Industry Research 4 Apr 28 Air Transportation OVERWEIGHT (Maintain) Joshua Yang (82-2-769-2738) arbor@daishin.co.kr Growth in IIA s transportation indicators slows down in Mar Maintain OVERWEIGHT, TP adjusted downward Though we maintain our OVERWEIGHT rating for the airline industry, we are downwardly adjusting our TP s both for Korean Air and Asiana Airlines by 26% and 16.7% to W68, and W1,, respectively. This adjustment comes as we also downwardly revised the two airlines 1Q8, and 28 transport growth rates to factor in the slowdown in Incheon International Airport s (IIA) transportation indicators. Due to the revised RPK s and RTK s for international flights, we also made a downward adjustment in the two companies earnings forecasts. Outperformance (%) Sector index (%) 7 KOSPI KOSPI( (RHS) ) 2,5 6 2, 5 4 1,5 3 2 1, 1 5-1.1 1.9 3.5 5.1 6.9 IIA s 1Q8 transportation growth slows down On Apr 3, IIA announced its transportation performance for Mar to finish up the performance figures for 1Q8. Overall, 1Q8 s transportation performance showed a sharp decline in growth for both passengers and freight. Korean Air s 1Q8 IIA transportation indicators show that its flights increased by 3.5% yoy, while its international passengers and freight volume increased by 3.2% and 5.2% yoy, respectively. Meanwhile, Asiana Airlines reported a 9.1% yoy increase in flights, a 4.1% yoy increase in international passengers and a 16.5% yoy increase in its freight volume. The growth rate for international passengers fell short of our expectations for both of these airlines. Mar IIA transportation performance deteriorates significantly IIA s Mar transportation indicators fell far short of expectations. The overall growth of international passengers and the daily average passenger growth both recorded negative figures for the first time in 28 months. Likewise, the growth rates in international passengers for these two airlines also came in negative. We believe these indicators deteriorated due to the following: 1. Rising exchange rates, the economic slowdown, and higher airfares stemming from increased fuel surcharges. 2. A high comparison base (i.e. the growth rate was high in 1H7) 3. Reduced demand before the Apr general elections. Forecasts and valuations Sales OP Pre-tax profit NP EPS Chg. P/E P/B EV/EBITDA ROE Net D/E (Wbn) (Wbn) (Wbn) (Wbn) (W) (%) (x) (x) (x) (%) (%) 26A 11,529 624 629 514 2,67-137.2 7.3.7 7.6 9.9 149. 27A 12,462 88 27 117 471-77.2 6.4 1.3 9.2 2.1 171.6 28F 14,112 79 1 71 287-39.1 74.9 1. 8.9 1.3 192.2 29F 14,973 1,35 594 431 1,733 54.7 12.4.9 8.2 7.5 193.8 21F 15,86 1,349 847 614 2,472 42.6 8.7.8 7.4 9.8 187.5 Source: operating performance based on KAL, Asiana Airlines data
1. Maintain OVERWEIGHT, downwardly adjust TP Downward adjustment to est. passenger and freight transportation growth Though we maintain our OVERWEIGHT rating for the air transportation industry, we are downwardly adjusting our TP s for both Korean Air Lines (KAL s) and Asiana Airlines by 26.