* 2Q review: End of the tunnel

- We maintain BUY and our six-month price target of W63,000

Despite the announcement of its worst quarterly operating loss, our view of Korean Air is still bright as we believe the company’s earnings will rapidly grow from 3Q08. Profitability should significantly improve in 3Q as seasonally demand will likely sustain, air surcharges, which were raised in July, will probably be raised again during September, and oil prices have been declining precipitously.

As there are concerns that demand growth could weaken, the stock’s recovery has been slowing despite falling oil prices. Actually, demand for air transportation has contracted, primarily from tourists, as fares soared and the global economy has slowed down. However, we believe that air transport demand will be able to maintain 1-2% growth in 2H08. As consumers have developed a taste for overseas travel and because globalization has accelerated, outbound demand on international routes has been structurally changing in the favor of airliners. Although demand has dwindled, it should only be temporary and will probably begin to recover from 4Q08. Moreover, if Korea is included into the US visa waiver program in early 2009, demand on US-bound routes would skyrocket, driving up total air demand and improving investor sentiment.