Asiana Airlines Crash at SF Airport: Book Value Loss Irony

Asiana Airlines Crash at SF Airport: Book Value Loss Irony

On July 6, Asiana Airlines Inc (KRX:020560) (OTCMKTS:ASIC) (Asiana) B777-200ER crash landed at the San Francisco International Airport. Asiana confirmed that there were 291 passengers onboard. The accident is currently under investigation and no immediate action has been taken against Asiana’s scheduled flights to/from the US. According to LibertyTimes (July 8), this is the third major flight accident for Asiana while the first and second accidents occurred in 1993 and 2011, respectively.

According to Asiana Airlines, the aircraft was under finance lease and its net book value was KRW137 bn at the end of 2012. According to the company the net financial impact from the incident is to be about a KRW20 bn loss after factoring in a US$99 mn (KRW117 bn) claim from insurance, representing 1.7% of Asiana’s 2013E book value (not including passenger compensation). Separately, the South Korean Transport Ministry has announced special inspections of B777 engines by August 25, 2013. According to company announcements, Asiana Airlines currently has 11 B777s out of a passenger fleet of 68 (of which 34 are widebody),

Asiana Airlines reported the book value of the destroyed B777-200ER aircraft to be 137.3bn won, with 113.6bn won covered by insurers; the difference, 23.7bn won, will be booked as a non-operating loss in 3Q13. Paul Wan of CLSA notes that  ironically, this is 44.5% less than the impairment loss (~42.7bn won) the airline would book if it were to market the aircraft to market based on a current market value for an equivalent aircraft.

Asiana Airlines Earnings cut by CLSA on reduced traffic

British Airways had a similar but less serious incident in 2008, which resulted in a limited earnings impact. The nature of the current event is more serious with three fatalities. More importantly, Paul Wan notes ‘Asians are generally more risk averse if there are safety issues on Asiana Airlines’. As such CLSA has trimmed their load factor forecasts by 1.5% & 1% for 2013 & 2014, in addition to the aforementioned 23.7bn won non-operating loss to be booked in 3Q13. This translates into 23.6% & 21.4% and 79% & 33.5% cuts in OP & NP forecasts for 2013 and 2014.

In terms of the cause of the Asiana Airlines crash, according to the Wall Street Journal

Deborah Hersman, head of the National Transportation Safety Board, said an investigation of the crash of Asiana Airlines Flight 214 in San Francisco found no evidence of equipment malfunctions.

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