Airline Weekly - May 9, 2011

Cover Story

Seoul Position: Asiana moves from laggard to leader. What’s working, and can it continue?

Through the ups and downs of the past half decade, Korea’s Asiana never lost its reputation for top-notch customer service. But its finances were never as comfortable for investors as its seats were for travelers. Asiana’s average operating margin from 2006 to 2009 was a miniscule 1%, compared to 4% for its larger rival Korean Air. On a net level, it lost nearly $200m ex special items in 2009 alone.

Last year, however, was a different story—one with a much happier ending for Asiana. Not only did its operating margin soar to 13%, shattering even its own internal goal of 7%. But just as satisfyingly, this figure topped Korean Air’s 10%. Both experienced strong recoveries, but Asiana’s was stronger.

Asiana beat its rival in the fourth quarter alone too: 8% to 7%. And it outgrew Korean Air in the revenue category 18% y/y to 12%—on ASK capacity growth of 6% compared to Korean Air’s 1%. More importantly, these sky-high figures put both airlines near the top of the world rankings for operating margin for both Q4 and all of 2010.

What’s suddenly going so right?

Two years ago, remember, demand in Northeast Asia was devastated by not just the worldwide recession but also the H1N1 virus. China’s voracious comeback changed things dramatically in 2010, as did steep capacity cuts by Japan Airlines and constrained supply trends in general. For Asiana, like Korean Air, a rebound in cargo helped enormously, with freight revenues accounting for 28% of the company’s total last quarter, one of the highest percentages in the world among airlines whose primary business is passenger carriage. Almost half of Asiana’s cargo revenues, incidentally, come from U.S. routes, with IT products accounting for a large share of the volume.

U.S. routes, of course, are at least as important to Asiana’s passenger revenues, representing nearly a fifth of its total. That’s partly because of the special relationship South Korea has with the U.S.—the American military has a large presence on the Korean peninsula, and more foreign students in the U.S. are from Korea than from any other country. In addition, the U.S. added South Korea to its visa waiver program in late 2008, triggering a boom in tourism. A U.S.-Korea free trade agreement... (390 of 1,558 words)

Also Inside this Issue:

How will the death of the world’s most notorious mass murderer impact the airline industry?

Probably not much. The Airlines Reporting Corporation actually reported a small negative impact: an uptick in ticket refunds in the days after Osama bin Laden’s death. And nobody believes that international terrorism is a thing of the past. To paraphrase the old Billy Joel song: the world’s been burning since the world’s been turning.

But here’s better news as far as airline finances are concerned: oil prices plummeted late in the week, falling below $100 a barrel.

Not that some airlines even need the boost. Korean Air did rather well in the first quarter. WestJet did even better. And Copa? It just flat-out embarrassed everyone else with its ridiculously high margins.

But what about the big boys of Europe? As it happens, Lufthansa and BA/Iberia both had decent first quarters, all things considered. Operating margins were modestly negative, but results improved y/y despite higher taxes and higher fuel prices. Fortunately, longhaul premium revenues were higher too.

Elsewhere, Air Canada unveiled some details about its LCC plans, Virgin Blue unveiled its new name (Virgin Australia) and Qatar Airways unveiled more new routes. The secretive Gulf carrier is also said to be readying some big plane orders for the Paris Airshow.

While Qatar Airways keeps its finances secret, rival Emirates does not. It will unveil its independently audited fiscal year earnings this week.

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