2010 Air (KAL:003490)

Korean Financial
Analyst Report

Company Summary

Business Overview
Company: Korean Air

Date Established: March 1, 1969 SNU MBA Analyst

Area of Business: Passenger, Cargo, Aerospace, Catering, Recommendation
Hotel, In-Flight Sales, Limousine

Fleet: 129 (As of September 30, 2010)

Route: Domestic: 13 Cities Intl: 38 Countries,

105 Cities
Rating:
Employees: 19,178 GOOD
Operating Revenue: 9,393,700,000,000 Won

Operating Result: Passengers: 20.41 Million Cargo: 1.57

Million Tons

Earnings Outlook

Based on the current growth rate, we expect the FY10 revenue to rise by
15% and the operating costs to rise 8%. The net profit forecast will
increase to KRW328 bill gain from a KRW393 bill loss the previous year.
The reasons for these gains are:

➢ Demand for passenger seats will rise 9% compared to the

previous year. This is based on the GDP growths of each country
according to their share of KAL revenue.
➢ The KRW will continue to gain value vs. the USD
➢ With KAL’s focus on increasing and improving their international
business class (estimated 48% of total revenue) we expect the
profit margin and revenues to gain.
➢ The new development of a cargo hub based in China nearing
completion will increase productivity and utilization of KAL’s fleet
and increase its freight capacity kilometers.
➢ The continuing growth of semiconductors, electronics, and
automotive parts exports should drive the outbound cargo loads.
➢ Good foresight and financial management by properly hedging
fuel prices should contain the rising operating costs.

Potential Risks

There are several risk factors that could lead to a decline in the current growth rate of KAL:

➢ A relapse into an economic slowdown

➢ Catastrophic weather and natural disasters such as the Icelandic volcanic eruption
➢ Pandemic disease limiting the travel rate such as the swine flu
➢ Oil and fuel costs becoming instable due to turmoil in the middle east
➢ Rising tension of North and South Korea from regime change
Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

➢ A decline in productivity of Korean companies

Forecasts/Ratios

Strategy Analysis

Business Summary

Corporate Overview

Korean Air was first established on June 19, 1962 under the name, National Korean Airlines, by the
Korean government and was then privatized on March 1, 1969, by Hanjin Group, one of the world’s
largest transportation companies. Since its incorporation on March 1, 1969, the company’s shares
have been offered for public ownership and all issued and outstanding shares are listed on the Korea
Stock Exchange.

Korean Air started as a small regional airline, but currently the company offers air transportation to
117 cities in 39 countries with fleet of 129 aircrafts (as of July 31, 2010), being recognized as a global
carrier with top ratings by travelers and critics throughout the world. It engages in the various
domestic and international airline services with its main business residing in Air Transportation
(Passenger, Cargo shipping, Maintenance service, Training service, Building lease) which generates
approximately 96% of the total revenue. Its other business areas (Aerospace, Catering & In-Flight
Sales, and Hotel & Limousine) accounts for the remaining 4%.

Market Overview

Korean Air comprised of about 63% of the total Korean Airline market in 2009 with operating revenues
consisting of KRW 9,393.7 billion and operating income consisting of KRW 133.4 billion. This was still
an 8% decrease in its revenue, but an increase of 1.6% gross profit to KRW 1,413.7 billion as it
reduced its flight expenses. This resulted in a better performance when compared to most other
international airlines during this timeframe.

Competitive Landscape

The Korean airline industry consists of approximately 5 million commercial passenger airlines. The
major regional competitor is Asiana Airlines which controlled approximately 33% market share in 2009.
In the international market, some of the main competitors are Cathay Pacific, Delta, and Air China. The
Korean airline market is an oligopoly of competition between two major airlines, Korean Air and Asiana
Airlines, but we cannot disregard the international airlines, which impacts on the total share of Korean
passenger revenues. In addition, it is highly sensitive to the economic conditions, which has significant
Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

effects on the demand of two operation mainstreams: airline passenger demand and international
cargo transportation.

Financial Trends

Korean Air (KAL) was valued at 78,000 Won on Oct. 1, 2010 which was an increase from the previous
year. We can attribute this gain to the global economic recovery and the growing strength of the KRW
to the USD. The economic stimulus has led to a recovery in cargo demand and an increase in the
number of travelers. Despite the increase in fuel costs revenues, both cargo and passenger divisions
have seen positive revenue streams.

Sub-Industry Outlook

The airline sub-industry appears to have a positive outlook. Traffic statistics at many carriers shows
improving demand and increases in revenues for the first half of 2010. This trend is expected to
continue as the economic conditions improve their way forward. In addition, with the passenger
demand for travel increasing (whether it be for business or personal purposes), we should be able to
see a turnaround and recovery from the previous two years which were impacted by the economic
downturns.

