4 September 2017, Asia Pacific – North Korea’s thermonuclear test on Sunday has heightened geopolitical tensions in the Korean Peninsula and the broader Asia Pacific region. This escalating tensions could drive travellers to postpone or cancel their trips to South Korea which is a popular tourist destination. This will hurt Korean Air, Asiana as well as Southeast Asian airlines AirAsia X, Vietnam Airlines and VietJet the most.
Korean Air will be the biggest casualty if international travellers shun South Korea
The biggest victim in the aviation sector will be Korean Air (003490:KS) and Asiana (020560:KS) which derive over 90% of their passenger traffic from international routes. Jeju Air (089590:KS) will also be significantly hurt as international routes account for 75% of its total passenger capacity.
Chart: Asia Pacific airlines passenger capacity exposure to South Korea (2017)
AirAsia X is most exposed among Asia Pacific airlines flying internationally to South Korea
Apart from the Korean carriers, AirAsia X (AAX:MK), Vietnam Airlines (HVN:VN), VietJet (VJC:VN), Philippine Airlines (PAL:PM) and Cebu Air (CEB:PM) have the largest passenger capacity exposure to South Korea routes at 10%, 7%, 6%, 5% and 4% respectively among the Asia Pacific airlines.
Chinese carriers have already slashed their capacity to South Korea
Due to the collapse in Chinese outbound traffic to South Korea following the travel curbs (see our previous report below), the Chinese airlines have already slashed their capacity on China-South Korea routes by 40% y/y as at August 2017. Spring Airlines (601021:CH) continues to have the largest passenger capacity exposure to South Korea at 1.4% among the Chinese carriers, followed by China Eastern Airlines (670:HK) at 1%.
Predominantly domestic and short-haul carriers tend to have limited direct exposure to South Korea routes
Asia Pacific airlines with no or limited direct exposure to South Korea routes are major low cost carriers AirAsia (AIRA:MK) and IndiGo (INDIGO:IN). Major full service carriers Qantas (QAN:AU) and Jet Airways (JETIN:IN) have exposure to South Korea via their codeshare flights.
Chart: Korean carriers passenger capacity exposure to international routes (2017)
Some traffic could divert to other markets, particularly in Southeast Asia but the yields on these routes tend to be lower
Some international leisure traffic (particularly Chinese outbound travellers) could be diverted from South Korea to the other Asian destinations and we see Southeast Asian countries as the biggest beneficiaries.
The airlines could cut capacity on their Korea flights and redeploy the capacity to these other markets which will also help to mitigate the negative impact. However, due to the high-yielding nature of South Korean routes, the resultant net profits could still be lower for the Asia Pacific airlines as a result of any traffic fallout.
Rising war risk is likely to lift oil prices higher and strengthen the US dollar which will be additional headwinds for the Asia Pacific airline sector. Flights may have to be diverted to longer routes to avoid the Korean Peninsula.
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