South Korea aviation market: a decade of rapid growth driven by LCCs
South Korea has had one of the most dynamic and fastest growing aviation markets in Asia this decade. Change is unlikely as more start-ups prepare to launch services, the market leader Korean Air begins a new chapter under a new leader, and South Korea's second largest airline Asiana restructures.
Passenger traffic in South Korea has more than doubled over the past 10 years - from 52.3 million in 2008 to 117.5 million in 2018. The number of local airlines operating scheduled services has increased from only three at the beginning of 2008 to eight currently.
Three more Korean start-ups are planning to launch operations in 2H2019 or 2020. It seems unrealistic that the market could sustain so many airlines - even if passenger traffic continues to grow at a high single digit or low double digit rate.
However, consolidation predictions from 10 years ago - when four airlines entered, increasing the playing field to seven - have proved inaccurate. This indicates that Korea is a unique market that is potentially capable of supporting an unusual number of competitors over the long term.
- South Korea's aviation market has experienced significant growth, with passenger traffic more than doubling over the past decade.
- The international market has grown at a faster pace than the domestic market, driven by increasing demand in both the inbound and outbound segments.
- South Korea has a total of six low-cost carriers (LCCs), with three more start-ups planning to launch operations in the near future.
- LCCs in South Korea have achieved rapid growth, with international passenger traffic increasing by 24% in 2018, resulting in a market share of 29%.
- Korean Air remains the market leader, but has been losing market share over the past decade.
- The South Korean aviation market is highly concentrated in Seoul, Busan, and Jeju Island, with Incheon Airport emerging as a major hub for LCCs.
Summary:
- South Korea's aviation market has more than doubled in size this decade, driven by LCC growth.
- The international market has tripled in size, led by the outbound segment.
- South Korea has six LCCs, with three more start-ups in the wings.
- South Korean LCCs grew international passenger traffic by 24% in 2018, lifting their market share to 29%.
- Korean Air remains the market leader but has been steadily losing market share over the past decade.
South Korea passenger traffic has grown by at least 5% every year since 2010
After declining slightly in 2009 due to the global financial crisis, South Korea passenger traffic has increased by at least 5% for nine consecutive years. Passenger traffic grew 128% during this period - from 51.5 million in 2009 to 117.5 million in 2018.
Growth peaked at 17% in 2010, driven by the post-GFC recovery and the launch of three new LCCs, and at 16% in 2016 - when yet another new LCC was launched. Passenger traffic growth has since been more modest but is still very healthy, including growth of 5% in 2017, 8% in 2018 and 6% in 1Q2019.
South Korea passenger traffic and year-over-year growth: 2008 to 1Q2019
Source: CAPA - Centre for Aviation & South Korea MOLIT.
Domestic passenger traffic nearly doubled from 2008 to 2017, from 17 to 32.4 million, before contracting slightly in 2018. The 2004 opening of high-speed rail on Korea's mainland led to a sharp decline in domestic traffic but over the past decade the market has been growing again due to increasing demand for holidays on Jeju Island.
Jeju accounted for 87% of domestic passenger traffic in Korea in 2018. While Jeju is connected with 12 airports on the mainland, Seoul Gimpo accounts for over 60% of Jeju's domestic capacity and the Gimpo-Jeju route has become the world's busiest route.
South Korea domestic passenger traffic and year-over-year growth: 2008 to 1Q2019
Source: CAPA - Centre for Aviation & South Korea MOLIT.
International growth has been faster than domestic
South Korea's international traffic has grown at a faster pace, driven by growing demand in both the inbound and outbound segments as well as sixth freedom traffic. Korea's international market has nearly tripled in size over the past decade - from 33.4 million in 2009 to a projected 92 million in 2019.
Double digit growth has been achieved every other year - in 2010, 2012, 2014, 2016 and 2018. Growth in the mid to high single digits has been achieved in the odd years this decade. In 1Q2019 international passenger traffic grew by 7%, which represented a slowdown compared to the 12% growth from 2018.
South Korea international passenger traffic and year-over-year growth: 2008 to 1Q2019
Source: CAPA - Centre for Aviation & South Korea MOLIT.
Korean carriers grow faster than foreign airlines
Korean carriers have accounted for a majority of the growth in the international market but foreign airlines have also benefitted from the surging demand.
