Korean Air will post consolidated sales of 2 trillion KRW and an operating profit of 106.5 billion KRW in the second quarter of this year. Although sales are expected to decrease by 35.3% compared to the same period last year, operating profit is expected to turn positive. This is a completely different outcome compared to the previous forecast of an operating loss of 171 billion KRW.

The basis for this outlook is attributed to the increase in cargo demand. Cargo division sales are expected to rise by 97.6% year-on-year to 1.245 trillion KRW. Minjin Bang, a researcher at Eugene Investment & Securities, explained, "Due to the COVID-19 pandemic, global passenger flights were suspended, significantly reducing cargo supply that utilized cargo space in passenger aircraft. However, cargo demand, centered on protective equipment such as masks, remained strong, causing freight rates to surge. Korean Air's cargo freight rates have been rising significantly since last month, benefiting large domestic full-service carriers (FSCs) with a high proportion of cargo sales among global airlines."

However, passenger division sales are still expected to remain sluggish, projected at 236 billion KRW, down 87.9% year-on-year. Researcher Bang stated, "Although some international flights are scheduled to resume next month, if demand recovery does not support it, the sustainability of operations will be low. Considering that the average fuel cost per unit has dropped by more than 40% year-on-year due to the sharp decline in jet fuel prices, fuel expenses are estimated to decrease by more than 450 billion KRW compared to the same period last year."

Accordingly, Eugene Investment & Securities maintained its investment opinion of 'Hold' on Korean Air and kept the target stock price at 18,000 KRW. The closing price on the previous day was 21,400 KRW. Researcher Bang forecasted, "The pace of passenger demand recovery is slow, and the sustainability of cargo freight rates is uncertain, so despite the strong operating performance in the second quarter, it is still difficult to raise expectations for the second half of the year. However, the outstanding performance among global airlines in the second quarter presents a valid short-term trading opportunity."