Korean Air Weathered Pandemic Turbulence With Style

Date: Friday, August 26, 2022
Source: Wall Street Journal

Air travel in the U.S. is a mess but in Asia things look rather different. One way to play that difference: Take a look at South Korea’s flag carrier.

Despite an initial sharp hit in the early days of the pandemic, Korean Air 003490 0.57% has prospered over the past two years by further expanding its substantial cargo business—and taking advantage of the damage done to other regional hubs like Tokyo and Hong Kong by longer lasting visitor bans, draconian quarantine requirements, and political instability. This affects cargo as well as passenger volume, as lots of cargo is shipped in the belly of passenger planes, and things like quarantine restrictions can be impediments to the crew of cargo flights as well.

The comparison with Hong Kong in particular, which until earlier this year had one of the world’s longest quarantines for arrivals, is instructive. In April to June 2022 Cathay Pacific, Hong Kong’s flag carrier and the world’s fifth largest cargo carrier in 2019, racked up just 46% of the cargo and mail metric ton-kilometers it moved in the second quarter of 2019 according to data from CEIC. Meanwhile Korean Air, the sixth largest cargo carrier in 2019, notched 42% more ton-kilometers last quarter than in spring 2019. Cargo revenue was up 44% year over year.

And thanks to worldwide shipping snarls, airfreight rates have also been sky-high: Although rates have fallen somewhat since the peak of supply chain tangles last summer, the Baltic Air Freight Index has remained around twice 2019 levels for most of 2022. That has added up to a bonanza for Korean Air: The firm’s operating income leapt nearly fourfold year over year to 735.9 billion won, equivalent to $551 million, in the second quarter, according to preliminary results released in early August.

To be sure, some of the good news on cargo won’t last. Airfreight rates may drop further this winter as global growth slows and competing hubs like Tokyo and Hong Kong further reopen. But some of Korean Air’s gains will probably be sticky—especially since China’s refusal to meaningfully reopen its borders and political changes in Hong Kong seem likely to deal long term damage to Hong Kong’s status as an aviation hub.

Moreover, any headwinds from ebbing cargo growth should be at least partly offset by rebounding passenger traffic. The company’s passenger revenue has begun bouncing back strongly. The recovery in Southeast Asia revenue has been especially impressive, reflecting the impact of loosened restrictions in key tourism markets like Thailand, which finally dropped its mask mandate this summer. Overall passenger revenue was up 307% year over year last quarter, and revenue from Southeast Asian routes was up 554%. And since Korean Air’s passenger revenue in early 2019 before the pandemic was more than three times as large as its cargo revenue, the continued potential for recovery remains immense: passenger-kilometers notched are still 70% below second-quarter 2019 levels.

All in all, Korean Air looks like a reasonable bet on Asia’s continued reopening. That’s particularly true since, having paid down debt over the past two years, it now looks cheap on the basis of enterprise value to expected earnings before interest, taxes, depreciation and amortization, according to FactSet—a ratio of 5.4 currently against over six for most of the past decade.

The food is good too—as long as you don’t mind hot sauce.

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