By Lee Hyo-sik
Korean Air and Asiana Airlines had a great year in 2010 as a record-high number of Korean travelers headed overseas on rising incomes and other favorable economic conditions. Plus, an all time high 8.8 million Japanese, Chinese and other foreign visitors came here, providing a further boost for both carriers.
Capitalizing on last year’s success, they have each unveiled an aggressive business plan to add new airplanes to their fleets and expand overseas operations in 2011.
However, this year they face unfavorable business environments at home and abroad, with the number of inbound and outbound travelers projected to grow at a much slower pace.
Surging oil prices as a result of geopolitical conflicts in North Africa and the Middle East as well as other negative external factors may force the airlines to abandon their expansion-oriented business strategy after all, industry analysts said.
Korean Air said it will spend 2.1 trillion won this year for 18 new airplanes, based on projections that the number of travelers will continue to increase in the years to come.
Asiana also plans to spend 456.3 billion won to buy three new airplanes and expand its overseas operations.
Experts have warned that their policies may backfire if not as many passengers as they expect decide to fly with them and while global oil prices continue to soar, chipping away at their bottom lines.
“A record number of Koreans traveled overseas in 2010, following a strong economic rebound from the worldwide financial crisis of 2008 and 2009. The story is the same for Japanese, Chinese and other Asians who came here. It is uncertain whether the numbers of both inbound and outbound travelers this year will exceed 2010,” said Hyun Min-kyo, chief analyst at Shinhan Investment Corp.
The number of passengers on Asiana Airlines’ international routes rose only 1.6 percent in February from a year earlier, following a 2.1 percent-jump in January. Korea’s second largest air carrier saw the number of passengers increase at a double-digit rate throughout 2010.
Korean Air also saw growth rates of its international flight passengers in January and February fall sharply, compared to the same months last year.
The number of its international passengers inched up by only 1 percent in February and 3 percent in January from a year ago.
“The overall business environment for airlines has and will remain generally strong. But if the international oil prices continue to head upward, it will spell serious trouble for Korea’s two flagship carriers,” Hyun said.
Fuel prices have recently surged by more than 51 percent to over $130 per barrel from a year earlier.
The two airlines’ profitability is expected to weaken compared to 2010. Last year, Korean Air recorded revenue of 11.5 trillion won, while generating a 1.12 trillion won operating profit. Asiana posted 5.07 trillion won in revenue and earned 636 billion won in operating profit.
“If the oil prices continue to rise, and geopolitical uncertainties surrounding Libya and other Arab nations persist, the two airlines will likely see falling profits. They are also facing increasing competition from foreign airlines and low cost carriers. I think Asiana will be hit harder than its larger counterpart by a range of emerging negatives at home and abroad,” Hyun said.
Both airlines told The Korea Times that they have taken all possible steps to cope with rising fuel costs, including more frequent cleaning of engines and unloading of unnecessary equipment and supplies.