Korean Air may acquire Asiana to form mega flag carrier

Korean Air Lines and Asiana Airlines carriers parked at the Incheon International Airport on Friday. [YONHAP]

The impossible could soon happen, with a Korean Air Lines acquisition of Asiana Airlines reportedly under discussion.

While the formation of a single mega flag carrier would solve many problems and could bring significant benefits to the country, some shareholders are objecting to the combination, saying that it would further entrench the current power structure at Korean Air Lines.

According to local media reports, the combination is being mulled following the collapse of a deal to acquire cash-strapped Asiana by Hyundai Development Company which fell through in September. The reports say that Hanjin KAL, which owns 30 percent of Korean Air Lines, could send a letter of intent to the target this month and that an announcement could be made next week.

“We are reviewing various options, but nothing has been confirmed,” said the state-run Korea Development Bank (KDB) in a statement Wednesday.

KDB is major creditor to both Korean Air Lines and Asiana Airlines.

Along with the Export-Import Bank of Korea (Eximbank), it agreed in May to provide Korean Air Lines with 1.2 trillion won ($1.08 billion) in loans to help it overcome challenges caused by the Covid-19. KDB loaned Asiana Airlines 2.4 trillion won after the Hyundai Development Bank acquisition deal fell apart.

Korean Air Lines was vague about its intent, but it noted that the banks might have a considerable say in what happens.
“Loans from KDB to Korean Air Lines could be converted to shares,” said Kim Won, a spokesperson for Korean Air Lines. “It, therefore, isn’t irrelevant for KDB to get involved in a Korean Air Lines acquisition of Asiana Airlines.”

One possible plan is for KDB to provide capital to Hanjin KAL for the purchase of Kumho Industrial’s 30.77 percent stake in Asiana Airlines, according to local media reports. The plan would leave KDB as the third-largest shareholder of Hanjin KAL.

The combined entity would be an operation of significant scale, with an estimated 15 trillion won in sales. Asiana has 81 aircraft and Korean Air 164.

Professor Hur Hee-young, who teaches business at Korea Aerospace University, agreed that Hanjin KAL’s acquisition of Asiana Airlines is one of the few possible solutions for the struggling airline.

“Mergers and acquisition are common among overseas airlines,” said Hur. “Having a lot of airlines, as happened in Korea since the emergence of low-budget carriers since 2005, was part of a transition period for an airline industry to reach a developed stage.”

He noted other positive effects of the acquisition.

“A single legacy carrier means it can secure more routes and operate more efficiently, lowering costs for the airline’s operation. Also, having one full-service carrier in a country, which is common outside Korea, won’t result in a monopoly since airline is a global business with abundant competitors based abroad,” Hur added.

Following the reports, Korea Corporate Governance Improvement (KCGI) objected to the possible acquisition, saying it could harm shareholders, creditors and customers.

KCGI formed a coalition with Hanjin KAL shareholder Cho Hyun-ah and Bando Engineering & Construction to challenge Hanjin KAL Chairman Cho Won-tae for control. Together, they own around 46 percent of Hanjin KAL shares. Cho Won-tae and his allies own around 41 percent of the company.

KCGI “reasonably doubts KDB’s fund injection to Hanjin KAL to consider the acquisition of Asiana Airlines is disregarding the rights of other shareholders,” it said in a press release. It also said that the arrangement would reduce its influence and could cement Cho Won-tae’s control.

The stake of the coalition would be diluted if KDB becomes the third-largest shareholder of Hanjin KAL. It could stand in the way of a shareholder revolt challenging Won-tae and allies.

“Incorporating Asiana Airlines, which is going through the worst financial crisis, without thinking through the industrial synergy effects and values created [from the decision] could cause damage to customers, shareholders and creditors.”

It also added that Hanjin KAL could secure more than a trillion won through sales of assets.

Following the news, shares of Asiana Airlines closed 7.79 percent higher from the previous trading day to 4,290 won. During Friday's trading, it went up as high as 25.63 percent. Shares of Hanjin KAL declined 8.25 percent to close Friday’s trading at 77,800 won.

BY JIN MIN-JI [jin.minji@joongang.co.kr]