Airline Weekly - January 11, 2016
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Airline Weekly - January 11, 2016

A Gathering Storm: Korean Air is posting decent profits right now. But market conditions are worsening

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A Gathering Storm: Korean Air is posting decent profits right now. But market conditions are worsening

At first glance, things seem to be going rather well. In the peak third quarter, Korean Air’s operating margin reached nearly 10%, its best showing since 2010. The country’s air traffic is growing at a double-digit pace. The MERS virus scare seems to have faded. And oil prices keep falling and falling.

But Korean Air isn’t smiling. Instead, it’s nervously contemplating a daunting array of adverse trends, trends already forcing its main rival Asiana to downsize. Korean Air indeed did well at the operating level in Q3, thanks to lower costs underpinned by cheaper fuel. But huge foreign currency-related losses forced it to report a total net loss for the quarter of $421m. More germane to the business itself was a 6% y/y decline in revenues, aggravated by fuel surcharges that government law says must fall. With growth opportunities scarce, the airline felt compelled to shrink both its passenger and cargo capacity.

At the start of this decade, cargo contributed more than 30% of Korean Air’s revenues, one of the highest percentages of any passenger-focused airline worldwide. Well that was down to 21% last quarter, reflecting a multi-year slump in global trade and structural overcapacity that doesn’t appear likely to dissipate any time soon, not with the large cargo capacity of the latest widebody passenger aircraft. More encouragingly, Korean Air’s aerospace division is growing both revenues and profit margins, offering maintenance and repair work for other airlines and serving as a major supplier to manufacturers like Boeing and Airbus. But it only generates about 8% of revenues for the group, leaving international passenger transport increasingly vital to Korean Air’s success.

Alas, Korean Air’s international routes are deeply threatened by developments in China. During the 2000s, Korea’s airlines were perfectly positioned to take advantage of China’s miraculous economic boom. Not only was Seoul’s Incheon Airport in the right place geographically to serve as a gateway for demand into and out of China. Chinese airlines, just as significantly... (346 of 1,386 words)

Also Inside this Issue:

There’s no hotter topic in the U.S. market than ultra-LCCs, and the largest of the breed now has a new chief executive. Bob Fornaro, the former head of AirTran, will lead Spirit at a time when its profits are exceedingly high but its stock price uncomfortably low.

Spirit’s rival Frontier, for its part, unleashed a torrent of new routes scheduled to start this spring, many operating just a few days per week. Like Spirit, Frontier has lots of new large narrowbodies on order and isn’t afraid to challenge established carriers on their busiest business routes from their fortress hubs.

Chinese airlines, thus far protected from economic turmoil at home thanks to cheaper fuel and sustained demand, show no signs of abandoning their international ambitions. China Southern last week expressed its desire to serve Toronto from Guangzhou, while several of its rivals announced new routes to Japan. Air China, meanwhile, is buying more B777-300ERs. The important export and investment pieces of the Chinese economy are no longer the engine they once were, but the consumer economy appears resilient for now.

In an otherwise quiet week across the industry, Ryanair said it topped the 100m mark for passengers carried last year, becoming the only airline in Europe to achieve that distinction. It separately announced yet another new base, this one in Belfast.

Measured by net profit margins for the most recent 12 months of data, Ryanair happens to be the world’s most profitable airline. If you prefer operating margin as a better measure, the distinction goes to another ultra-LCC: Allegiant, with Spirit second, followed by Alaska and then Ryanair. No wonder why ultra-LCCs are the talk of the town.

Soon, the talk of the town will be Q4 earnings.

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