Foreign airlines carried 27.1 million passengers to and from South Korea in 2018, contrasted with only 13.4 million in 2010. However, during this same eight-year period the number of international passengers carried by South Korean airlines grew from 26.6 million to 58.8 million.
Foreign airlines accounted for only 31.5% of international traffic in 2018 and 31.2% in 1Q2019. The dominance of local airlines is not surprising, given that 12% of Seoul Incheon's passenger traffic is transit (8.2 million in 2018) and the fact that Korea has a larger outbound than inbound market.
Tourism is important and growing
Visitor numbers to South Korea have more than doubled over the past decade. However, the outbound market (South Korean residents heading overseas for holidays or for business) has grown faster and is nearly twice the size of the inbound market.
In 2018 the inbound segment (visitors from overseas) accounted for approximately 35% of total international passenger traffic, compared to approximately 10% for the transit segment and the remaining 55% for the outbound segment.
South Korea attracted 15.4 million visitors in 2018. Visitor numbers increased by 15% in 2018 and 14% in 1Q2019, recovering from a 23% decline in 2017.
Total visitor numbers to South Korea and year-over-year growth: 2008 to 1Q2019
Source: CAPA - Centre for Aviation and KTO.
China is South Korea's largest source market, accounting for 31% of total visitors in 2018. Political tensions led to a 48% decline in Chinese visitor numbers to Korea in 2017 (when China boycotted South Korea's tourism industry), but have since recovered.
Japan is South Korea's second largest source market but Japanese visitor numbers have been relatively flat over the past decade.
Taiwan, which overtook the US in 2017 to become the third largest source market, has been growing rapidly, with visitor numbers nearly tripling over the past decade.
The other top 10 source markets include Hong Kong, Thailand, the Philippines, Vietnam, Malaysia, Russia and Indonesia. Most of these are in Asia and have been growing rapidly.
South Korea visitor arrivals by source market (% of total visitor arrivals): 2018
Source: CAPA - Centre for Aviation and KTO.
South Korea has a huge outbound market
Foreign airlines have benefitted from the growth in the inbound market but often struggle to penetrate the larger outbound market. Korean airlines have an advantage in the outbound segment because of their strong local brands and distribution networks.
While the inbound market is significant, more South Koreans now travel regionally (within Asia) every year than there are total visitors (all regions) to South Korea. Outbound growth has been stimulated by rapid LCC expansion, which has resulted in low fares for short haul international travel.
Hong Kong, Japan, Taiwan Thailand, the Philippines and Vietnam are particularly popular vacation spots for Koreans. In 2018 these six outbound markets alone generated more than 25 million additional annual passengers in comparison with the beginning of this decade.
Vietnam has grown the fastest, attracting 3.5 million South Korean visitors in 2018 compared to only 400,000 in 2009. Thailand attracted 1.8 million South Korean visitors in 2018, up from 600,000 in 2009. The Philippines attracted 1.6 million South Korean visitors in 2018, up from 500,000 in 2009.
In North Asia, South Korean visitor numbers to Japan have increased from 1.6 million in 2009 to 7.5 million in 2018; Hong Kong from 600,000 in 2009 to 1.4 million in 2018; and Taiwan from 200,000 in 2009 to 1 million in 2018.
Several smaller Asian markets have also emerged as popular holiday destinations for South Koreans, including Cambodia, Laos, Myanmar and Mongolia. While the numbers are small, these markets are growing and are now served by multiple Korean carriers.
LCCs are well placed for growth
South Korea's international market is ideal for LCCs, since virtually all of East Asia is within narrowbody range.
East Asia accounts for more than 80% of South Korea's international seat capacity. The South Korea-East Asia market consists mainly of price sensitive leisure passengers (both outbound and inbound).
South Korea international capacity share (% of seats) by region: week commencing 20-May-2019
Source: CAPA - Centre for Aviation & OAG.
Full service airlines will also continue to serve and grow in this market. FSCs benefit from their legacy slot portfolios and traffic rights and are also needed to serve the business segments. Asiana and Korean Air also carry significant sixth freedom traffic between East Asia and North America.
However, LCCs have accounted for a majority of South Korea's short haul international growth in recent years and will continue to grow faster than their FSC competitors.
