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The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. — Ed.

2Q22 review: OP beats market consensus; expect limited earnings growth on peaked air cargo market, delay in recovery for air passenger market

— 2Q22 OP easily beat the market consensus thanks to booming air cargo/air passenger markets. However, the air cargo market appears to have peaked. Passenger earnings should fuel growth, but a full-fledged market recovery will likely be delayed. 

2Q22 standalone OP of KRW735.9bn beats KB estimate by 5.8%; marked recovery in international air passenger demand

— On a standalone basis, 2Q22 OP came in at KRW735.9bn (+273.7% YoY, -6.7% QoQ), higher than our estimate by 5.8%.

— On a consolidated basis, 2Q22 OP (to be released) should beat the market consensus of KRW454.2bn, even after taking into account losses at Jin Air.

— The solid earnings performance is attributable to a marked recovery in international air passenger demand and the booming air cargo market.

— International RPK ballooned 321.2% YoY (+KRW465.7bn total revenue), indicating earnings improvement was largely due to increased passenger traffic, even after factoring in KRW175.5bn in fuel/other costs stemming from use of additional planes.

— Cargo yield (air cargo revenue/FTK) surged 52.9% YoY (+KRW799.2bn total revenue), more than offsetting KRW544.0bn in costs from higher fuel prices (+105% YoY) and FX fluctuations.

— However, air cargo market conditions slowed QoQ, as 2Q22 freight rate did not reflect QoQ oil price increases. In terms of USD, 2Q22 fuel cost rose 40.0% QoQ but freight rate fell 1.2% QoQ. Korean Air failed to pass oil price increases through to freight rates for the first time since 3Q21. 

Air cargo market appears to have peaked; expect decline in Passenger earnings contribution 

— The air cargo market appears to have peaked, limiting Cargo’s profit-generating capacity. The recovery should contribute to earnings growth until 3Q22, but Passenger earnings contribution should decline going forward.

— The air cargo market is still booming, yet retailers in advanced markets are lowering inventory, port bottlenecks are easing and load factor is falling (more available cargo space following addition of planes). Korean Air’s air cargo load factor fell 1.7pp YoY/0.3pp QoQ in 2Q22. According to the IATA, avg. air cargo load factor at global airlines fell 6.9pp YoY in June. With freight rates still quite high, airlines should find it more lucrative to fill vacancies (even with rate discounts). As such, we anticipate airlines to enter a global price war.

— Passenger should be a strong earnings driver until 3Q22 but appears unlikely to recover to pre-pandemic levels soon. Strong oil prices and a weakened KRW should translate into a larger cost burden for travelers, while potential extensions of the pandemic and economic slowdown (e.g., possible recession) threaten to undermine travel demand. According to Kyunghyang Shinmun (Aug 2), no. of air passengers at Incheon International Airport from Jul 22 to Aug 1 fell 24%  below the airport’s forecast. 

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