Korean Airline Swings to Loss

Carrier Expects Current Period to Be Aided by Stronger Won, Stabilizing Jet-Fuel Prices
Kyong-Ae Choi
The Wall Street Journal
Friday-Sunday
July 20-22,2012

SEOUL-Korean Air Lines Co. said on Thursday that rising passenger traffic, stabilizing oil prices and a rebounding Korean won will help it post a profit in the third quarter after the national flag carrier swung to a loss in the second quarter.

Outbound traffic from South Korea is expected to rise while inbound and transit demand remains strong, a company spokesman said. Cargo shipments are expected to recover gradually due to seasonal demand and the coming London Olympics, he added.

As jet fuel accounts for 40% of Korean Air's overall costs, a sustained decline in oil prices is likely to be the biggest catalyst to help the airline return to the black in the current quarter, analyst said. In addition, given that much of its business is transcasted in the local currency while debts are denominated in dollars, a strengthening of the won against the dollar will also bolster earnings, they said.

Despite a decline in jet-fuel prices, expenses for the fuel rose 3.1% on year to 11.981 trillion Korean won ($10.5 billion) in the second quarter as the airline scheduled more flights. Jet-fuel prices fell 2% to an average of $136.3 a year earlier.

For the three months ended June 30, Korean Air swung to a consilidated net loss of 158.5 billion won from a net profit of 21.15 billion won a year earlier due to the weak local currency and higher fuel expenses.

"A weaker won drove up the value of dollar-denominated debts which left the company with foriegn exchange translation losses worth 136 billion won," the spokesman said. Such debts increased 12% to $12.34 billion as of the end of June.

In contrast, Korean Air reported Foreign-exchange gains worth 165 billion won in the year-earlier period.

The dollar had strengthened to 1,153.80 won at the end of June from 1,078.10 won a year earlier. The greenback was trading at about 1,139.10 won on Thursday.

The airline recorded a loss of 48 billion won in the June quarter relating to the firm's affiliates, compared with a profit of 39 billion won a year earlier.

At the operating level, the carrier swung to a profit of 128.48 billion won in the second quarter from an operating loss of 19.73 billion won a year earlier. Sales rose 11% to 3.272 trillion won from 2.944 trillion won.

Increased outbound demand on long-haul routes to Europe and the U.S. helped buoy the second-quarter operating profit, the Korean Air spokesman said.

Still, amid global economic uncertainties outbound shipments of technology products and auto parts fell for Korean Air, which is the world's second-largest cargo carrier by freight volume.

Meanwhile, Korean Air on Thursday disclosed it will purchase two B777-300ER passenger jets for $558 million from Boeing Co. to strengthen its services on long-haul routes. The airline expects to complete the jetliner purchases by 2014.

Separately, Canada's Competition Bureau said on Thursday that Korean Air pleaded guilty and has been fined about $5.4 million for its participation in an air-cargo price-fixing cartel between 2002 and 2006. The investigation has now yielded a total of seven convictions.