June 22 (Bloomberg) -- Korean Air Lines Co. shareholders may be the biggest beneficiaries of the $71 billion boost in commerce between the European Union and South Korea after a free-trade agreement between the two takes effect July 1.
The EU’s first trade accord with an Asian nation will increase air shipments of Samsung Electronics Co. flat screens from South Korea and Louis Vuitton bags and crates of Beaujolais Nouveau from France. That may help Korean Air reclaim the rank of the world’s biggest international air-cargo company that it lost to Cathay Pacific Airways Ltd. last year.
“Airlines will most definitely benefit from the trade agreement,” said Song Jae Hak, a transport analyst at Woori Investment & Securities Co. in Seoul, who has a “buy” rating on Korean Air. “Korean Air is sure to reclaim its No. 1 position.”
The 27-member bloc’s trade deal with South Korea, the world’s seventh-biggest exporter, is expected to expand their almost $100 billion of annual commerce by $4.7 billion a year over the next 15 years, according to a 2010 study led by state- run Korea Institute for International Economic Policy. South Korea’s annual air shipments may rise 6.4 percent and imports by 2.8 percent by 2015, Korean Air said in a written response to queries last week.
Korean Air earned 28 percent of its freight revenue in the first quarter of this year from European routes, compared with 40 percent from the Americas.
The company’s shares have rallied 22 percent from their March 15 low to 68,900 won yesterday on a stronger Korean currency and investor expectations that the introduction of Airbus SAS A380 superjumbos will cut costs per seat and lure more premium-class passengers.
The share-price gain makes Korean Air the second best- performing over that period among the 31 stocks that comprise the Bloomberg World Airlines Index. Hong Kong-based Cathay Pacific declined 4.3 percent.
Korean Air may have room to gain. Twenty-seven out of 33 analysts tracked by Bloomberg have a “buy” recommendation on the stock, with Song’s 12-month target of 105,000 won the highest. The average target price of 17 analysts that provided them was 84,158 won.
The EU pact is likely to increase the relative importance of European markets for South Korea over the U.S. while congressional disputes delay approval of a similar trade agreement with America. That may help companies such as London- based GlaxoSmithKline Plc and Ludwigshafen, Germany-based BASF SE get ahead of U.S. rivals in Asia’s No. 4 economy.
The deal creates “even more incentive for us to move as quickly as we can,” U.S. Commerce Secretary Gary Locke said in Seoul on April 29. “We don’t want a long period of time in which products from the EU have a significant competitive advantage over U.S. goods.”
“The EU FTA will bring an immediate rise in imports of wine and luxury goods to South Korea,” said Yun Hee Do, an analyst at Korea Investment & Securities Co. in Seoul. Airlines are likely to enjoy more benefits than shipping lines, where “the problem of overcapacity looms,” he said.
The global container shipping fleet may grow 9 percent this year, said Paris-based Alphaliner, which provides data on the industry. The biggest rise is expected in Asia-Europe trade as shipping lines deploy vessels longer than the 324-meter (1,063- foot) Eiffel Tower. Capacity on the route may have risen about 19 percent in May alone, it said.
The trade accord “could serve as a positive factor, albeit small, for shipping lines pressured by low rates,” said Heo Pil Seok, chief executive officer of Seoul-based Midas International Asset Management Ltd., which oversees $3.2 billion in equities. Midas holds Korean Air shares, according to data compiled by Bloomberg.
“Normally when you get these tax incentives or free-trade agreements there is clear growth in business,” Thomas Knudsen, head of Asia-Pacific operations for Maersk Line, a unit of A.P. Moeller-Maersk A/S, said in an interview in Singapore. EU tax exemptions for Cambodian goods helped shipments from there to Europe grow “significantly” this year, he said.
South Korea’s annual commerce with the 10-member Association of Southeast Asian Nations has jumped 61 percent to $107 billion in the four years since a trade accord came into effect in June 2007, the Ministry of Foreign Affairs and Trade says. Korea’s combined exports to countries it has trade pacts with jumped 34 percent in 2010 from a year earlier, faster than the 28 percent growth in total exports, Korea Customs Service figures show.
Auto parts, medicines and fine machinery -- such as cameras and watches -- are industries expected to benefit from the South Korea-EU agreement, Korean Air said in the statement.
The company plans to add five Airbus A380s this year on routes including between South Korea’s Incheon and Paris in September. The Seoul-based company is scheduled to receive five more A380s by 2014 and said on May 3 it would purchase seven new planes, set to be delivered between 2013 and 2015. Korean Air is also due to get seven Boeing Co. 747-8 freighters by 2015.
The airline on Jan. 27 forecast a record operating profit this year, with cargo traffic expected to gain 3.8 percent.
Global air-cargo traffic may rise 5.5 percent this year, from a 4.3 percent pace in the first four months, according to the International Air Transport Association in Geneva. Demand for air cargo may recover in the second half as retailers restock for year-end holidays, according to airlines including Cathay and FedEx Corp.
Cathay Pacific may see cargo growth cooling “a little bit” in 2011 after last year’s 18 percent rise in volumes, Chief Executive Officer John Slosar said March 9. Last year was “extraordinary” with the end of the global recession and shipments of Apple Inc.’s iPhones and iPads, he said.
--With assistance from Seonjin Cha in Seoul. Editors: Ben Richardson, Anne Swardson
To contact the reporters on this story: Bomi Lim in Seoul at firstname.lastname@example.org; Kyunghee Park in Hong Kong at email@example.com
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