Foreign carriers outpace Korean airline profits

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Foreign carriers outpace Korean airline profits

The nation’s major airlines were less profitable than their global competitors, largely due to heated competition in the small local market powered by the rise of low-cost carriers.

U.S.-based journal Airline Weekly studied the performance of 72 global air carriers for a 12-month period from September 2015.

Korean Air, the nation’s largest carrier, was ranked 18th in revenue but fell to 46th in profit, showing lower operating margins than its competitors.

During the term, Korean Air raked in $10.1 billion in revenue and $72 million profit resulting in a 9 percent operating margin. The margin is less than a third of Allegiant Air, the world’s No. 1 air carrier by margins, which posted 30 percent.

Asiana Airlines, the nation’s second runner, was stuck in a similar situation, ranking 28th in revenue but 49th in profit. It earned $5.03 billion in revenue and $66 million in profit, translating to an even smaller 4 percent operating profit-to-sales ratio than Korean Air.

Analysts blamed larger carriers losing ground in domestic flights, which are usually more profitable, to low-cost carriers and a price war in the market due to low ticket prices offered by the cheaper airlines.

“Despite rising oil prices and an unfavorable foreign exchange rate trends, Korean Air has failed to fully reflect increased cost burdens in pricing,” said Jay Ryu, an analyst from Mirae Asset Daewoo.

In a stark comparison, American Airlines and Delta Airlines, top players in revenue, also posted high profit, posting two-digit profit-to-sales ratios.

American Airlines, which made more than $40 billion in revenue, reaped a $3.99 billion profit, which sums to a 16 percent operating margin. Delta Air Lines made a $39.68 billion revenue and $4.34 billion profit, resulting in an 18 percent operating margin.

Those ranked in top five operating margins were all low-cost carriers.

U.S. low-cost carrier Allegiant Air was followed by Lion Air (23 percent), Alaska Airlines (23 percent), Spirit Airlines (21 percent) and JetBlue (20 percent).

Considering low-cost carriers’ business model is designed to reap high profit and inject low costs, their operating profits usually are higher than traditional carriers. However, as Korea’s major airlines also lag other full-size carriers, analysts suggest the need for them to strategically reorganize flight routes and put their efforts to cut costs by stockpiling jet fuel when the price is low.

As part of Korean Air’s effort to ramp up profitability, it plans to suspend flights from Incheon International Airport to Riyadh, the capital of Saudi Arabia, and the port city of Jeddah, routes which have been less popular among consumers, by the end of the month.

On popular routes to the U.S. such as Seattle, the carrier plans to extend flights. In search of new business opportunities, it is also opening up new service to Barcelona, Spain, in April.

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