Airlines February IIA data: Passenger and LCCs continue relative outperformance Overweight (Maintain) February IIA data: Passenger traffic holds up well, despite tough comparison 1) Passenger: According to Incheon International Airport (IIA) data, international Industry Report passenger traffic growth in February improved for the first time in four months, to March 11, 2019 5.3% YoY (vs. +4.5% YoY in January; all growth figures are YoY unless denoted otherwise). Traffic growth on China routes (+9.6%, vs. +8.5% in January) expanded for the second straight month, while traffic on Southeast Asia routes (+9.4%, vs. +5.5% in January) also picked up. Traffic growth on Japan (+2.6%, vs. +3.1% in January), US (- Mirae Asset Daewoo Co., Ltd. 7.9%, vs. -3.8% in January), and Europe (+7.9%, vs. +11.6% in January ) routes, however, weakened compared with the previous month. Meanwhile, non-transfer passenger [Transport/Energy ] traffic growth (+7.5%, vs. +3.6% in January) and load factor indicator (+0.7%, vs. +0.7% Jay JH Ryu in January) were both up YoY. +822 -3774 -1738 [email protected] 2) Cargo: In February, international cargo traffic growth worsened to -10.2% (vs. -6.5% in January). Traffic growth improved on US routes (-5.4%, vs. -9.4% in January), but softened across Europe (-11.7%, vs. -5.5% in January), China (-16.1%, vs. -9.2% in January), Japan ( -18.4%, vs. -13.1% in January), and other major routes. The load factor indicator also declined at a sharper rate (-6.2%, vs. -4.9% in January). 3) Traffic by carrier: In February, international passenger traffic was up 1.6% (vs. +2.3% in January) at Korean Air and down 2.8% (vs. -2.4% in January) at Asiana Airlines. Cargo traffic growth also remained soft at both Korean Air (-12.5%, vs. -10.2% in January) and Asiana Airlines (-12%, vs -9.8% in January). LCCs: Traffic growth accelerates in both domestic and international In February, low-cost carrier (LCC) traffic growth accelerated to 12.5% (vs. +8.1% in January), with growth improving in both domestic (+6.1%, vs. +1.7% in January) and international (+19.6%, vs. +15% in January) . LCC market share marginally fell in the domestic segment (57.5%, vs. 58.5% in January), but remained at an all-time high in the short-haul international segment (45%, vs. 45% in January). By carrier, Jeju Air and T’way Air saw their market shares slightly slip to 10.8% (vs. 10.9% in January; traffic growth of +27.3%) and 6.5% (vs. 6.6% in January), respectively. Jin Air suffered a sharper decline, with market share falling to 7.7% (vs. 7.9% in January). Air Busan’s market share remained unchanged a t 4.9% (vs. 4.9% in January). Meanwhile, the Ministry of Land, Infrastructure and Transport issued licenses to three new LCCs last week. The three new operators, Fly Gangwon, Aero K, and Air Premia, will be based in Yangyang, Cheongju, and Incheon, respec tively. A total of six airplanes will be introduced in 2019, but actual operation is expected in 2020. We believe the impact of the new LCCs will be limited in the near term. We expect the three LCCs to make up just 5% of short-haul international routes . Direct competition also looks unlikely, given their key routes (smaller cities and long-haul routes). Moreover, with the current LCC market already showing a widening gap between leaders and laggards, it remains to be seen whether the newcomers will be a ble to quickly turn a profit. Maintain Overweight; maintain Jeju Air as our top pick We remain Overweight on the airlines sector. Despite a tough comparison, passenger demand is showing signs of a pickup, led by short-haul routes. Expectations of earnings improvements driven by falling oil prices also remain intact. We maintain Jeju Air (089590 KS/Buy/TP: W45,000) as our top pick, as we believe the carrier will prove its competitive strength amid increasing competition among LCCs. March 11, 2019 Airlines Table 1. New LCCs’ flight route operation plans Fly Gangwon Air PREMIA Aero K Ulsan, Gwangju, Gimpo Narita, Nagoya, Kitakyushu, 2H19 Macau, Taipei, Kaohsiung, Taichung Qingdao, Taipei, Hai Phong Kota Kinabalu, Clark Field, Da Nang Narita, Osaka, Nagoya 1H20 Hanoi, Ho Chi Minh Hiroshima, Weihai, Yantai, Sanya, Jinan, Osaka, Narita, Hong Kong 2H20 Haikou, Hakodate, Macau, Hanoi Hanoi, Ho Chi Minh Nha Trang 1H21 Siem Reap, Kalibo LA 2H21 Cebu, Vladivostok San Jose Haikou, Kaohsiung 1H22 Hai Phong, Khabarovsk Honolulu 2H22 Vancouver To expand to 25 routes three years into To expand to 9 routes three To expand to 11 routes three Remarks operations years into operations years into operations Sources : Company data , Ministry of Land, Infrastructure and Transport , Mirae Asset Daewoo Research Figure 1. New LCCs’ aircraft adoption plans (Units) 2019 2020 2021 2022 Fly Gangwon: B737(189 seats) Air PREMIA: B787(310 seats) 9 Aero K: A320(180 seats) 7 7 7 6 5 5 5 3 3 3 0 Fly Gangwon Air PREMIA Aero K Sources: Ministry of Land, Infrastructure and Transport, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 March 11, 2019 Airlines Figure 2. IIA long-haul passenger traffic growth Figure 3. IIA short-haul passenger traffic growth (%, YoY) (%, YoY) 40 Europe US 100 Southeast Asia Japan China 80 30 60 20 40 10 20 0 0 -20 -10 -40 -60 -20 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Figure 4. International passenger traffic growth: Korean Air Figure 5. Passenger L/F indicator: Korean Air vs. Asiana vs. Asiana Airlines Airlines (%, YoY) (%p) 40 Korean Air Asiana Airlines 30 Korean Air Asiana Airlines 25 30 20 20 15 10 10 5 0 0 -5 -10 -10 -20 -15 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Figure 6. International passenger traffic growth vs. transfer Figure 7. International passenger traffic growth ex-China passenger traffic growth routes (%) (mn persons) (%) International passenger traffic growth (L) Passengers ex-China (L) 6.0 30 45 Transfer passenger traffic growth (R) Passenger traffic growth ex-China (R) 35 5.0 20 25 4.0 15 3.0 10 5 2.0 -5 0 -15 1.0 -25 0.0 -10 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 3 March 11, 2019 Airlines Figure 8. IIA long-haul cargo traffic growth Figure 9. IIA short-haul cargo traffic growth (%, YoY) (%, YoY) US Europe 60 Japan China 60 40 40 20 20 0 0 -20 (20) -40 (40) 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Figure 10. International cargo L/F indicator: Korean Air vs. Figure 11. International cargo traffic growth: Korean Air vs. Asiana Airlines Asiana Airlines (%p) (%, YoY) 55 Korean Air Asiana Airlines Korean Air Asiana Airlines 40 45 35 20 25 15 0 5 -5 -20 -15 -40 -25 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Figure 12. IIA international cargo L/F indicator Figure 13. IIA international passenger L/F indicator (%p) (%p) 35 Cargo L/F indicator 30 Passenger L/F indicator 25 20 15 10 5 0 -5 -15 -10 -25 -20 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 4 March 11, 2019 Airlines Figure 15. LCC traffic growth on short-haul international Figure 14. LCC M/S on short-haul international routes routes (%) (%) 50 Total LCC MS (A+B) 200 Total LCC YoY 45 Korea LCC MS (A) Korea LCC YoY Foreign LCC MS (B) International LCC YoY 40 150 35 30 100 25 20 50 15 10 0 5 0 -50 10 11 12 13 14 15 16 17 18 11 12 13 14 15 16 17 18 Source: IIA, KAC, Mirae Asset Daewoo Research Source: IIA, KAC, Mirae Asset Daewoo Research Figure 16. Korean LCCs’ M/S on short-haul international Figure 17. ISM index vs. IIA cargo traffic growth routes (%) (Index) (%, YoY) 12 Air Busan 80 ISM (L) IIA cargo growth (R) 60 Eastar Jet Jeju Air 10 70 40 Jin Air 8 T'way Air 60 20 6 50 0 4 40 -20 2 0 30 -40 11 12 13 14 15 16 17 18 19 06 07 08 09 10 11 12 13 14 15 16 17 18 19 Source: IIA, KAC, Mirae Asset Daewoo Research Source: IIA, Bloomberg, Mirae Asset Daewoo Research Figure 18. IIA transshipment cargo trend Figure 19. IIA transfer passenger trend ('000 tonnes) (%) (Passengers) (%) 120 40 Transit cargo (L) Growth (R) 800,000 Transfer passengers (L) Growth (R) 40 700,000 30 90 20 600,000 20 500,000 10 60 0 400,000 0 300,000 -10 30 -20 200,000 100,000 -20 0 -40 0 -30 10 11 12 13 14 15 16 17 18 19 10 11 12 13 14 15 16 17 18 19 Source: IIA, Mirae Asset Daewoo Research Source: IIA, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 5 March 11, 2019 Airlines APPENDIX 1 Important Disclosures & Disclaimers 2-Year Rating and Target Price History Company (Code) Date Rating Target Price Company (Code) Date Rating Target Price Jeju Air (089590) 02/06/2018 Buy 52,000 01/14/2019 Buy 45,000 06/20/2017 Buy 50,000 11/06/2018 Buy 50,000 04/26/2017 Buy 42,000 08/07/2018 Buy 60,000 04/07/2017 Buy 40,000 06/21/2018 Buy 62,000 12/02/2016 Buy 36,000 05/08/2018 Buy 65,000 04/06/2018 Buy 60,000 (W) Jeju Air 80,000 60,000 40,000 20,000 0 3 17 3 18 3 19 Stock Ratings Industry Ratings Buy : Relative performance of 20% or greater Overweight : Fundamentals are favorable or improving Trading Buy : Relative performance of 10% or greater, but with volatility Neutral : Fundamentals are steady without any material changes Hold : Relative performance of -10% and 10% Underweight : Fundamentals are unfavorable or worsening Sell : Relative performance of -10% Ratings and Target Price History (Share price ( ─), Target price (▬), Not covered ( ■), Buy ( ▲), Trading Buy ( ■), Hold ( ●), Sell ( ◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.