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

"Middle East war has limited impact on demand fundamentals"


"LCC market capitalization, long neglected, remains excessively low"

With oil prices surging due to the war between the United States and Iran, crisis concerns emerged for the airline sector in the second quarter. However, after the announcement of their second quarter earnings, the consensus is that airlines performed better than expected. Some analysts also suggest that, in the second half of the year, attention should shift from major carriers like Korean Air to low-cost carriers (LCCs), which have so far attracted less notice.

Although a 'pandemic-level crisis' had been anticipated for second quarter results, the airline sector delivered more resilient numbers than feared. Combined fuel costs for listed airlines rose by 1.6 trillion won compared to the same period last year, but operating profit declined by only 600 billion won. Korean Air was the only airline to post an operating profit, recording 261.8 billion won in the second quarter despite a twofold surge in fuel costs, which accounted for 30% of its revenue. Jeju Air posted -52.4 billion won, maintaining a similar performance to the same quarter last year.

Yonhap News Agency

Rising international passenger and air cargo fares helped offset cost pressures. Korean Air and Asiana Airlines saw a 11% increase in international fares, while LCCs benefited from a mix of short-haul routes and a favorable year-base effect, leading to a 30–40% spike. In this environment, stronger consumer sentiment—seen as a "wealth effect"—drove more Korean tourists to Japan, while the number of Chinese tourists visiting Korea reached a decade-high. Cargo rates rose by about 40%, outpacing the increase in oil prices. This was backed by rising demand linked to AI, semiconductors, and K-beauty-related shipments.

Choi Kooun, a researcher at Korea Investment & Securities, explained, "Ultimately, the Middle East war has driven up cost risks significantly, but the impact on demand fundamentals remains limited. The positive effects from semiconductor-related cargo demand, robust demand for trips to Japan, and the strength in inbound and transfer traffic are expected to continue into the second half of the year."

From an investment perspective, the focus was placed on low-cost carriers. Choi stated, "With recent rising volatility in the stock market, neglected sectors are being reassessed as investment alternatives. As LCCs have largely been forgotten in the stock market since the Muan incident at the end of 2024, there is little supply overhang." He added, "Second quarter performance has passed the bottom, and while oil prices have recently rebounded, the exchange rate has fallen. Jeju Air, leading the turnaround, is expected to achieve a full-year operating profit this year faster than the market expects."

Choi also highlighted that current LCC valuations remain depressed. "While the LCC industry continues to struggle to maintain profitability amid external variables, it has still steadily grown its scale along with structural increases in overseas travel demand. Combined revenues are now approaching 10 trillion won. Yet, with the top four LCCs each valued at only around 300 billion won in market capitalization, it is an excessively low valuation considering future market opportunities," he remarked. In particular, Jeju Air's share price has dropped by 30% since the war broke out, bringing its expected 2027 price-to-earnings ratio (PER) down to around 5.

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