Korean airline yields deteriorating in key markets of China and Japan; capacity discipline needed

For the first time since 2009, Korea's main carriers - Asiana and Korean Air - are both in the red for the first half of the year. While Korean Air's non-consolidated operating profit has improved from 1Q2013, Asiana's has deteriorated. As of 2Q2013 Korean Air is at a -1.5% operating margin while Asiana is at -3.2%. The difference is largely due to failure to practice capacity discipline: Asiana grew international ASKs by 7.2% while Korean Air grew its international ASKs only 0.9%. Two of Asiana's markets saw 16% growth, including China, whose current demand weakness is well known. Another weak market is Europe, where Korean Air cut capacity by 6% while Asiana grew by 6%.

Such brash moves from Asiana are perhaps only justified by taking a long-term view that capacity must be put in now to secure a position in the future, but this is a bet. The third quarter is typically the strongest for the carriers, when they can derive upwards of 50% of their annual profits. But unchanged is underlying regional weakness that has seen yields plummet. Capacity discipline is also wanting: Asiana so far is due to grow 5.7% in 3Q2013. Meanwhile a curious hybridisation movement is hatching at Asiana, which will re-configure eight A320s to an all-economy regional layout.