% and 16.6% to W68, and W1,, respectively. This adjustment comes as we also downwardly revised the two airlines 1Q8F, and 28F transportation growth rates to factor in the 1Q8 slowdown in Incheon International Airport s (IIA) transportation indicators. In our view, passenger and freight growth is declining due to the global economic slowdown, the rising wondollar exchange rate and higher air fares stemming from increased fuel surcharges. As such, we have made a downward revision to both companies forecasted 28 transportation growth. We adjusted Korean Air s international RPK growth rate downward from 6% to 2.8%, and its RTK growth rate from 7% to 4.8%. Meanwhile, we also downwardly adjusted Asiana Airlines international RPK growth rate from 9.4% to 4.8%, and its RTK growth rate from 6.% to 3.7%. However, as the yield is rising on the back of additional fuel surcharges, we made an upward adjustment to the yield growth rates. KAL s revised earnings forecast (Wmn, %) Previous Revised Change (%) 1Q8F 28F 1Q8F 28F 1Q8F 28F Operating revenue 2,315,9 1,22,57 2,275,647 9,875,36-1.7-1.5 Operating expense 1,92,812 7,853,841 1,899,84 7,828,362 -.2 -.3 SG&A 337,276 1,462,56 337,276 1,462,56.. OP 74,922 76,16 39,287 584,943-47.6-5.5 1. Airline business (1) Domestic passengers 134,814 588,56 13,687 579,13-3.1-1.5 (2) International passengers 1,237,567 5,283,364 1,28,245 5,181,37-2.4-1.9 Total passengers 1,372,282 5,871,419 1,338,932 5,76,474-2.4-1.9 (3) Freight 67,932 2,946,921 669,446 2,926,843 -.2 -.7 (4) Others 181,648 826,741 177,221 811,68-2.4-1.9 Total air transportation business 2,224,962 9,645,82 2,185,219 9,498,385-1.8-1.5 2. Aerospace business 67,693 277,629 67,693 277,629.. 3. Air catering business 14,496 64,217 14,496 64,217.. 4. Special business 7,859 35,13 7,859 35,13.. Total 2,315,9 1,22,57 2,275,647 9,875,36-1.7-1.5 Source: KAL, Daishin Securities Research Center
KAL s revised assumptions used in the earnings forecast (Wmn, %) Previous Revised Change (%) 1Q8F 28F 1Q8F 28F 1Q8F 28F Operating revenue 2,315,9 1,22,57 2,275,647 9,875,36-1.7-1.5 Operating expenses 1,92,812 7,853,841 1,899,84 7,828,362 -.2 -.3 OP 74,922 76,16 39,287 584,943-47.6-5.5 NP -217,35 82,85-226,931-13,997 4.4-116.9 Assumptions for the operating revenue forecast Domestic RPK growth rate -2. -2. -5. -5. -3%p -3%p International RPK growth rate 6. 6. 2.7 2.8-3.3%p -3.2%p Freight RTK growth rate 7. 7. 5. 4.8-2%p -2.2%p Domestic yield growth rate 2.7 4.1 2.7 4.1.. International yield growth rate 7.1 7.6 7.9 8.5 11.3 11.8 Freight yield growth rate 1.1 8.9 12. 1.5 18.8 18. Jet fuel prices 11 11 11 11 Won-dollar exchange rate 965. 966.8 965. 968.8 Source: KAL, Daishin Securities Research Center Asiana Airlines revised earnings forecast (Wmn, %) Previous Revised Change (%) 1Q8F 28F 1Q8F 28F 1Q8F 28F Operating revenue 1,3,343 4,28,82 985,193 4,236,879-1.81-1.1 Operating expenses 818,244 3,412,46 89,766 3,386,689-1.4 -.74 OP 29,243 218,122 21,185 25,16-27.55-5.97 NP -19,299 93,752-24,913 85,218 29.9-9.1 Domestic passengers 61,872 285,545 59,398 274,124-4. -4. International passengers 532,255 2,234,61 513,556 2,185,2-3.51-2.21 Total passengers 645,817 2,739,49 622,8 2,673,285-3.56-2.41 Freight 247,738 1,74,973 256,517 1,19,135 3.54 3.18 Others 19,789 465,7 15,876 454,458-3.56-2.41 Domestic passenger RPK 392 1,732 376 1,663-4.1-3.97 International passenger RPK 5,848 23,784 5,558 22,78-4.96-4.22 Freight RTK 886 3,71 9 3,792 1.61 2.2 Jet fuel prices 11 11 11 11 Won-dollar exchange rate 965. 966.8 965. 968.8 Source: Asiana Airlines, Daishin Securities Research Center