South Korean LCCs pursue rapid international expansion
In 2018 South Korean LCC international traffic grew by 24%, to 25 million passengers. In comparison, South Korean FSC traffic grew by just 5%, to 33.8 million passengers (20.1 million for Asiana and 13.7 million for Asiana).
South Korea's largest and oldest LCC, Jeju Air, carried 7.3 million international passengers in 2018 along with 4.7 million domestic passengers. Its international traffic has grown rapidly since it began international services in 2009, including 25% growth in 2018 and 27% growth in 1Q2019. Jeju's domestic traffic has been relatively flat since 2016 as it has focused almost entirely on international expansion.
Jeju Air international passenger traffic: 2010 to 2018
Source: CAPA - Centre for Aviation & South Korea MOLIT.
Korea's second largest LCC, Jin Air, carried 3.5 million domestic passengers in 2018 and 5.4 million international passengers. Jin's domestic traffic has also been relatively flat over the past three years as it has focused on the international market. It is the only widebody LCC operator in Korea.
However, Jin's growth has been impacted in the past year by government-imposed restrictions. Jin's total passenger traffic grew by only 3% in 2018 and by 5% in 1Q2019 - although international traffic increased by 11% and 7% respectively as it cut back domestic capacity.
Jin Air international passenger traffic: 2010 to 2018
Source: CAPA - Centre for Aviation & South Korea MOLIT.
Korea has six LCCs, carrying more than 40 million passengers per year
T'way Air is the third largest Korean LCC in the international market but is the fourth largest overall.
T'way carried 2.9 million domestic passengers and 4.2 million international passengers in 2018. Its international traffic has quadrupled over the past three years, whereas domestic traffic has grown by only 12%.
T'way Air international passenger traffic: 2010 to 2018
Source: CAPA - Centre for Aviation & South Korea MOLIT.
Air Seoul, Korea's smallest and newest LCC, only operates in the international market. Air Seoul carried 1.7 million passengers in 2018, up by 109% from 2017 (on a very low base as it only launched operations in mid-2016).
Korea's two other LCCs, Air Busan and Eastar Jet, still have larger domestic than international operations.
Air Busan carried 4.5 million domestic and 3.6 million international passengers in 2018, making it the third largest LCC overall. Air Busan has grown international passenger traffic by 122% over the past three years, while domestic traffic has grown by a more modest 38%.
Eastar Jet carried 3 million domestic passengers and 2.9 million international passengers in 2018. Its international traffic has doubled over the past three years and its domestic traffic has grown by nearly 50%, indicating a stronger focus on domestic growth than the other Korean LCCs.
Eastar Jet, T'way and Jeju Air are independent. Jin is fully owned by Korean Air, Air Seoul is fully owned by Asiana, and Air Busan is partially owned by Asiana.
Korean is still the market leader
Korean is the largest airline group in South Korea. In 2018 the Korean Air Group flew 33% of passengers in the domestic market (22% for the main brand and 11% for Jin) and a leading 30% share of the international market (including 23% for the main brand and 6% for Jin).
Asiana is the second largest player overall, although it is slightly larger than Korean in the domestic market The Asiana Group accounted for a 34% share of the domestic market in 2018 (19% for the main brand and 14% for Air Busan) and a 22% share of the international market (16% for Asiana, 4% for Air Busan and 2% for Air Seoul).
The three independent LCCs combined captured a 34% share of the domestic market and only 17% of the international market. Jeju accounted for 15% and 9% respectively; Eastar Jet for 10% and 3%; and T'way for 9% and 5%.
South Korea has North Asia's highest LCC penetration rate
Overall, Korean LCCs (both independent and FSC subsidiaries) accounted for 59% of domestic passenger traffic and 29% of the international passenger market in 2018. When foreign LCCs are included, the LCC share of the international market exceeds 35%.
Korean LCCs have grown rapidly from a base of zero only 15 years ago and a very small base 10 years ago.
Jeju launched operations in 2005, becoming Korea's first LCC. Three more LCCs - Air Busan, Eastar Jet and Jin Air - were part of an early wave of start-ups that launched in 2008 and early 2009. Air Seoul launched much later, in 2016.
