[Click eStock] "3Q Surprise Earnings Expected for Korean Air, Stronger Than US Airlines"

Lower Passenger Share and Higher Cargo Share Compared to Overseas Travel Agencies
Less Burden from Oil Price Increase and Exchange Rates... Expected to Grow Further if Travelers Increase

[Asia Economy Reporter Minwoo Lee] Despite Korean Air's 'surprise earnings' expected to exceed forecasts for the third quarter of this year, its stock price continues to adjust. This is interpreted as a result of foreign investment banks (IBs) projecting a slower-than-expected recovery in the airline industry. However, Korean Air is analyzed to be differentiated from other airlines due to relatively strong expectations for air cargo demand and passenger recovery.

On the 26th, Daishin Securities maintained its investment opinion of 'Buy' on Korean Air and a 6-month target price of 43,000 KRW. The closing price the previous day was 31,400 KRW.

Korean Air's standalone earnings for the third quarter of this year are expected to be sales of 2.1959 trillion KRW and operating profit of 347.7 billion KRW. This exceeds the market consensus operating profit of 269.2 billion KRW by more than 100 billion KRW. Researcher Jihwan Yang of Daishin Securities explained, "Due to strong performance driven by the air cargo business division and the profit leverage effect from the recovery of air passenger demand, operating profit is expected to exceed initial expectations by more than 10%."

Nevertheless, since mid-month, the downward revision of investment opinions and target prices for U.S. airlines by foreign IBs has led to stock price adjustments. Korean Air's stock price has fallen about 7% from the closing price on the 1st to the previous day. During the same period, the KOSPI rose by 0.04%.

However, Korean Air is analyzed to be in a different situation from foreign airlines. Researcher Yang said, "In the U.S., there was high expectation for passenger recovery due to rapid COVID-19 vaccination, but demand recovery proceeded more slowly than expected," adding, "Airlines that expected passenger demand recovery significantly increased supply, which became a burden factor due to rising oil prices."

On the other hand, although rising oil prices and the weakening won are somewhat unstable factors for Korean Air, their impact on operating performance is limited. Korean Air's air passenger supply still remains at about 20-25% compared to pre-COVID-19 levels in 2019, so the cost increase due to rising oil prices is relatively small. Additionally, Korean Air has a larger proportion of air cargo compared to foreign airlines, and air cargo is in a supply shortage situation. Most of the oil price increase can be reflected in fares.

Researcher Yang predicted, "Furthermore, an increase in passenger demand can be expected due to the rise in vaccination rates in our country," and added, "Theoretically, with minimal additional variable costs, passenger sales and profits could increase up to twice the current level."