Korean Air rides out pandemic turbulence with turn to cargo

SEOUL -- Korean Air Lines reported its second straight quarterly operating profit on the back of its robust cargo business, defying the global industry's malaise from the steep drop-off in passenger traffic. In September, Korean Air removed all seats from two Boeing 777s to convert the passenger planes into cargo carriers after it became clear ridership would not improve in the short term amid the pandemic-induced travel restrictions. The carrier took out wiring and other components as well, with the blessing of the transport ministry and Boeing.

The move secured more than 10 tons of additional cargo space in each plane, which helped to maximized revenue, according to Korean Air. The national flag carrier reported Thursday an operating profit of 7.6 billion won (£6.7 million) for the July-September quarter, down 94% from a year earlier. This follows the 148.5 billion won profit from the second quarter.

Overall sales in the third quarter declined 53% to 1.55 trillion won. Revenue from passengers dropped 87% from a year earlier, but cargo revenue jumped 59%. Freight accounted for 66% of the total revenue, up 46 points from a year earlier.

Korean Air reported a net loss of 385.9 billion won for the third quarter. One silver lining from the coronavirus pandemic is that air cargo rates climbed by 50% to 100%. Normally, about half of air-ferried freight are loaded on cargo-only aircraft, while the remainder is placed in the cargo holds of passenger planes.

But the drop in passenger flights has significantly cut the normal carrying capacity, and the imbalance between demand and supply has raised cargo fees. Korean Air is well positioned to take advantage of the market shift since it made over 20% of its sales from cargo before the pandemic. The ratio is well above competitors: Japan's All Nippon Airways, which is suffering massive losses for the current fiscal year, derived less than 10% of its aviation business revenue from cargo.

Another factor in Korean Air's favor is that many of South Korea's top exports, such as semiconductors and smartphones, are light, have high-added value, and are well-suited for air transport. The cargo heads for destinations like China and Vietnam that are home to tech assembly plants. Korean Air's home base of Incheon International Airport has aimed to become the Asian hub since it opened in 2001.

The airport underwent two construction projects that expanded the intake capacity of both passengers and cargo.

Korean Air removed seats to convert this passenger jet into a freighter.

The airport is able to process 5 million tons of freight a year, one of the largest volumes in Asia. There are plans to develop a high-speed rail service line to help speed up shipping times. The government expanded the size of the free trade zone at Incheon to boost the global competitive advantage of the airport.

Quarantine and customs capabilities were enhanced as well. Tax incentives along with cuts and exemptions to aircraft parking fees were rolled out. Transit cargo accounts for over 40% of the processing volume at Incheon, with large ratios traveling between Western and Asian nations.

Korean Air has benefited the most from such freight. The airline operates a dedicated cargo terminal at Incheon, and long-distance corridors between the airport and destinations in the U.S. and Europe account for roughly 80% of cargo sales.  Korean Air operates 23 cargo aircraft, making it well placed to respond to the increase in shipping demand.

The carrier is ranked sixth in the world in terms of freight carrying capacity, according to the International Air Transport Association. Korean Air would be fourth if couriers such as FedEx were excluded. South Korea has a small land mass, and people make use of other transportation options such as buses for domestic travel.

Domestic flights only made up 6% of Korean Air's passenger revenue last year. Now with border controls disrupting traffic, over 80% of all flights have been grounded. Most of the staff are still furloughed.

Meanwhile, Korean Air is expanding the cargo it will handle. Last month, the company established a task force to prepare the airline for transporting vaccines. Korean Air forecast demand for coronavirus vaccines will reach 10 billion doses worldwide.

The crucial nature of the vaccines raises the prospect that they will be shipped by air.

Korean Air will leverage its know-how on shipping medical supplies, such as temperature controls, in this venture.

"Incheon is increasing its role as an intermediate port of call between North America and Asia," said Jung Yeon-seung, an analyst at South Korea's NH Investment & Securities. "The October-December quarter is a busy season for airfreight, so Korean Air's earnings will increase further."

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