Korean Air: Looking Forward to 2H23 

The author is an analyst of NH Investment & Securities. He can be reached at ys.jung@nhqv.com — Ed.

KAL’s margins deteriorated q-q in 4Q22 on lower freight rates and higher operating costs. Its OP is to be sapped in 1H23 by decreased freight rates, but we anticipate an earnings recovery from 2H23. We see sufficient profit figure improvement factors (acquisition of Asiana, introduction of new aircraft, expansion of the firm’s engine business) as being in play.

Freight rate decrease inevitable over mid/long term, but see sufficient internal factors for improving profitability

We maintain a Buy rating and a TP of W31,000 on Korean Air (KAL), although we upwardly adjust our 2023E OP estimate by 5%. Our TP was calculated by applying 2023E average EV/EBITDA of 5.2x for comparable large global FSCs (excluding Chinese airlines) to KAL’s projected sales for the next three years (from 2023E).

Although cargo and passenger fares are expected to decline throughout the year, the extent of decline in passenger fares from their pre-pandemic levels should be limited thanks to both increased passenger traffic and strong demand for premium seats. We see several catalysts in play that should strengthen KAL’s mid/long-term earnings, including likely market share expansion (via the acquisition of Asiana Airlines), improved fuel efficiency (by introducing new aircraft), and the expansion of the firm’s new business (engines).

4Q22 review: Profitability hit by higher costs and lower freight rates

KAL announced consolidated 4Q22 sales of W3,880.2bn (+33.5% y-y), OP of W516.6bn (-26.6% y-y), and NP of W340.7bn (-16.8% y-y), with its profit figures arriving below consensus. Passenger sales upped on higher traffic volume, while cargo sales decreased due to lower freight rates. Looking at operating expenses, OPM declined on hikes in labor costs, airport usage fees, and passenger costs alongside an increase in passenger traffic. Cost burden was amplified by a rise in labor costs due to the paying out of hefty employee incentives (+W60bn y-y) in light of favorable annual performance in 2022.

On a non-consolidated basis, passenger ASK (carrying capacity) and RPK (carrying volume) upped 141% and 329% y-y, respectively. International fares stood at W131/km, rising 4% y-y but falling 4% q-q. Cargo AFTK (carrying capacity) and FTK (carrying volume) slid by 12% and 21% y-y, respectively. The average freight rate fell to W701 (-10% y-y, -13% q-q). We believe that passenger traffic will expand further in 1Q23, but a decline in cargo rates appears inevitable within the year, and OP will likely continue to narrow through 2Q23. Starting in 2H23, anticipated earnings improvement at the passenger division should make up for the decline in cargo business profitability, leading to an overall rise in quarterly OP growth.