Associated with the general economic downturns are the volatile fuel prices and the currency
transaction and translation which the airline industry is highly exposed to. In fiscal 2008, this lead to
negative performance along with higher COGS and operating profit fluctuations despite the operating
revenue increases of 14% over the 2007 fiscal year-end. However, since fiscal 2009, the total fuel
expenses decreased as the average price per barrel stabilized. This trend, along with the settlement
of oil price zero-cost collar option contracts, is expected to ease cash usage throughout the group
and positively influence operating profit for fiscal 2010.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Risk Analysis

Same-line industry competition

Korean Air continues to develop new routes in South America, Europe & Asia Pacific regions, targeting
a larger international customer base. The overall size of domestic and international passengers had
been an increasing trend for the last three years. In order to capitalize on the fast growing Chinese
market for reliable cargo services, the company has continuously opened new routes and destinations
within the Greater China area. Korean Air has also established a cargo terminal at the Tianjin Binhai
International Airport, China, as a joint venture with Sinotrans Air Transportation Development to have
a cargo hub to meet regional demands. With such diversified transportation services and increasing
passenger levels, the subject borrower’s market position is considered to be superior to other
competitors.

High exposure to jet fuel costs & foreign exchange rate

Despite the positive turnaround in the economy and thus in fuel price and exchange rate, potential
risks do exist in this area. For FY 2008, the soaring fuel price and loss on foreign currency transaction
had imposed a great challenge for the subject airline, significantly reducing the year-end operating
profits into negative margins. To mitigate ongoing risk factors, Korean Air now attempts to develop
new selective destination/route(s) in high-potential market areas and to provide premium service,
seating upgrades, and point-to-point services, especially in the long-term flight routes. These changes
and upgrades will be performed on an annual basis. In order to hedge the exposure to changes in oil
prices as it affects aircraft fuel, Korean Air has entered into oil price zero-cost collar option
contracts, which consist of call-options in long positions, put-options in short positions and oil
price swap contracts that are based on West Texas Intermediate. For FY 2009, the operating
profits indicated a positive trend due to reduced risks for the weaker KRW and fuel price fluctuations.
2010 1Q exhibited a higher profitable operation with a 42% increase in total operating profit (2009’s
$114 million to 2010’s $195 million). Net profit also increasingly turned into a positive margin to $206
million from overall gains on foreign currency exchange. Considering sufficient cash flows (interest
coverage ratio of 3.01x as of 03/31/10) and reserved assets & net worth ($14,855M & $2,821M), the
above risk factor can be mitigated. The current efficiency of the management team is also added
benefit.

Growing Low-Cost airline market

With increasing consumer demand in domestic and Asia Pacific routes, along with the increasing travel
rate of younger generations, more practical and low cost carriers have created a new segment in the
airline industry, leading to fiercer and wider competition among the airlines. In order to face this new
trend and these rising challenges, Korean Air now manages Jin Air, a low-cost carrier which mainly flies
short-term routes and targets younger generations.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Despite the various challenges it faces, Korean Air prepares well and mitigates through them by
leveraging its core strengths and advantages which then generates positive output and growth.
Korean Air visions itself as a ‘Respected Leader in the World Airline Community’, which they strive for
through delivering its mission of ‘Excellence in Flight’ in the areas of operations, services, and
Innovation. As shown through the successful breakthrough in 2009, Korean Air has now set a 10 year
strategy which states its goal as achieving a revenue of KRW 25 trillion, an operating profit of KRW 2.5
trillion, and a ranking in the Global Top 10 airlines by year 2019. This will be accomplished through its
competitive advantages: Strengthened Core Competencies, Customer Focused Service, Expansion of
Business Sectors, and Advancement in Management System.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Accounting Analysis

Key Accounting Policies

The Company maintains its official accounting records in Korean won and prepares statutory financial
statements in the Korean language in conformity with accounting principles generally accepted in the
Republic of Korea (Korean GAAP).

Account Disclosure per 2009 Annual Report

Property, aircraft “Depreciation of property, plant and equipment is provided using the straight-
and equipment, line method over the estimated useful life of the assets Property, aircraft and
and related equipment are stated at cost less accumulated depreciation, except for
depreciation certain assets which were revalued and are stated at revalued amount less
accumulated depreciation. Maintenance and repairs are expensed in the year
in which they are incurred. Expenditures which enhance the value or extend
the useful life of the related assets are capitalized.”

