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UPDATE 1-Jeju Air sees record Q3 profit, says China again blocked charter flights
August 22, 2017 / 3:24 AM / a month ago

UPDATE 1-Jeju Air sees record Q3 profit, says China again blocked charter flights

* S.Korea’s biggest LCC benefiting from changing spending patterns

* CFO says Korea LCC consolidation likely after two, three years

* Requests for China charter flights rejected since missile spat (Add earnings of Korean Air and Asiana Airlines, plus Jeju’s share price)

By Hyunjoo Jin

SEOUL, Aug 22 (Reuters) - Jeju Air Co Ltd expects record quarterly profit in July-September, as changing lifestyles at home in South Korea translates into demand that more than makes up for China again rejecting its monthly application to provide charter flights.

South Korea’s biggest low-cost carrier (LCC) by market share is benefiting as more Koreans travel overseas spurred by lower fares, and increasingly spend on small luxuries in a departure from a past focus on savings, Chief Financial Officer Kim Tae-yoon told Reuters.

But the airline, like its peers, is still hamstrung in China, where authorities declined Jeju’s request to offer charter flights in August to and from the country - the latest in a series of rejections stretching back to January.

The initial rejections came after Seoul’s decision to deploy a U.S. missile defence system to counter any potential threat from North Korea. Beijing objected that the system’s radar was capable of penetrating Chinese territory.

Ensuing anti-Korean sentiment involved protests and boycotts of Korean goods and services. Chinese tour groups to South Korea were also halted, as were charter flights.

“There are no signs that China will approve the resumption of charter flights,” Kim said in an interview. “Nevertheless, we are preparing to resume flights whenever they are approved.”

Jeju generated only a small portion of revenue from Chinese charter flights. It has since redeployed aircraft to Japan and Southeast Asia and, in April-June, booked operating profit of 16.2 billion won ($14.23 million) - a 24-fold jump from a year earlier, when bad weather reduced travel demand.

Full-fledged carriers Korean Air Lines Co Ltd and Asiana Airlines Inc - which are more exposed to Chinese business - also posted strong second-quarter earnings as surging chip demand increased cargo from Samsung Electronics Co Ltd and SK Hynix Inc.

CONSOLIDATION

Jeju operates 29 Boeing Co 737-800s. It plans to expand its fleet to 32 by year-end and add six to eight aircraft each year to reach 50 in 2020, Kim said. All planes will be 737-800s to achieve economies of scale and help keep costs low.

He said Jeju’s expansion will accelerate consolidation in South Korea’s low-cost carrier sector, which he expects to reach saturation point after two or three years.

South Korea has six low-cost carriers, with competition set to increase early next year with two more. Kim expects the sector to eventually settle with two or three carriers.

“Now, everyone is holding up well, but when the market deteriorates, only airlines with cost-competitiveness like us will survive,” he said.

One competitor is Jin Air, affiliate of Korean Air. Jin Air plans to list on the stock market and use listing proceeds to fund investment for growth, such as buying aircraft.

Jeju Air’s share price has jumped over 50 percent this year, partly due to expectations for steep earnings growth. The price was down 1.4 percent at 0315 GMT on Tuesday, compared with a 0.4 percent rise in the Kospi benchmark share price index.

$1 = 1,138.2100 won Reporting by Hyunjoo Jin; Editing by Christopher Cushing

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