KAL and Busan sign pact to build aerospace hub

Korean Air Lines signed a memorandum of understanding with the city of Busan yesterday to set up an aerospace cluster in the region.

The nation’s largest airline announced yesterday it will build its second technical center, which will cover an area of 230,000 square meters (2,475,699 square feet), in the southern port city no later than 2020.

An affiliate of logistics giant Hanjin Group already has a 710,000 square-meter technical center near Gimhae International Airport in Daejeo-dong, western Busan.

The airline’s aerospace division was previously only known for maintenance and modification work on Korean and U.S. aircraft. But in recent years, it has been trying to expand into unmanned aircraft development and even satellite and space launches.

The company said it will invest 1.5 trillion won ($1.37 billion) until 2020 and build facilities such as aircraft assembly factory, maintenance, repair and overhaul center, aerostructure development center and automated logistics center.

Busan said it will support some 50 aircraft parts and engineering companies to join the cluster.

KAL expected that its sales in aerospace will grow from 600 billion won to 3 trillion won in the next eight years. It also said that more than 2,300 jobs will be created by 2020.

“Busan hopes to emerge as a core of the Northeast Asia economy while Korean Air wants to step up to be the best aerospace company in Asia by 2020,” said Ji Chang-hoon, CEO of Korean Air. “We want to vitalize the regional economy in cooperation with SMEs [small- and medium-sized enterprises] and make the aerospace business one of the best industries in Busan.”

Industry insiders suspect that KAL’s aerospace ambitions indicate the company’s determination to buy Korea Aerospace Industries (KAI), the nation’s sole aircraft manufacturer. KAL has been claiming that its proposed takeover of KAI would create synergy and upgrade Korea’s aerospace industry.

The airline is set to enter a second round of bidding along with Hyundai Heavy Industry, the nation’s largest ship builder. Both are scheduled to begin preliminary due diligence next Thursday before making binding bids for a 41.75 percent stake in KAI next Friday, which is estimated to be worth 1.1 trillion won, to the Korea Finance Corporation.

The first preliminary bid fell through in September due to a lack of competition. Korean Air was the only participant.

Cho Won-tae, a senior vice president at KAL, said that the company has prepared the money to buy KAI.

“Our position to buy KAI at an appropriate price has not been changed,” Cho, who is also son of Hanjin Group Chairman Cho Yang-ho, said at the MOU signing event. “I heard Hyundai Heavy Industries has more financial power than us, but I’m not sure if that company has the will to acquire KAI.”

By Joo Kyung-don [kjoo@joongang.co.kr]