2. IIA s 1Q8 transportation performance KAL s total flights decrease In 1Q8, KAL s IIA flights maintained an increase of less than 5%, while Asiana Airlines maintained growth at nearly 1%. During the period, KAL s total international flights climbed 3.5% yoy to 17,61, while Asiana s surged 9.1% yoy to 12,57. According to IIA s transportation performance from Jan~Mar, KAL s total international passengers increased by 3.2% yoy to 2.99mn. We believe that this increase stems from a high comparison base (ie. the high growth rate of 15.% in 1Q7), and negative growth in March s international passenger demand before the Apr general election. Meanwhile, KAL s 1Q8 airfreight totaled 37.7K tons, an increase of 5.2% compared to the same period last year. Airfreight growth is outpacing passenger growth, which we believe is attributed to the robust exports of telecom equipment including handsets. For 1Q8, Asiana Airlines international passengers totaled 2,7, people, up 4.1% yoy. Its slowed international passenger growth was driven in part by the high comparison base of the previous year (strong international passenger growth of 16% for 1Q7) and in part by slower demand stemming from the upcoming general election, the slowed global economy and the rising won-dollar exchange rate. By contrast the carrier s total airfreight soared sharply by 16.5% yoy to reach 135.6K tons. Quarterly performance by carrier
KAL s quarterly international passengers KAL s international airfreight Int. l passengers Chg. (%,yoy) Int. l cargo shipments Chg. (%, yoy) people % Tons 3,5 3, 2,5 2, 1,5 1, 5 1Q5 3Q 1Q6 3Q 1Q7 3Q 1Q8 16 14 12 1 8 6 4 2 Asiana Airlines quarterly international passengers Asiana Airlines international airfreight Int. l passengers Chg. (%, yoy) Int. l cargo shipments Chg. (%, yoy) people ton
3. IIA releases sharply slowed Mar transportation indicators Average daily passenger growth: negative for the first time in 28 months IIA unveiled its Mar transportation data revealing that the total number of international flights climbed only 2.9% yoy to 17,521, which is a rather dramatic slowdown in growth. This is due to the fact that as airlines post higher fuel costs on surging oil prices, they are slashing their lower margin routes. Slowed flight growth combined with negative growth rates for both international passengers and the average daily passengers brought results far short of our expectations. March s international passengers totaled 2,47, people (down.7% yoy), whereas the average daily passengers were estimated at 79,671 people (down.7% yoy). The growth in both airfreight and passengers slowed sharply as the total amount of airfreight as well as the daily average airfreight both showed growth of only 1.8% yoy, which are the lowest gains since Oct 25. The slump in airfreight was mostly the result of reduced amounts of incoming and trans-shipment cargo. After recording sluggish results in Feb, the growth of this cargo was -3.6% yoy for the former and.2% yoy for the latter, respectively. In our view this stemmed from the won s depreciation. IIA s passenger and cargo shipment data ( people, tons) 3,5 Total passengers Chg. (yoy, RHS) Total airfreight Chg. (yoy, RHS) % 25 3, 2 2,5 15 2, 1 1,5 1, 5 5 6.1 6.7 7.1 7.7 8.1-5
