Korean Air swings to net profit but in the red at operating level

Korean Air sated it expects improved outbound travel and cargo demand in 2H2011 due to reconstruction work in Japan and easing political tensions in the Middle East and North Africa. The carrier also noted that the addition of five A380 on long-haul routes would likely boost profit margins, while the free trade agreement with Europe is expected to increase cargo business. The carrier will also benefit from improved seasonal demand and an easing of jet fuel prices. It is unclear whether the carrier still anticipates to report a record operating profit in 2011, as per a Jan-2011 forecast.

Net profit of USD32m; operating loss of USD375m

During 2Q2011, Korean Air achieved a consolidated net profit of KRW33.7 billion (USD32 million) compared with a net loss of KRW196.7 billion (USD187 million) in 2Q2010. The appreciation of the won led to foreign-currency gains of KRW164.7 billion (USD156 million) in the quarter compared to losses of KRW439.4 billion (USD417 million) in the same period of 2010.

However, a 34% year-on-year increase in fuel costs eroded the bottom-line, the company said. The airline recorded an operating loss of KRW19.7 billion (USD19 million) compared to an operating profit of KRW395 billion (USD375 million) in 2Q2010. Korean Air’s jet fuel expenses stood at KRW1.162 trillion (USD1.1 billion) in the three-month period as the average per barrel cost increased 46% to USD136.30. Revenue increased 2.0% to KRW2.944 trillion (USD2.8 billion). Korean Air Chairman Cho Yang-ho warned last month that a rise in average oil prices to more than USD100 a barrel would hurt the company's competitiveness.

The airline's dollar-denominated debt was USD6.04 billion at the end of Jun-2011, up 16% from Mar-2011 levels. The debt level was, however, partly offset by the strong won.

To operate five A380s by the end of 2011 and 10 by 2014

Korean Air launched its first A380 service from Seoul Incheon to Narita and then to Hong Kong on 17-Jun-2011, becoming the first A380 operator in Northeast Asia and the sixth worldwide. The carrier is also planning to deploy its first A380 on service to New York JFK from 09-Aug-2011.

Korean Air this month also confirmed it would have five A380s in operation by the end of this year operating to Tokyo Narita, Hong Kong, Bangkok, New York and Los Angeles. Korean Air has 10 A380s on order, which it hopes to have in operation by 2014.

The carrier stated it expects the A380 operations to boost profit margins. However, Korean Air this month stated that between 17-Jun-2011 and 19-Jul-2011, load factors on the A380-operated Seoul Incheon-Tokyo Narita stood at 77%, down from 89% in the same period of 2010, and load factors on Seoul Incheon-Hong Kong service was 81%, down from 91% in 2010, according to reports in Joonang. B747 and B777 equipment were previously deployed on the route. The carrier stated the reduced load factor was due to disappointing business class sales. The A380 has two to three times more business-class seats than on the B747 and B777 equipment. Meanwhile, economy class was almost full on the routes, the carrier said, with 94% load factors.

A Korean Air spokesman said: "We kind of predicted this would happen since we placed the aircraft for short routes as a tryout. But when we start running the aircraft for long routes, things will change.” Korean Air also said it is difficult to gauge the losses from the Japanese Government's directive to diplomats to refrain from flying with Korean Air to protest the test flight last month of its new A380 aircraft over Dokdo. The carrier, however, expects the damage to be minimal.

Korean Air is operating the lowest density A380s in the industry, configured in a three-class layout with 407 seats. The A380 cabin features 12 first class, 94 business class and 301 economy class seats. Korean Air has also taken the bold step of being the first carrier globally to devote an entire deck of the A380 to a single class, with the deck to feature only business-class seats. On the other end of the spectrum, Air Austral has floated an 840-seat configuration.

Known A380 configurations  

Airline	First	Business	Premium economy	Economy	Total
Korean Air	12	94	0	301	407
Skymark	-	-	-	-	400-450
Singapore Airlines (new deliveries)	12	86	-	311	409
Qantas^	14	72	32	332	450^
Singapore Airlines	12	60	0	399	471
Emirates (Ultra long range)	14	76	0	399	489
China Southern	8	70	0	428	506
Thai Airways	12	60	0	435	507
Malaysia Airlines	8	54	26	420	508
Air France	9	80	38	389	516
Emirates (long range)	14	76	-	427	517
Lufthansa	8	98	0	420	526
Air France	9	80	-	499	538
Air Austral	0	0	0	“Around 840”	“Around 840”

Source: Centre for Asia Pacific Aviation and airline reports
NB: Qatar Airways stated it would include first-class cabins on its coming fleet of A380s with CEO Akbar al Baker stating the A380 "will be the only model in our fleet which will have a first-class cabin"
^ Qantas will reconfigure 12 A380s at Lufthansa Technik's new facility in Manila to increase seat density from 450 to 484. The refit is part of work to begin in Aug-2011 to boost the number of seats in its B747 and A380 aircraft to make them

In addition, Korean Air has become the first airline to offer a flying duty free shop. The stall has been designed and manufactured for Korean Air by AIM Aviation and will replace 13 seats on the A380. The carrier expects to make up for the lost revenue in duty free sales.

