[Click eStock] "Korean Air Trading Approach Possible if Exchange Rate Stabilizes"

On December 26, Shinhan Investment Corp. stated that a structural turnaround in the airline industry will take time. However, the firm analyzed that if the exchange rate stabilizes, a short-term trading approach (aiming for quick profits) in Korean Air could be possible.

Choi Mingi, a researcher at Shinhan Investment Corp., said, "While U.S. airline stocks have recently shown strength, domestic airline stocks have remained weak throughout the year," adding, "Apart from exchange rate stabilization, a reversal in the weak Korean won trend could improve short-term investor sentiment toward airline stocks."

Choi identified two main factors behind the recent strength in U.S. airline stocks. First, the bankruptcy filing of low-cost carrier Spirit Airlines has raised expectations for higher domestic fares due to reduced competition, leading to a sharper rebound in the stocks of low-cost carriers with a high share of domestic routes. Second, declining oil prices have eased operating cost burdens.

In contrast, domestic airline stocks are facing the opposite situation. Choi explained, "Passenger demand growth has slowed, and an increase in supply from low-cost carriers and foreign airlines is putting downward pressure on fares," adding, "Despite falling oil prices, rising non-fuel costs are keeping operating expenses high."

Choi pointed out that the biggest disadvantage for domestic airlines in terms of operating costs is the exchange rate.

Choi analyzed, "This is because a large portion of operating costs are settled in foreign currencies," adding, "Since the end of the pandemic, aircraft expansion has led to higher lease payments, and increased supply has also raised maintenance and insurance costs." He further explained, "Jet fuel is fundamentally linked to the U.S. dollar, and as the share of international routes grows, airport-related costs settled in foreign currencies are also on the rise."

Accordingly, Choi believes that if the exchange rate stabilizes, a trading approach to airline stocks is possible, with Korean Air as the top investment priority.

Choi said, "Domestic passenger demand is also affected by the exchange rate, so airline stocks have traditionally been sensitive to currency movements," adding, "Apart from intensifying competition, a reversal in the weak Korean won trend could improve short-term investor sentiment toward airline stocks."

Long-haul fares for Korean Air are currently affected by corrective measures from the Fair Trade Commission related to its merger with Asiana Airlines. Most issues in Europe have been resolved, and for major routes to the Americas, it is expected that the entry of competitors on routes such as Seattle, New York, and Honolulu will lead to resolution within the year. Financial instability issues among long-haul low-cost carriers are also ongoing.

In the short term, a recovery in the cargo sector is also a favorable factor for Korean Air. The BAI Air Freight Index has risen by 22% since October. In addition to the stable Europe and Middle East routes, transpacific fares from Asia to North America, which had been affected by tariffs, have also shown significant improvement.

Choi added, "Even considering the year-end peak season for inventory replenishment, demand for IT cargo such as semiconductors is expected to remain strong next year as well."