KAL s international passenger volume decreases yoy KAL s total flights rose by 2.2% yoy to 2,967 for the month of Mar. Meanwhile, its international passenger volume shrank by.2% yoy to 927, people, falling for the first time since Dec 25. In addition, the airline s airfreight volume rose by only 2.3% yoy due to the decrease in incoming freight. In Mar, Asiana Airlines total flights climbed 9.1% yoy to 4,278, continuing solid growth. However, the airlines international passenger volume contracted.5% yoy to 65, people. In other words, just as for KAL, Asiana s passenger business suffered sluggish operating results. On the other hand, its airfreight volume increased 14.7% yoy to 49K tons. Though this is a notable increase in growth, it is attributable to the fact that Asiana s airfreight volume decreased in both Mar and Apr 27, thus providing a low comparison base. KAL s monthly passenger volume KAL s monthly airfreight volume ( people) KAL passengers (LHS) Chg. (RHS) ( people) KAL Airfreight (LHS) Chg. (RHS) Asiana s monthly passenger transport volume Asiana s monthly Airfreight transport volume ( people) Asiana passengers (LHS) Chg. (RHS) ( pp.) Asiana Airfreight (LHS) Chg. (RHS)
Transport statistics by month and route Total flights and changes for the Japanese route Total flights and changes for the Chinese route (Flights) # of flights Chg. (yoy; RHS) (Flights) # of flights Chg. (yoy; RHS) Total flights and changes for SE Asian route Total flights and changes for the American route (Flights) # of flights Chg. (yoy; RHS) (Flights) # of flights (US only) Chg. (yoy; RHS) Total flights and changes for the European route Total flights and changes for the Oceania route (Flights) # of flights Chg. (yoy; RHS) # of flights (Australia and (Flights) New Zealand only) Chg. (yoy; RHS)
Passenger volume and changes for the Japanese route Airfreight volume and changes for the Japanese route ( people) Passengers ( tons) Airfreight Passenger volume and changes for the Chinese route Airfreight volume and changes for the Chinese route ( people) Passengers ( tons) Airfreight Passenger volume and changes for the SE Asian route Airfreight volume and changes for the SE Asian route ( people) Passengers ( tons) Airfreight
Passenger volume and changes for the American route ( people) Airfreight volume and changes for the American route Passengers ( tons) Airfreight Passenger volume and changes for the European route Airfreight volume and changes for the European route ( people) Passengers ( tons) Airfreight Passenger volume and changes for the Oceania route Airfreight volume and changes for the Oceania route ( people) Passengers ( tons) Airfreight
Income Statement Balance Sheet (Wbn) 26A 27A 28F 29F 21F (Wbn) 26A 27A 28F 29F 21F Sales 11,529 12,462 14,112 14,973 15,86 Current Assets 2,83 2,638 2,377 2,652 2,695 (Growth,YoY) 8.2 8.1 13.2 6.1 5.9 Cash Equivalent 516 813 376 559 57 Cost of Sales 9,81 9,718 11,215 11,724 12,193 Short-term Financial Instruments 17 18 2 21 23 (Growth,YoY) 8.3 7. 15.4 4.5 4. Account Receivables 852 959 1,86 1,152 1,22 (% of Sales ) 78.8 78. 79.5 78.3 76.9 Inventories 295 363 41 435 461 Gross Profit 2,448 2,745 2,897 3,249 3,668 Non-Current Assets 15,339 16,642 17,81 19,21 2,263 (% of Sales ) 21.2 22. 2.5 21.7 23.1 Investment Assets 1,28 2,182 3,177 4,171 5,166 SG&A 1,824 1,936 2,17 2,214 2,318 Tangible Assets 13,332 13,651 13,86 14,19 14,388 (Growth,YoY) 2.8 6.2 8.8 5.1 4.7 Intangible Assets 24 238 238 238 238 (% of Sales ) 15.8 15.5 14.9 14.8 14.6 Other Non-Current Assets 522 57 535 52 471 Operating Profit 624 88 79 1,35 1,349 Total Assets 17,422 19,28 2,187 21,672 22,958 (Growth,YoY) 27.4 29.5-2.3 31. 