[Into the Stock] Korean Air, Between Cold Rationality and Passion

Securities Firms Set Target Price Above 30,000 Won
Expecting Strong Cargo Performance and COVID-19 Vaccine Impact
HIC Faces Challenge of Overcoming Poor Performance and Sharp Asset Value Decline
Need to Monitor Impact of Asiana Airlines Integration

On the 26th, the initial batch of Pfizer vaccines secured through the international vaccine supply organization 'COVAX facility' was unloaded from a Korean Air cargo plane and transported at the Incheon International Airport Cargo Terminal in Yeongjongdo. / Yeongjongdo - Photo by Airport Photographers Group

[Asia Economy Reporter Junho Hwang] Paradoxically, Korean Air is a listed company expected to benefit from COVID-19. Since the damage caused by COVID-19 was significant, corresponding benefits can be anticipated. The keywords to watch for Korean Air’s stock price this year can be divided into the strong performance of cargo, the disappearance of passengers, the poor performance of HIC and other hotel businesses, and the integration with Asiana Airlines.

COVID-19 and Cargo

Beyond the Korean Air Cargo Terminal at Incheon International Airport, the eventful year of the Year of the Rat is coming to an end. In the New Year of the Year of the Ox, we hope that the novel coronavirus disease (COVID-19) will disappear and the skies will open wide. / Photo by Mun Ho-nam munonam@

According to financial information provider FnGuide on the 15th, research analysts at various securities firms have raised Korean Air’s target stock price to the 30,000 KRW range this year. At the end of last year, investment opinions mostly turned to “buy” following improved earnings. This is a result of increased expectations for first-quarter earnings.

Due to COVID-19, the passenger sector, which can be called the core of air transportation, is expected to continue to be sluggish. The securities industry expects that even if vaccines are somewhat supplied in the second half of this year, actual passenger demand will be seen from next year onward. At the end of last year, Korean Air’s passenger transport performance (RPK) plummeted by 77% compared to the previous year. The decline in transport performance by route was recorded as China 88%, Japan 85%, Europe 83%, Southeast Asia 79%, and the Americas 72%. Domestic demand decreased by 44%. However, by raising fares on international routes, route yield was increased by 13%.

The strong trend in the cargo sector is expected to continue. Korean Air is minimizing operating losses through strategies to maximize cargo transport revenue, such as improving cargo aircraft utilization and operating cargo-dedicated passenger planes. Daishin Securities estimated that in the fourth quarter of last year, air cargo supply was 2.98 billion km, up 7.9% year-on-year, and transport performance was 2.47 billion km, up 21.2%. Korean Air recently stated in a conference call regarding cargo revenue outlook, “Although there are regional differences, overall cargo demand is expected to rise in a situation where cargo supply is limited.” Regarding measures to respond to the surging cargo demand, they said, “Currently, cargo supply is operating at maximum capacity. Passenger seats are limited, so it is not possible to increase cargo supply further, but if prices (costs, oil prices, etc.) decrease and conditions become favorable, there is a possibility of increasing supply.”

Hwang Eoyeon, senior researcher at Shinhan Financial Investment’s corporate analysis department, said, “Korean Air has secured profits and financial strength to endure until the end of COVID-19,” and “If the acquisition of Asiana is successful, meaningful revenue growth in the passenger sector can be expected after the end of COVID-19.” However, he added, “Since quantitative estimates of future profit growth and corporate value increase are not possible, the investment opinion remains neutral.”

HIC’s Poor Performance and Asiana Integration

The biggest crisis for Korean Air is the continuation of the COVID-19 situation. As of the 15th, with COVID-19 confirmed cases exceeding 700 for two consecutive days and talk of a fourth wave spreading, the current situation is a major negative factor for Korean Air. While the impact on passengers and cargo is significant, it is expected to be the biggest obstacle to securing performance in the hotel sector.

In particular, it is necessary to pay close attention to the impact on HIC (Hanjin International), a U.S. hotel subsidiary wholly owned by Korean Air. HIC operates the convention hotel Wilshire Grand Center in the U.S. The Wilshire Grand Center is an InterContinental Hotel with 889 rooms. It has 11,200 pyeong (approx. 37,000 sqm) of office space, seven floors of low-rise commercial space, and convention facilities. It is also a place where asset values plummeted due to the COVID-19 pandemic in the U.S. Anjin Accounting Corporation stated in Korean Air’s audit report that asset value impairments of 355.328 billion KRW and 76.122 billion KRW occurred in tangible assets and investment real estate, respectively.

On the other hand, the scheduled integration with Asiana Airlines within this year acts as a positive factor. NH Investment & Securities expects that by 2023, the combined company’s sales will recover to 19.5 trillion KRW (international passenger 11.8 trillion KRW, cargo 3.7 trillion KRW). Operating profit is also expected to reach 2.15 trillion KRW with an operating margin of 11.0%.

Researcher Jeong Yeonseung of NH Investment & Securities analyzed, “With Korean Air’s successful capital increase (3.3 trillion KRW), the standalone debt ratio is expected to fall to 330% by 2021, and Asiana Airlines’ short-term borrowing burden will be alleviated, greatly improving financial stability. Even considering the acquisition effect of Asiana Airlines, the consolidated Korean Air debt ratio is only 532% at the end of 2021.”