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…
This issue is not currently online. To inquire about purchasing a copy, please email firstname.lastname@example.org.