Estimated useful life in years:

Buildings 40

Aircraft and engine 20

Leased aircraft and 20

engine

Other aircraft parts 15

Vehicles 6

Others 6-15

Leases “The Company accounts for leases that transfer substantially all the risks and
rewards incidental to ownership of assets as capital leases and leases other
than capital leases as operating leases. The Company accounts for leases that
transfer substantially all the risks and rewards incidental to ownership of
Rental expenses for operating leases, which are expensed on a straight-line
basis over the lease term, are charged to current operations as they become
payable. The Company recognizes a capital lease as an asset and a liability in
the statement of financial position at an amount equal to the fair value of the
leased asset or, if lower, the present value of the minimum lease payments at
the inception of the lease. In calculating the present value of the minimum
lease payments, any residual value guarantee is excluded and the interest
rate implicit in the lease is used as the discount rate. Leased assets are
Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

depreciated in the same manner as other assets through purchases. Minimum

lease payments are apportioned between the finance charges and the
reduction of the lease liability. The finance charges are allocated to each
period by the effective interest rate method and recognized as an interest
expense.”

Number of Aircraft Operatin Capital Own Total Operating

g lease Lease Lease / Total
fleet

Korean Air 27 67 33 127 21.3%

Asiana 43 22 9 74 58.1%

Delta 213 93 677 983 21.7%

Cathay Pacific 29 49 48 126 23.0%

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Key Accounts and Financial Statement Analysis

Property Plant and Equipment and related depreciation (PP&E)

PP&E is an important asset account for airlines as it accounts for a large part of their assets and
consequently their related depreciation expense item accounts within their operating expenses. In
addition, as operating expenses have an impact on Net Income, the various methods and estimates
used in calculating depreciation amounts can vary among the firms in the industry. Compared to 2008
Korean Air’s Total Assets increased about 6% and most of this increase was primarily attributed to a
44% increase in Cash and an increase in PP&E. In 2009, Korean Air’s Net Property Plant and
Equipment’s balance was 11,681,659 Mill KRW. This amount is about 69% of the Company’s total
assets. The Depreciation Expense for the year was 758,231 Mill KRW and this amount is 8.49% of
Operating Expenses. The table below shows that this percentage is reasonable to other airlines in the
industry.

YE 1999 Korean Air Asiana Delta Cathay

Pacific

PP&E 11,681,659 2,457,557 23,775,800 9,770,750

Total Assets 16,919,272 5,814,972 50,662,000 17,003,500

PP&E / TA 69.04% 42.26% 46.9% 57.46%

Depreciation 785,986 205,433 3,402,370, 852,848

Total OPEX 9,260,327 4,123,907 33,031,100 9,323,930

Depreciation/OPEX 8.49% 4.98% 10.3% 9.15%

Off-balance sheet Liability

As of FYE 2009, there are pending litigations against Korean Air. It has been accused of price-fixing its
cargo services and they are being investigated by the US Department of Justice. Furthermore, lawsuits
have been filed against Korean Air regarding collusion.

Korean Air has also entered into aircraft purchase contracts as of Dec. 31, 2009 with companies such as
Boeing. The amount of these purchase contracts is about 10,061,600 Mill KRW.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Revenue

In the airline industry, strong revenue levels need to exist in order to meet the high-levels of
obligations. Per review of Korean Air’s income statement expenses, the higher expenses of
2008 are attributable to Jet Fuel costs of 4,195 Mill KRW, which took up about 40.7% of
operating expenses. Additionally, lower 2009 revenues are due to lower Passenger and Cargo
revenue which have been attributed to the H1N1 virus and the global economic crisis. 2009’s
Passenger revenue was 5,469,948 Mill KRW and the Cargo revenue was 2,704,599 Mill KRW
while 2008’s was 5,953,328 Mill KRW and 3,026,849 Mill KRW respectively.

Korean Won Millions 2009 2008

Revenue 9,393,703 10,212,578

COGS 7,980,015 8,821,368

Gross Profit 1,413,688 1,391,210

Operating Expenses 1,280,312 1,490,507

Operating Income 133,376 (99,297)

Ratios 2009 2008

% of COGS 85.95% 86.38%

% of Gross Profit 15% 13.62%

% of Operating 13.63% 14.59%

Expenses

Per analysis of Korean Air’s revenue through ratios, COGS and Operating Expenses have
been fairly consistent over the past 2 years. Despite the Operating Loss in 2008, Korean Air
has bounced back in 2009 and has had a good handle on cost control.