Two more start-ups, Air Philip and Air Pohang, launched in 1H2018. However, Air Pohang suspended operations in late 2018 and Air Philip suspended operations in early 2019. Although they were awarded LCC licences, Air Philip and Air Pohang followed regional airline models, operating turboprop aircraft.
Three more start-ups close to launching services
In Mar-2019 South Korea's MOLIT awarded business licences to another three start-ups - Aero K, Air Premia and Fly Gangwon. All three aim to launch operations by the end of 2020 and are also licensed as LCCs.
However, Air Premia is essentially following a FSC model. It has leased an initial fleet of three 787-9s, which will be configured with 309 seats (253 economy and 56 premium economy) for delivery in 2H2020.
Air Premia plans to launch regional services within Asia in Sep-2020, followed by long haul services in 2021 (once ETOPS approvals are secured, enabling transoceanic flights). Air Premia's five-year business plan includes a fleet of 10 787-9s and several long haul routes. The new Seoul-based airline has identified Honolulu, Los Angeles, San Jose and Vancouver as potential long haul destinations. Although North America appears to be the initial priority, Australia and Europe are also a consideration.
Aero K and Fly Gangwon are planning to follow a typical LCC model with high density narrowbody aircraft operating regionally. Aero K has committed to acquiring A320ceos and Fly Gangwon to 737-800NGs.
Secondary Korean airports poised for growth
Aero K and Fly Gangwon will both be based on secondary cities - Cheongju and Yangyang respectively. The South Korean government favours bases in secondary cities when considering applications from proposed start-ups.
There are opportunities for growth in South Korea's secondary cities, which are generally underserved. LCCs are particularly well placed, given that these smaller markets have limited business demand and consist mainly of price sensitive leisure travellers.
Yangyang is currently only served by Korea Express Air. Korea Express Air is a Yangyang-based charter airline operating a fleet of three ERJ-145 regional jets. Its current schedule includes two domestic and one international route from Yangyang (based on OAG schedules for the week commencing 20-May-2019).
Cheongju has a population of nearly 1 million and is the capital of North Chungcheong province, which has a population of two over two million. Cheongju is a larger market that is currently served by four Korean airlines as well as two Chinese carriers. However, Cheongju Airport has less than 10 flights per day and accounts for less than 2% of total seat capacity in South Korea.
Yangyang is located in Gangwon, a mountainous province with a population of over 1.5 million. Gangwon province has only one other commercial airport - Wonju - which is only served by Korean Air from Jeju.
Seoul, Busan and Jeju dominate South Korea's market
South Korea's market is heavily concentrated in Seoul, in the second largest city Busan, and on Jeju Island. The two Seoul airports, Busan and Jeju, account for 92% of total seat capacity in South Korea (based on CAPA and OAG data for the week commencing 20-May-2019).
There are another 11 airports in South Korea but only four currently have international services - Daegu, Muan, Cheongju and Yangyang. Daegu is the largest of the secondary airports; it is also the largest of South Korea's secondary cities (population 2.5 million).
South Korea airports ranked by weekly seat capacity: week commencing 20-May-2019
| Rank | Airport | IATA | Weekly seats | % of total seats in South Korea |
|---|---|---|---|---|
| 1 | ICN | 1,615,776 | 49.4% | |
| 2 | CJU | 535,784 | 16.4% | |
| 3 | GMP | 480,401 | 14.7% | |
| 4 | PUS | 359,439 | 11.0% | |
| 5 | TAE | 111,398 | 3.4% | |
| 6 | CJJ | 56,326 | 1.7% | |
| 7 | KWJ | 42,830 | 1.3% | |
| 8 | MWX | 23,888 | 0.7% | |
| 9 | RSU | 15,770 | 0.5% | |
| 10 | USN | 9,122 | 0.3% | |
| 11 | HIN | 6,824 | 0.2% | |
| 12 | KPO | 3,650 | 0.1% | |
| 13 | WJU | 3,070 | 0.1% | |
| 14 | YNY | 2,100 | 0.1% | |
| 15 | KUV | 1,920 | 0.1% |
Inevitably any airline based outside Seoul will also need to have a base in Seoul to grow and achieve sufficient scale.
Seoul's metropolitan area has a population of more than 25 million. Although half of South Korea's population lives outside the Seoul, metro area income levels and propensity to travel are higher in the city.
