"Passenger Demand Recovery Remains Distant... Attention Needed on Aviation Market Restructuring"

Korea Investment & Securities Report

Behind the construction site of the 4th runway at Incheon International Airport, passenger planes of Korean Air and Asiana Airlines are parked. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Minji Lee] As passenger demand recovers slowly, there is an opinion that investors should focus on low-cost carriers (LCCs) when investing in airline stocks. This is based on the expectation of stock price fluctuations as a restructuring of low-cost carriers is anticipated following major airlines.

According to the financial investment industry and Korea Investment & Securities on the 14th, international and domestic passengers in January decreased by 97% and 47%, respectively, compared to the same month last year. Looking at the increase rates of paying international and transfer passengers by airline, major airlines Korean Air and Asiana Airlines saw a 96% decrease, while low-cost carriers such as Jeju Air, Jin Air, T'way Air, Air Busan, and Air Seoul all decreased by about 98% compared to the previous year. Foreign airlines also decreased by 97%.

For domestic paying and transfer passengers, Korean Air and Asiana Airlines decreased by 63% and 60%, respectively, while Jeju Air (-49%), T'way Air (-16%), and Air Busan (-33%) also declined. Air Seoul (38%) and Jin Air (18%) showed increases.

Choi Go-woon, a researcher at Korea Investment & Securities, said, “International flights have stagnated around 200,000 passengers since June last year, and domestic flights seemed to recover until November but halved again within two months. Although social distancing measures are easing in February, and a rebound is expected, it seems more time is needed for normalization.”

However, air cargo performance showed favorable results. Last month, the volume of international cargo at Incheon Airport increased by about 25% year-on-year, with Korean Air up 37% and Asiana Airlines up 21%. Although long-haul cargo rates based on TAC have slowed after the year-end due to seasonality, the year-on-year growth rate still maintains strength at the level of November last year.

Given that passenger demand recovery requires time, it is expected that more time is needed before investing in airline stocks. Ultimately, if investing in airline stocks, attention should be paid to the results of the airline market restructuring, such as consolidation and reorganization, rather than market normalization. Following Korean Air's acquisition of Asiana Airlines, a restructuring of low-cost carriers is expected this year.

Researcher Choi said, “When Korean Air announces a detailed integration plan next month, the outline of how Jin Air will merge Air Busan and Air Seoul will also become clear,” adding, “Competitor LCCs such as Jeju Air and T'way will also accelerate their strategic changes.”

Among LCCs, he predicted that Jin Air's stock movements should be watched first. Researcher Choi said, “It leads in financial stability, government relations, and group synergy effects, so it has the greatest expectations for the post-COVID era,” adding, “Although the airline industry restructuring will take several years to complete, stock market liquidity is quickly reflecting these mid- to long-term expectations.”