Korean Won Millions 2009 2008 2007

Revenue 9,393,703 10,212,578 8,811,989

Total Expenses 9,260,327 10,311,875 8,175,152

Operating income 133,376 (99,297) 636,837

(loss)

Jet Fuel 2,938,700 4,195,100 2,606.4

% Jet Fuel / Total 31.7% 40.7% 31.9%

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Expenses

Revenue 2008 2009

Passenger 5,953,328 5,462,948

Cargo 3,026,849 2,704,599

Others-revenues 1,232,401 1,226,156

Total Revenue 10,212,678 9,393,703

% of Passenger Rev 58.29% 58.16%

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Ratio Analysis

In fiscal year 2009, Korean Airlines recorded an ROE of -3.37% due to the airline industry slowdown
associated with unfavorable economic conditions. However, Korean Air performed better than their
competitors with a higher ROE than companies such as Asiana with a reported -35.5%. This ROE can
be decomposed to three drivers, which are net profit margin, asset turnover and financial leverage.

Korean Airlines maintained its positive RNOA (0.69%) and remained more profitable than its domestic
competitor, Asiana Airlines (-3.22%), in deploying its operating assets to generate greater operating
profit. Its higher NOPM (1.12%), which shows how much it is able to keep as profit from recognized
sales, was mainly caused from its premium pricing strategy as a leading company, efficient
procurement in a duopoly market, and excellent cost management of its own maintenance subsidiary.
Korean Airline’s operating asset turnover, NOAT, which shows how efficient to use its operating assets
to generate sales (0.62), was slightly lower than Asiana’s (0.75).

2009 Korean Air Asiana Cathay Pacific Delta

RNOA 0.69% -3.22% 6.48% -0.62%

NOPM 1.12% -4.27% 6.32% -0.90%

NOAT 0.62 0.75 1.03 0.68

NOPMxNOAT 0.69% -3.22% 6.48% -0.62%

Its spread, which signifies the economic effect of borrowing, was negative (-0.98%) because the return
on operating assets (0.69%) was lower than the cost of borrowing (1.67%). Asiana airlines’
significantly negative ROE(-35.05%) is magnified by the high extent of financial leverage(579%)
relative to its equity base and negative spread (-5.50%).

2009 Korean Air Asiana Airlines Cathay Pacific Delta

ROE -3.37% -35.05% 11.85% -221.09%

RNOA 0.69% -3.22% 6.48% -0.62%

FLEV 415.70% 579.12% 64.80% 7245.76%

SPREAD -0.98% -5.50% 8.28% -3.04%

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

As Korean Airlines increased its

liabilities to maximize its
equity based return in 2007, its
spread turned negative due to
the economic recession, and
operating profit marked its
worst performance as ROE
indicated -53.67% and debt
increased. But ROE is expected
to turn positive
(14.69~16.34%) from 2010
because of its aggressive
strategy of purchasing new air
fleets and developing more
international routes during this
economic recovery.

　 2006 2007 2008 2009 2010E 2011E 2012E

ROE 8.26% 0.25% -53.67% -3.37% 16.34% 14.69% 15.33%

RNOA 3.12% 0.56% -0.55% 0.69% 4.14% 4.40% 4.50%

FLEV 1.97 1.99 2.92 4.16 3.83 3.30 2.86

SPREAD 2.61% -0.15% -18.21% -0.98% 3.19% 3.12% 3.78%

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Valuation

Discounted Cash Flow Valuation Method

Cost of Equity = 7.07%

Net Income = ₩
752,211.00

Net Income without interest income from ₩

cash= 719,640.00

Growth rate in Net Income = 2.05%

Equity Reinvestment Rate for high growth 13.68%

phase=

The dividends for the high growth phase are shown below
(upto 5 years)

2010 2011 2012 2013 2014

Expected Growth Rate 2.05% 2.05% 2.05% 2.05% 2.05%

Net Income ₩ ₩ ₩ ₩ ₩
734,407.00 749,477.00 764,856.00 780,551.00 796,568.00

Equity Reinvestment Rate 13.68% 13.68% 13.68% 13.68% 13.68%

FCFE ₩ ₩ ₩ ₩ ₩
633,940.00 646,948.00 660,223.00 673,771.00 687,597.00

Cost of Equity 7.07% 7.07% 7.07% 7.07% 7.07%

Cumulative Cost of Equity 107.07% 114.64% 122.74% 131.42% 140.71%

Present Value ₩ ₩ ₩ ₩ ₩
592,080.00 564,331.00 537,883.00 512,674.00 488,647.00

Present Value of FCFEs in high growth phase ₩

= 4,245,941.00

Present Value of Terminal Equity Value = ₩

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

783,112.00

Value of equity in operating assets = ₩

5,029,054.00

Value of Cash and Marketable Securities = ₩

890,400.00

Value of equity in firm = ₩

5,919,454.00

Value per share = ₩

87,651.07

*Notes. Accounted for the losses in historical FX translations as an anomaly for future projections.