Seoul Incheon continues to grow rapidly
Incheon continues to expand as Gimpo, which was Seoul's only airport until 2001, is now only open to domestic and limited regional international flights. In 2018 Incheon opened a second terminal, which is the new home for Korean Air and SkyTeam partners.
Incheon has started work on an extension for T2 and a fourth runway, which is expected to be completed by 2023. Incheon's passenger traffic has more than doubled over the past decade, reaching 68 million in 2018. The airport expects to reach 95 million passengers by 2023.
Seoul Incheon annual passenger traffic and year-over-year growth: 2008 to 4M2019
Source: CAPA - Centre for Aviation & Incheon Airport reports.
Nearly all of Incheon's traffic is international (99% in 2018), whereas Busan, Gimpo and Jeju are primarily domestic airports. Domestic accounted for 94% of passenger traffic at Jeju in 2018, 83% at Gimpo, and 73% at Busan Gimhae.
More rapid growth for South Korea is plausible
Overall, South Korean residents travel overseas on average once every two years and have a domestic return flight on average once every three years (generally to Jeju and back).
While South Koreans are travelling significantly more frequently than they were a decade ago - driven mainly by LCC growth, which has led to significantly cheaper fares - there is plenty of room for further growth. Increasing the propensity to travel to one overseas trip per year would double the already large outbound segment.
Once again, LCCs are well placed to drive the future growth, given the price sensitive nature of the outbound leisure travel segment and the fact that most of Korea's main markets are within narrowbody range.
Incheon emerges as LCC hub
Incheon will continue to be the main beneficiary of LCC growth. The airport handled 20.8 million LCC passengers in 2018, representing 31% of total traffic. LCC traffic grew by 20%, which was double the rate of growth for the total market (10%).
In the first four months of 2019 LCC passenger traffic at Incheon grew by 11%, while the total market grew by 5%.
Incheon is currently served by five of South Korea's six LCCs and nine foreign LCCs. Air Busan is the only Korean LCC not serving Incheon but it is, unsurprisingly, the largest airline (LCC or FSC) in the Busan market, where it accounts for 45% of LCC capacity and 28% of total capacity.
Korean LCCs dominate the Incheon market, accounting for 76% of international and total LCC capacity at Incheon (there are no domestic LCC flights at Incheon). VietJet is the largest foreign LCC, accounting for a nearly 8% share, although AirAsia/AirAsia X is slightly larger than VietJet when affiliates are included.
Seoul Incheon LCC seat capacity by airline: week commencing 20-May-2019
| Rank | Airline | IATA | Weekly seats | % of total LCC capacity |
|---|---|---|---|---|
| 1 | JEJU air | 7C | 119,070 | 24.3% |
| 2 | Jin Air | LJ | 92,666 | 18.9% |
| 3 | T'way Air | TW | 67,704 | 13.8% |
| 4 | Eastar Jet | ZE | 50,476 | 10.3% |
| 5 | Air Seoul | RS | 41,925 | 8.6% |
| 6 | VietJet Air | VJ | 36,910 | 7.5% |
| 7 | Peach | MM | 17,640 | 3.6% |
| 8 | Philippines AirAsia | Z2 | 14,760 | 3.0% |
| 9 | AirAsia X | D7 | 13,572 | 2.8% |
| 10 | Thai AirAsia X | XJ | 11,840 | 2.4% |
| 11 | Cebu Pacific | 5J | 11,116 | 2.3% |
| 12 | HK Express | UO | 7,904 | 1.6% |
| 13 | Scoot | TR | 2,250 | 0.5% |
| 14 | Spring Airlines | 9C | 2,196 | 0.4% |
Incheon accounts for 62% of international LCC capacity in South Korea, followed by Busan with a 20% share. When the domestic market, dominated by the Gimpo-Jeju route, is included, Incheon's share of LCC capacity in South Korea drops to 36%.
Jeju is the second largest LCC airport in South Korea based on total LCC seat capacity, accounting for a 21% share, followed by Busan with 17% and Gimpo with 14%. Secondary cities on the mainland account for the remaining 12%.
Consolidation seems inevitable
Korean LCCs should again drive most of the growth at all Korean airports over the next decade. However, there will inevitably continue to be questions on how many local LCCs can be sustained.