The Korean flag carrier is hopeful the new A380 offering will turn around a slump in its inflight duty free sales. Korean Air has set a target of USD200 million in inflight duty free sales revenue for 2011 - in line with USD201 million generated in 2010. Deputy General Manager Inflight Sales, JY Jung, told Trend: "The indiscriminate promotions of airport duty free shops have seriously affected our inflight sales. Monthly revenue has gradually decreased since Jun-2010 and the slump is continuing." Korean Air’s inflight duty free sales rankings by value for Jun-2011 saw Ballantine’s Scotch whisky, Shui Jing Fang, Chanel fragrances, SK-II, and Hawaiian Sun lead their respective categories for the third consecutive month.

Korean Air confirms purchase of 10 Bombardier CSeries aircraft. Receives B737-800 aircraft

Korean Air Lines on 29-Jul-2011 also confirmed that the LoI it signed at the Paris Air Show in Jun-2011 to acquire 10 PW1521-G powered CS300 aircraft has now been converted into a firm order. The transaction also includes options on 10 CS300 aircraft and purchase rights for an additional 10 CS300 aircraft. Deliveries will commence at a rate of two aircraft per quarter from 2Q2015.

The firm order makes Korean Air the launch customer for the CSeries aircraft in Asia. "This is the first time we have bought Bombardier, but we believe that they can pull this off," said Walter Cho, senior vice president in charge of fleet planning for Korean Air, in Jun-2011. Mr Cho said Korean Air operates a fleet of 137 predominantly Boeing and Airbus aircraft, including a fleet of 31 B737-800/900s, with a further 10 B737NGs on order. 

Mr Cho last month called the deal “the beginning of a steady partnership with Bombardier.” He continued: “We are a growing airline. We believe the CSeries fits into our fleet very well and we’ll be exercising all, well if not all, most of the purchase rights and options very soon.” He added that the options would be exercised “as soon as the aircraft proves itself”.

Korean Air will be the Asian launch customer for Bombardier’s CSeries programme. Korean Air has determined it “can operate the aircraft with very high efficiency” on 45 routes in China, Japan and Southeast Asia. Mr Cho, in an interview with The Montreal Gazette, stated the aircraft would also be deployed on thinner domestic routes, replacing B737s, which the airline will redirect to denser city-pairs.

“We need more environmentally friendly planes and some of our airports in (South) Korea have noise issues. And some of our routes are too small for our (Boeing) 737s. So this will be a perfect aircraft for those kind of routes and airports,” he said. The CSeries jets are additions to its fleet, not replacements for older aircraft.

In other fleet news, Korean Air this month received a new 138-seat B737NG. The aircraft will operate short to mid-haul international destinations such as Ho Chi Minh City, Phnom Penh in Southeast Asia, and Xian, Shenzhen in China by the end of Jul-2011 after completing necessary tests. By adopting the B737-800 aircraft, Korean Air aims to further improve its premium service strategy. Korean Air completed its cabin refurbishment project for mid to long-haul flights earlier in the year. The carrier has also decided to make an additional purchase of two 159-seat B737-900ERs, for delivery in 2013.

Korean Air likely to be one of biggest beneficiaries of EU-South Korea FTA

Korean Air Lines, meanwhile, could be one of the biggest beneficiaries of a USD71 billion boost in commerce between the European Union and South Korea due to a free-trade agreement between the two nations, which took effect on 01-Jul-2011. It may help Korean Air reclaim the rank of the world’s largest international air-cargo company that it lost to Cathay Pacific in 2010.

The trade agreement between the 27-member EU and South Korea, the world’s seventh-largest exporter, is expected to expand their almost USD100 billion of annual commerce by USD4.7 billion p/a over the next 15 years, according to a 2010 study led by Korea Institute for International Economic Policy. South Korea’s annual air shipments may rise 6.4% and imports by 2.8% by 2015, Korean Air said.    

Auto parts, medicines and fine machinery are industries expected to benefit from the South Korea-EU agreement, Korean Air said. At present, the carrier earns around 30% of freight revenue from European operations, compared to around 40% from the Americas. The carrier is also expanding its freight fleet, with scheduled deliveries of seven B747-8Fs by 2015.