LCCs’ profits take flight in Q3

The poor performance of Korea’s full-service carriers Korean Air and Asiana Airlines in the third quarter contrasted sharply with low-cost carriers that maintained rapid growth.

Korea’s largest full-service airline Korean Air announced on Tuesday that it posted 61.6 billion won ($55.24 million) in net profit in the third quarter, falling by a whopping 88 percent year on year. Its operating profit shrank 22.7 percent during the same period to 355.5 billion won while its revenue grew 3.1 percent to 3.21 trillion won.

“Political instability in the Northeast Asian region cut flight demand to Korea,” Korean Air said in a statement Tuesday. “Also, Korea’s golden holiday week, or Chuseok, fell mostly in October, which is part of the third quarter.”

Asiana Airlines faced similar woes. Its operating profit in the third quarter fell 21.6 percent to 118.9 billion won, largely dragged down by a shortage of demand from the Chinese customers that it is heavily dependent on. Chinese services have accounted for roughly 40 percent of Asiana’s business in the past.

Despite its efforts to strengthen services to Southeast Asian countries, it wasn’t enough to fully compensate for the losses incurred due to the lack of Chinese travelers after geopolitical tensions increased following the Thaad deployment and North Korean nuclear issues, according to Asiana. Korea-China relations have only recently shown signs of improving as President Moon Jae-in and Chinese President Xi Jinping mended ties through the latest presidential summit.

Korean low-cost carriers came up with a very different report card in the fourth quarter, though they were also impacted by the geopolitical tensions.

The largest domestic LCC Jeju Air posted 266.6 billion won in revenue and 40.4 billion won in operating profit in the third quarter on Tuesday, hitting a record quarterly performance. Compared to the previous year, revenue jumped by 20.3 percent while operating profit grew 5.9 percent.

“We aggressively increased our fleet to capture increasing Korean demand to travel abroad,” a Jeju Air spokesperson said. “Flexible operation on our service routes and expanding supplies to Japan and Southeast Asia also contributed to the positive performance.”

Another local LCC T’way Air, which boasted the third largest passenger carrying volume on international routes among local LCCs, reported 165.2 billion won in revenue and 25.9 billion won in tentative operating profit for the third quarter on Tuesday. Revenue soared 42 percent year on year while operating profit rose by 56 percent.

LCCs were less affected by the decline in Chinese customers as they weren’t able to obtain many slots to take off and land at Chinese airports anyway. Accordingly, local LCCs were early in snatching alternative sources of profit by expanding services to Japan and Southeast Asia. Also, an increasing customer preference toward cost-effectiveness beefed up the popularity of LCCs that offer cheaper tickets to shorter-haul destinations.

According to the Ministry of Land, Infrastructure and Transport, local LCCs already carry roughly 60 percent of passengers traveling domestically. Even in carrying passengers to overseas destinations, LCC’s share of the market increased from 11.3 percent in 2012 to 30.3 percent last year.

Such rapid growth puts full service carriers to look for new growth engines.

Korean Air is trying to strengthen longer-haul services by forming a joint-venture with Delta Air Lines.

Still, as LCCs vie to attract more passengers by offering even cheaper deals and expanding international services, full-service carriers are feeling the pressure.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]