3.4 Current Liabilities 4,35 4,857 3,897 3,746 3,375 (% of Sales ) 5.4 6.5 5.6 6.9 8.5 Account Payable 33 288 326 346 367 EBITDA 1,555 1,796 1,799 2,54 2,389 St. Debt 547 54 641 74 589 (Growth,YoY) 11.8 15.5.2 14.2 16.3 Current Portion of Lt. Debt 1,773 2,389 1,29 1,21 78 (% of Sales ) 13.5 14.4 12.7 13.7 15.1 Non-Current Liabilities 7,995 8,91 1,72 11,949 13,19 Gain/Loss Non-Operating 4-62 -69-441 -52 Bonds 1,969 2,29 3,239 3,439 3,789 Interest Expense -468-54 -55-65 -649 Lt. Debt 1,478 2,264 2,644 3,373 3,793 Net Gain / Loss on Equity Method 89 14 18 19 112 Total Liabilities 12,3 13,767 14,617 15,696 16,394 FX Translation/Transaction 52-25 -226 84 66 (Debt Ratio 69.1 71.4 72.4 72.4 71.4 Others -119-177 -22-29 -31 Paid-in-Capital 1,239 1,243 1,243 1,243 1,243 Pre-tax Profit from Continuing Operations 629 27 1 594 847 Capital Surplus 3,7 3,7 3,7 3,7 3,7 Income Taxes 115 9 29 163 233 Capital Adjsutment -6-65 -65-65 -65 Tax Rates 18.3 43.4 28.6 27.5 27.5 Accumulated Other Comprehensive Income -2 42 42 42 42 Income from Discontinued Operation Retained Earnings 1,27 1,287 1,345 1,751 2,338 Net Profit 514 117 71 431 614 Total Shareholder's Equity 5,392 5,513 5,57 5,977 6,563 (Growth,YoY) 121.7-77.2-39.1 54.7 42.6 Total Debt 8,569 1,29 11,12 12,161 12,839 (% of Sales ) 4.5.9.5 2.9 3.9 Net Debt 8,36 9,459 1,76 11,58 12,31 EPS 2,67 471 287 1,733 2,472 Net Debt / Equity 332.1 353.3 372.6 358.8 334.4 Per Share Data & Multiples Cash Flow (W, x) 26A 27A 28F 29F 21F (Wbn) 26A 27A 28F 29F 21F EPS 2,67 471 287 1,733 2,472 Operating Cash Flow 1,374 1,43 1,282 1,41 1,626 PER 7.3 6.4 74.9 12.4 8.7 Net Income 514 117 71 431 614 BPS 2,875 21,225 21,456 23,91 25,452 Additions to Net Profit 79 1,116 1,346 1,5 1,86 PBR.7 1.3 1..9.8 Depreciation 931 987 1,9 1,19 1,39 EBITDAPS 6,258 7,225 7,238 8,264 9,612 FX Translation/Transaction -44 79 226-84 -66 EV/EBITDA 7.6 9.2 8.9 8.2 7.4 Net Gain / Loss on Equity Method -89-14 -18-19 -112 SPS 46,392 5,146 56,785 6,249 63,819 Others 388 154 218 224 225 PSR.3.6.4.4.3 Incr. in Cash (Decr) 71-19 -135-71 -74 CFPS 5,813 4,443 4,345 5,834 6,654 Investing Cash Flow -1,256-1,853-2,7-1,972-2,33 DPS 147 245 56 97 111 Investment Securities -211-847 -889-886 -883 Tangible Assets -1,35-1,396-1,2-1,25-1,3 Financial Ratios Others 26 39 19 165 151 (%, x) 26A 27A 28F 29F 21F Financing Cash Flow -237 1,17 351 745 354 >>Growth Ratios St. Debt 188-11 11 99-151 Sales Growth 8.2 8.1 13.2 6.1 5.9 Bonds/Lt. Debt 1,624 2,285 1,41 929 77 OP Growth 27.4 29.5-2.3 31. 3.4 Right Issue NP Growth 121.7-77.2-39.1 54.7 42.6 Cash Dividend -24-33 -61-14 -24 >>Profitability Ratios Others -2,25-1,135-1,99-269 -241 ROIC 3.8 1.7 4.4 5.3 6.7 Incr. in Cash (Decr) -119 297-437 183-52 ROE 9.9 2.1 1.3 7.5 9.8 Cash at the Beginning 635 516 813 376 559 >>Stability Ratios Cash at the End 516 813 376 559 57 Debt Ratio 223.1 249.7 262.4 262.6 249.8 Unleveraged CFO 1,755 1,188 1,78 1,849 2,97 Net Debt / Equity 149. 171.6 192.2 193.8 187.5 NOPAT 58 233 69 75 978 Interest coverage ratio 1.2 1.5 1.4 1.6 2. Free Cash Flow 34-17 283 449 644 Source: Korea Line, Daishin Securities Research Center
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