Fresh Blow for Airlines from Terrorism Fears

      November 18, 2015 13:05

      Korean airlines had barely recovered from the blow dealt by the outbreak of Middle East Respiratory Syndrome than calamity struck again in the form of Friday's terror attacks in Paris.

      Industry watchers fear the terror threat may last longer and have a bigger impact than the MERS outbreak earlier this year. A look at third-quarter earnings at domestic carriers shows they hardly benefited from low international oil prices.

      ◆ External Shocks

      Korean Air, Asiana Airlines and Jeju Air all reported dwindling earnings in the third quarter. Korean Air's losses mounted by around W100 billion while Asiana shifted into the red, ceding second place in market cap to plucky newcomer Jeju Air (US$1=W1,173).

      The poor earnings were surprising given that carriers made little effort to translate low oil prices into cheaper tickets.

      At Korean Air, oil costs accounted for 36 percent of total expenditures in the third quarter of 2014, when global crude prices soared, but this year that fell to 28 percent.

      At Asiana, the proportion of fuel costs compared to total spending fell from 34 to 25 percent. That means Korean Air saved W300 billion in oil costs in the third quarter compared to last year, and Asiana W130 billion.

      But the dollar exchange rate got in the way of improved earnings. The exchange rate stood at W1,099 per US$1 late last year, but fell almost 10 percent to W1,195 in late September.

      The MERS outbreak directly hit the airline industry as people stopped coming to Korea. Due to a 15-percent drop in inbound visitors, Korean Air's total passenger volume dropped three percent compared to last year.

      Asiana's passenger revenues also dropped 10 percent. "We suffered a bigger blow because passengers from China, Japan and Southeast Asia account for 52 percent of our total flights," an Asiana spokesman said.

      The increase in the number of international flights offered by budget carriers also ate into Korean Air and Asiana's earnings.

      Making matters worse, the economic slump led to reduced cargo traffic. "Korean Air's cargo traffic fell around four percent compared to last year," said Ryu Je-hyun, an analyst at KDB Daewoo Securities. "It's unlikely things will improve in the fourth quarter, which is the industry's peak season."

      ◆ Recovery Next Year

      The terror attacks in Paris last week are seen as a negative factor for the global airline industry. "Terror attacks are not limited to a particular region, so fears could spread and have a bigger impact. This factor could have a bigger impact in the fourth quarter of this year," said Daeshin Securities analyst Lee Ji-yoon.

      But the number of travelers is expected to surpass 30 million next year, which is encouraging, according to market watchers.

      "During the SARS epidemic in 2003, passenger traffic dropped around 11 percent, but then it surged 22 percent the following year. We could see a quick recovery this time as well," said Lee Hoon at Hanyang University.

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