Sharp turnaround in second quarter operating profits underlines recovery, but Korean carriers suffer on exchange rates

Korean airlines remain optimistic about the prospects for the rest of 2010 despite net profits suffering because of currency swings against the US dollar.

The country's leading carrier, Korean Air, posted an operating profit of $299 million on revenues of $2.41 billion in the quarter to 30 June, reversing the operating loss of $108 million it reported a year before. However, foreign exchange losses as the Korean won appreciated against the dollar drove up non-operating expenses, resulting in the SkyTeam carrier posting a net loss of $198 million versus a net profit of profit of $67 million a year before.

"International passenger and cargo businesses remained the major revenue contributors for the airline, accounting for 47% and 36% of the operating revenue respectively," says the carrier.

It remains "optimistic" about the rest of the year, and expects passenger revenues to increase further in the third quarter as outbound traffic recovers and new routes launch. But it cautions that cargo traffic growth might slow down and will resume only in the fourth quarter "due to seasonality factors".


Despite the net loss, analysts believe the airline is likely to recover in the second half as the country's economy grows and demand for both passenger and cargo traffic rebounds from last year's levels. Planned increases in capacity during the second half of the year and the increasing importance of Seoul's Incheon Airport as a regional hub are also likely to boost the carrier, they add.

"Macroeconomic forecasts, including the GDP growth rate and the exchange rate closely related to travellers' sentiment, are favourable to the tourism industry through 2011," says SK Securities analyst Lee Heui-jung,. "A possible slowdown in the cargo business is likely to be offset by a rising demand in the passenger business through 2011."

Others highlight that the airline's core business remains strong, which should help as the won eases up this quarter and the next. "Earnings came out strongly last quarter as demand for both outbound trips and cargo traffic was very high," says Kim Seung-Churl, an analyst at Seoul's Meritz Securities. "The company's bottom line may improve in the third quarter as the won will likely be stronger against the dollar."

Similarly, Korean's rival Asiana saw its net profits fall due to exchange rates. The Star Alliance carrier posted a net profit of $12 million, down sharply from the $40 million of a year ago. This quarter was hit by a 743 billion won ($64 million) loss on foreign currency, while the same quarter last year included a one-off gain from the sale of its IT unit. At an operating level, its $151 million profit on revenues of $1.05 billion improved on an operating loss of $110 million a year before.

Almost every major Asian carrier reported profits during the quarter, buoyed by a region that has recovered faster than the rest of the world from the debilitating economic crisis of 2008-09.

One notable exception is Malaysia Airlines, which reported a second quarter net loss of $166 million and an operating loss of $89 million. The carrier attributed this to higher fuel prices and consumption, saying that the figures included a mark-to-market loss of 217 million ringgit ($70 million) from fuel hedging.

"While we are doing the right things and this is reflected in the improved operational performance for the second quarter, which is traditionally our weakest quarter, we have instituted additional measures to recover more of the fuel cost increase. The volatility of the fuel price remains a key challenge for the industry," says chief executive and managing director Azmil Zahruddin.

It, however, remains buoyant about the rest of the year, saying the "action is in our back yard" as Asia Pacific continues to register strong growth. "We are recording higher than pre-economic crisis seat factors. As the positive trend is holding up for the rest of the year, we will continue to focus on increasing yield, as well as gaining premium customers. We have put in place an aggressive sales programme to increase corporate sales," Azmil says.

Source: Airline Business