The basis for the valuation was based on historical data utilizing incomes, cash flows, asset fluctuations, and
market values

We have assumed a 3.5% risk free rate and have use the Beta value 1.19 as listed by the Korea Exchange as of
June30, 2010.

Due the instability of the economy during this recovery period, there were some challenges in
formulating an accurate model of growth with the amount of fluctuations in data. Although this
discounted cash flow model, based primarily on data collected from July 01, 2009 to June 30, 2010, still
provided a favorable estimate, we believe that the growth for Korean Air has an even higher potential
with the strategic approach they are endeavoring to execute. To reflect this perspective, below are
some further trend reports.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Forecasting and Recommendations

We recommend that Korean Airlines is a good company for investment and long term growth. Korean
Airlines has hit record EBIT values in the first quarter of 2010 and continued with a strong second
quarter. Although we do see the growth rate normalizing slightly, we believe that it will remain strong.
We believe that the fluctuations in the market value and earnings are non-volatile in nature especially
when compared to the industry and the economy so we can have assurance that the growth is
substantiated by Korean Air’s strategy and management. We expect that the demand for passenger
travel will exceed prior expectations allowing Korean Air for more growth with the release of their
newly purchased planes. The less predictable market for cargo services may be an issue and may be
affected by the ongoing filing against them for collusion and price-fixing, but we believe that they will
be able to bring stability because of their strong market share and plans for expansion in China.

The criteria for our recommendation are based on the earnings forecasts vs. the potential risks. The
key factors investor should keep an eye on the status of the economic recovery, the Korean
manufacturing and export industry, the continuity of Korean Airline’s growth and expansion execution,
and fuel prices. The risks to our valuations are mainly due to the Korean economy and the value of the
Won. Investors should also make note of the upcoming requirement to change to the IFRS accounting
principles which could affect the way Korean air accounts for their assets drastically changing the
values of their ROA and other ratios. These factors may impact their stock market value and share
price in the short term.

In summary, we believe Korean Airlines as a company has had strong performance especially when
compared to their main competitors like Asiana Airlines. We find no reason to believe that this trend
will not continue for the next several years. Korean Airlines aggressive strategic growth plans should
move them into a position to acquire even more market share both in passenger and cargo sectors.

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Appendix

Operating Results

Operating Results (based on 2009 IATA standards

Operating Revenues

Employees (Total 19,178)

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Financial Statements

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Analyst Team: Hae Ryun Kim, Eun Young Yang, Suh Joon Yoo, Robert Lee
2010 Air (KAL:003490)
Korean Financial
Analyst Report

Exhibit 1

Korean Airline Industry Analysis: Porter’s Five Forces

Bargaining Power of Suppliers

• Fuel & Oil Prices: Single largest airline cost expenditure

item
• Boeing & Airbus: low bargaining power as airliners are
mostly dominated by Boeing and Airbus
• Others: labor, raw materials, travel agents

Threat of New Entrants Rivalry Among Existing Threat of Substitute

Firms Products
• Low fare/cost
carriers: 1) High • Oligopoly: Two • Customer price
cost of entry in dominant players sensitivity:
airline industry had within Korean market Growing demand
reduced the threat for low fare/cost
of entry by (Korean Air & Asiana carriers especially
competitive Airlines) within domestic
companies in the
past, however,
• Industry Potential: routes
business model
Continuously • On-ground
growing market due transportation:
offered by low fare
to increasing 1) Improving
carriers exploited
demand in personal technology (i.e.
lower segment of
and business promptness,
the market via
travelers resulting expansion of
market price and
from economic routes) of on-
provided a
developments ground
foundation for entry
of low cost carriers • Cost Leadership & transportation
Differentiation: 1) such as train (i.e.
such as Jin Air and
Turnover KTX) and buses 2)
Jeju Air 2) No-frill
management and Convenience and
• International
low fare based on easy access
fliers: 1) With compared to flight
seasonality, routes
increasing demand transportation
2) Investment in

Bargaining Power of Buyers

•Elasticity of air travel: Casual travelers elastic to

economic conditions whereas business travelers are more
inelastic
• High consumer demand in quality: excellence in
service, convenience, and comfort important especially in
long distance routes
• Flexible, switching buyer demand: Low fare carriers
Analyst Team:
whoHae
offer Ryun
no frill Kim,
flights Eun Young
in return Yang, Suh
for discounted Joon Yoo,
fares Robert Lee
reshaping the airline industry as result of more options for
buyers