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Korean airlines’ profits, shares hit air pocket

Aug 15,2019
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A Daimaru Department Store in Fukuoka, Japan on Monday has a sign in Korean saying it accepts Kakao Pay. But diplomatic tensions have reduced the number of Korean tourists visiting the store, which used to be one of their most popular destinations. [YONHAP]
Korean airlines are suffering in both earnings and share prices due to trade wars between the United States and China and between Korea and Japan.

A weakening Korean won against the U.S. dollar is only adding to the airlines’ woes.

On Wednesday, Korean Air reported a 380.8 billion won ($313.8 million) net loss for the second quarter, up 38.22 percent from the 275.5 billion won net loss a year earlier. It posted 101.5 billion won in operating losses, turning red from its 82.4 billion won operating profit the previous year.

Revenue increased by 0.2 percent to 3.02 trillion won from 3.01 trillion won a year earlier.

Korean Air said sales grew largely thanks to a joint venture arrangement over trans-Pacific routes with Delta Air Lines of the United States. The losses widened due to unfavorable exchange rates as well as increases in labor costs affected by minimum wage increases.

The airline said the U.S.-China trade war negatively affected its cargo business. Overall cargo volume and revenue from the business shrank, though it did not reveal by how much on Wednesday.

“[Korean Air’s] passenger business should have been okay, but sluggish cargo business and labor costs would have offset the profits,” said Kim Yu-hyuk, a research fellow at Hanwha Investment & Securities. “As air cargo demand is largely affected by the global economy ... it will take some time for the business to recover, considering it doesn’t seem the trade disputes will be resolved soon.”

The country’s second-largest full-service carrier, Asiana Airlines, also blamed losses on the weak Korean won and sluggish cargo business. According to its April to June quarterly earnings report Wednesday, the company’s net loss widened 332.5 percent to 202.4 billion won from 46.8 billion won in the previous year.

According to data from the Ministry of Land, Infrastructure and Transport, air cargo volume decreased 3.7 percent year-on-year to 2.09 million ton in the first half of this year.

The second quarter was difficult for budget airlines as well. An oversupply of seats and the weak won were the main reasons for the low-cost carrier’s (LCCs) sluggish earnings.

Korea’s largest budget airline, Jeju Air, posted a 29.8 billion won net loss in the second quarter compared to a 16.5 billion won net profit a year earlier.

Korean Air’s low-cost subsidiary Jin Air also went into the red, posting a 24.4 billion won net loss in the second quarter, from 1 billion won in net profit a year earlier.

The weak won strained LCCs because most of their planes are leased in dollars. The Korean won’s value has dropped nearly 10 percent since the beginning of the year.

The airlines’ second quarter woes aren’t ending soon.

Declining demand for flights to Japan due to a boycott of Japanese things has led all of the country’s eight airlines - two full-service carriers and six LCCs - to announce plans to either suspend or reduce flights to Japan as of Tuesday. With most of the changes taking effect from later this month or from September, the impact on the airlines’ performances will be reflected in the July to September quarterly earnings. The third quarter may be even worse than the second for some airlines, although summer is usually a peak season.

Budget airlines, which are more dependent on earnings from Japanese routes, are expected to be particularly more affected by the boycott.

Flights to Japan have accounted for roughly 30 percent of local budget airlines’ earnings, with Air Seoul being most dependent.

“We are expecting fiercer competition among airlines,” a spokesperson from Jin Air said. “If low demand for Japanese travel continues in the long term, we will consider increasing flights to other destinations and place larger planes on routes popular for family travel and leisure.”

Asiana Airlines said it will increase flights on long-haul routes to Hawaii and New York in the second half of the year to beef up its profitability. It is considering increasing services to Southeast Asia too.

Local airlines’ falling share prices indicate investors’ concerns.

Compared to July 4, when Japan implemented a curb on exports to Korea of important industrial materials, the share price of Korea’s largest air carrier Korean Air dropped 20.48 percent from 28,800 won to 22,900 won on Wednesday.

The price of the country’s largest budget airline, Jeju Air, plummeted by 21.73 percent from 29,900 won per share on July 4 to 23,400 won Wednesday.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]