Number of Travelers to Japan Drops for First Time in 3.5 Years... Widening Gap Between Korean Air and LCCs [Click e-Stock]

Decline in Japan-Bound Passengers in July, Down 1% Year-on-Year
China Passenger Numbers Up 20% for Five Consecutive Months, Returning to 2019 Levels
Rising Competition and Falling Fares... LCCs Inevitably Face Sluggish Earnings

Yonhap News Agency

In July, the number of international passengers traveling to Japan turned to a year-on-year decline for the first time since the 2022 reopening. In contrast, passenger traffic to China recovered to 2019 levels. However, this benefit was concentrated among major full-service carriers (FSCs) such as Korean Air, which had already secured most of the available traffic rights, resulting in a widening gap with low-cost carriers (LCCs).

On August 12, Korea Investment & Securities analyzed this trend using aviation statistics from the Ministry of Land, Infrastructure and Transport.

First, the number of international passengers in July was approximately 7.99 million, up 4% year-on-year. However, this growth was considered sluggish compared to the increase in capacity. The number of passengers per flight decreased by 3%, and fares for short-haul routes are estimated to have dropped significantly.

Notably, the Japan route saw its first year-on-year decline since the 2022 reopening. In contrast, air passenger traffic to China recorded a growth rate in the 20% range for five consecutive months, finally recovering to pre-pandemic 2019 levels.

However, the benefits of the recovery in China routes were concentrated among FSCs, which had already secured most of the traffic rights. As a result, international passenger numbers for Korean Air and foreign carriers increased by 5% and 9%, respectively, while domestic LCCs managed to grow by only 1%. While the decline for Jeju Air narrowed to 3%, which is a positive sign, competition over short-haul fares has intensified further.

For T'way Air, despite summer being the peak season for Europe, its passenger numbers decreased by 8% year-on-year. Although the airline had actively expanded its fleet and capacity, this was the first negative growth since 2022. Air Busan also saw a 13% decrease. On the other hand, Air Premia, which focuses on long-haul routes, recorded a 51% increase during the same period.

Declining Demand and Rising Costs... LCCs Face Crisis

LCCs are now considered to be facing a particular crisis. This is because demand for short-haul travel has plummeted due to a combination of factors: the waning of pent-up demand following the reopening, sluggish domestic economic conditions, and incidents such as the Muan Airport and in-flight battery accidents.

Concerns are growing that, after two years of boom, LCCs are now left to bear the brunt of increased costs. Not only have labor and airport-related expenses risen, but aircraft acquisition costs have also surged due to prolonged production disruptions at Boeing in the United States. Despite a decrease in fuel costs, operating expenses are expected to rise even more than the increase in supply.

The situation is even worse for long-haul routes. On North American routes, inbound demand from foreign travelers is more important than outbound demand from Korea, and competing with the Korean Air-Delta Air Lines alliance cannot be achieved through price cuts alone. Excluding Jin Air and Air Busan, which are FSC-affiliated and have maintained a relatively conservative supply strategy, the LCC sector is expected to continue operating losses in the second half of the year. Jeju Air and T'way Air have managed to temporarily ease their financial pressures by raising capital, but analysts say that urgent financial improvements are needed for unlisted LCCs.

Korean Air's Solid Earnings Defense

Accordingly, Korea Investment & Securities maintained a neutral outlook on the airline sector. The firm emphasized that expectations for LCC earnings should be lowered even further. At the same time, it highlighted Korean Air's clear differentiation. While outbound fares from Korea may be indirectly affected by the overall industry sentiment, the impact is expected to be limited as demand is shifting from LCCs to FSCs.

Choi Gowoon, a researcher at Korea Investment & Securities, explained, "Now, the contribution of inbound passenger profits, especially from North American business demand, has become more important," adding, "The oligopoly effect resulting from the merger with Asiana Airlines will also become more pronounced during an economic downturn."