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Yields remain firm despite concerns

3Q24 review: Cargo-led earnings surprise

For 3Q24, Korean Air announced standalone revenue of W4.24tr (+9.8% YoY). While passenger revenue rose only 2.3% YoY, cargo revenue jumped 22% YoY, with cargo yield rising 19% YoY despite a slight slowdown in market conditions. Other revenue (including aerospace revenue) picked up 29% YoY, contributing to overall growth.

Standalone operating profit was W618.6bn (+19% YoY), exceeding our consolidated operating profit estimate (W604.5bn). A higher cargo yield coupled with lower fuel costs (-9% YoY) helped offset increased labor costs and airport handling fees. International passenger yield (+4.8% YoY) also contributed to improved profitability. On the non-operating side, interest expenses (W53.5bn) from increased debt and one-off losses from derivatives (W168.2bn) led to a 35% YoY decline in net profit.

Dominant position enhances negotiating power, allowing for greater flexibility

Korean Air transferred four A330s to T’way Air (one in 2Q24 and three in 3Q24), as it surrendered four European routes to the budget airline. It is also reducing its fleet of A380s (which are less efficient). Nevertheless, the total fleet remains at 136 aircraft, as the company has added three B787s and three A321neos this year. We expect it to introduce an additional six or seven mid/large-sized aircraft in 4Q24.

Even with the Boeing strike now over, global aircraft supply chain bottlenecks will likely continue for some time. Despite this, Korean Air continues to add new aircraft, which is a testament to its negotiating power as a major carrier. We believe this competitive advantage will allow the airline to respond flexibly to the expected increase in demand resulting from China’s expansion of its visa-free policy to Korea.

Maintain Buy and raise TP to W33,000

We lift our target price on Korean Air to W33,000 (from W30,000), as we lifted our 2025 net profit forecast by 9.6% and changed our valuation base year (target P/B of 1.0x unchanged). Passenger and cargo yields remain high, and the Asiana Airlines merger (once finalized) is likely to trigger a share price re-rating around the end of the year. The stock is trading at a P/B of 0.86x, close to the stock’s five-year average low.