So far, sceptics have been proven wrong as all six of the original LCCs have survived. (Air Philip and Air Pohang have ceased operations, but as discussed earlier in this report, they were not following LCC models and were tiny short-lived regional airlines.)
As two or three more LCCs launch services over the next year (three if Premia is counted as an LCC) it is hard not to foresee a consolidation scenario. Mergers are likely and failures are also possible.
LCC mergers could emerge, including within the Asiana Group
Eastar Jet and T'way came close to merging several years ago. A merger between these two airlines remains sensible, considering their independent status and relatively small size. Both operate 737NGs and have 737 MAXs on order, making for an easy transition.
A merger or acquisition involving one of the start-ups and an existing independent LCC could make sense as it would give the start-up (and investors) access to Seoul. A merger between Asiana's two LCCs, wholly owned Air Seoul and partially owned Air Busan, would also make sense as the group restructures.
Asiana is shrinking in a bid to improve profitability and is looking for a new investor to replace its largest shareholder, Kumho Industrial. Asiana should accelerate LCC expansion, given the opportunities and faster growth at the bottom end of South Korea's market. (Kumho intends to sell its stakes in Air Seoul and Air Busan, along with its 33% stake in Asiana, to the same investor as part of a package.)
Asiana has been expanding faster than its arch-rival Korean in recent years but slower than Korea's LCCs. Asiana's traffic increased by 60% from 2009 to 2018, whereas Korean's traffic only increased by 30% during the same period.
However, Asiana's traffic fell slightly in the first four months of 2019. A more significant decline in traffic is likely in the 2019/2020 winter season after the recently announced capacity and network cuts.
Asiana passenger traffic and year-over-year growth: 2008 to 4M2019
Source: CAPA - Centre for Aviation & Asiana reports.
Korean has been losing market share
Korean Air could also potentially make a move and acquire one of the independent LCCs.
Government-imposed restrictions on Jin, which were initially implemented in Aug-2018 and prevent Jin from registering any additional aircraft, are currently prohibiting Korean from growing in the LCC market. The restrictions were a better outcome than the threatened licence revocation but are resulting in market share declines as Korea's other LCCs have continued to expand. Korean is hoping that the restrictions on Jin will be lifted later this year but if they remain intact, buying a second LCC could become attractive.
Korean Air remains the market leader but its passenger traffic has been flat since the beginning of 2017, resulting in market share declines. Korean's passenger traffic dropped by 0.3% in 2017, up by only 0.2% in 2018 and up by only 0.5% in the first four months of 2019.
Korean Air passenger traffic and year-over-year growth: 2008 to 4M2019
Source: CAPA - Centre for Aviation & Korean Air reports.
More concerning is Korean's lack of growth over the past decade. The airline carried 26.8 million passengers in 2018, compared to 21.8 million in 2008.
Korean's share of the total market (domestic and international) slipped from 42% in 2008 to 23% in 2018. This is a significant drop, even when factoring in Jin, which accounted for a nearly 8% share of total passenger traffic in 2018.
Korean begins new era in relatively bright but extremely competitive market
Korean is entering a new era as Cho Won-tae takes over a chairman from his late father Cho Yang-ho, who passed away in Apr-2019.
The younger Mr Cho was already Korean's president and a board member. Significant changes in Korea's strategy are therefore unlikely.
Korean is expanding in the US following the 2018 implementation of its new JV with Delta Air Lines, which has already resulted in revenue and yield improvements. Passenger revenues on Korean's Americas routes were up 8% in 2018; Korean also recorded double digit passenger revenue growth in 2018 for Europe (10%), Southeast Asia (10%) and China (13%).
While clearly the biggest opportunities in Korea's dynamic aviation market are at the low cost end, there is still room for growth at the full service end. The long haul market continues to grow, along with business, corporate and transit traffic. These segments will continue to be dominated by FSCs, led by Korean.
Overall, the outlook for South Korea as it hosts the 2019 IATA AGM is relatively bright. Another decade of rapid growth in the outbound, inbound and transit segments is likely, enabling Incheon to make further gains in the global airport rankings. Incheon has already become the world's fifth largest international airport.
However, for the South Korean airline sector competition will intensify, pressuring profitability and potentially leading to consolidation.