"Despite War and Soaring Oil Prices, the Industry Endured"... Securities Revisit 'LCCs' [Weekend Money]

"Limited Impact of Middle East War on Fundamental Demand
Undervalued Market Capitalization for Overlooked LCCs"

With oil prices surging due to the war between the United States and Iran, concerns mounted over a potential crisis for the airline industry in the second quarter. However, after the release of second-quarter earnings, the sector is now being seen as having fared better than expected. Some analysts suggest that, in the second half of the year, investors should pay more attention to low-cost carriers (LCCs), which have so far attracted less interest than major airlines such as Korean Air.

Although the airline industry’s second-quarter results were anticipated to be as dire as those seen during the pandemic, they turned out to be solid compared to earlier worries. Combined fuel costs for listed airlines rose by 1.6 trillion won year-on-year, but operating profits declined by only 600 billion won. Despite its fuel expenses—making up 30% of its revenue—doubling, Korean Air posted a 2nd quarter operating profit of 261.8 billion won, remaining the only carrier to record an operating surplus. Jeju Air reported an operating loss of 52.4 billion won, but this figure was nearly unchanged from the same period last year.

Yonhap News Agency

Increases in international passenger fares and air cargo rates helped relieve cost pressure. International airfares for Korean Air and Asiana Airlines rose by 11%, while LCCs saw a 30–40% surge propelled by a focus on short-haul routes and the impact of last year's low base. Under these conditions, Korea saw a rise in the number of tourists visiting Japan due to the "wealth effect," while inbound demand from China reached its highest point in 10 years. Air cargo rates surged by roughly 40%, outpacing the oil price hike, and demand is growing in the sector for AI, semiconductors, and K-beauty–related goods.

Choi Goeun, a researcher at Korea Investment & Securities, explained, "In conclusion, the Middle East war has greatly increased cost risks, but its impact on demand fundamentals has been limited. Semiconductor-related benefits in air cargo, strong demand for travel to Japan, inbound demand, and transfer passengers are expected to continue in the second half."

In terms of investment strategy, the focus was placed on LCCs. Choi noted, "As market volatility has increased recently, overlooked sectors are being re-evaluated as alternative investments. LCCs in particular have long been forgotten on the stock market since the Muan incident at the end of 2024, so there is no supply-demand pressure." She added, "Second quarter results have hit the bottom, and although oil prices have rebounded lately, the exchange rate has moved in the opposite direction and fallen. Jeju Air, leading the turnaround, is expected to achieve a full-year operating profit sooner than the market anticipates."

It was further emphasized that LCCs currently remain undervalued in the market. Choi said, "The LCC industry has faced difficulty maintaining profitability due to external variables, but, regardless, it has consistently expanded its presence in response to structural growth in overseas travel demand. Combined revenue is approaching 10 trillion won." She continued, "However, the market capitalization of the top four LCCs is only about 300 billion won each, which is excessively low compared to the opportunity that lies ahead." In particular, Jeju Air's share price has dropped 30% following the war, causing its projected 2027 price-earnings ratio (PER) to fall to as low as five.

This content was produced with the assistance of AI translation services.