[Shortcut] Airline deal of the century

Industry

Published: 22 Nov. 2020, 17:22 Updated: 04 Dec. 2020, 14:15

[Shortcut] Airline deal of the century

Korean Air Lines and Asiana Airlines aircraft parked at Incheon International Airport on Nov. 16. [YONHAP]

Q. What are Korean Air Lines and Asiana Airlines?

A. Korean Air Lines and Asiana Airlines are the only two full-service carriers (FSCs) in Korea.

Unlike budget carriers, FSCs typically offer passengers more services, like meals and inflight entertainment, and they are often included in the ticket price. They also have wider operational networks than budget carriers do.
Price structuring can be different as well, with low-cost carriers (LCCs) traditionally charging on a point-to-point basis rather than using bundled fares.

Korean Air Lines is a flag carrier. In 1962, the government acquired Korean National Airlines, and changed the name to Korean Air Lines to become a state-owned airline. The Hanjin Group acquired the airline in March 1969.

It started off as a small airline in Asia with only eight planes, but has since developed into a global airline, flying to 127 destinations as of last year. It is also a founding airline member of SkyTeam, which is a global airline alliance formed in 2000.

Asiana Airlines, which was controlled by Kumho Industrial, was formed in February 1988, ahead of the 1988 Seoul Summer Olympics. The government gave its approval for the second FSC to foster competition, it and flew its first overseas route, to Tokyo, in 1990. As of last year, it flew to 64 cities.

The airline joined Star Alliance, the world’s largest global airline alliance, in 2003. But the company started to suffer as its major shareholders overextended themselves and were unable to commit enough capital to the airlines. The situation was aggravated by the global financial crisis in 2008.

Asiana is sometimes called a flag carrier.

Why is Korean Air Lines acquiring Asiana Airlines?

The main reason behind the takeover is to stabilize the airline industry, which has been battered by travel restrictions from Covid-19. Following the announcement of the acquisition, Hanjin KAL said, “Korean Air Lines as well as Asiana Airlines could be placed in a dangerous situation if Covid-19 continues.”

The hope is that business improves so that public capital will not have to be used to support the industry, which has already received trillions of won of government support.

Even before the pandemic, the airlines were running into trouble as a result of overcapacity, general economic weakness, poor management and many unprofitable routes.

How big will the mega-carrier be?

The mega-carrier will become the world’s No.7 carrier by capacity to transport passengers and cargo, according to 2019 IATA (International Air Transport Association) numbers provided by the Korea Development Bank (KDB). IATA is an organization of international airlines with the mission to represent the airline industry. Asiana Airlines operated 81 aircraft and Korean Air 164 as of last month.

Revenues for the combined entity is estimated at 15 trillion won ($13.5 billion).

To actually acquire Asiana Airlines, Korean Air Lines needs the approval from the Fair Trade Commission. As of late last year, the combined domestic market shares was 62.5 percent. The figure includes the market shares of their budget carriers. It also needs to win the approval from overseas authorities in destination jurisdictions.

That is not certain, given the monopolization of some routes after the merger, and it is possible that conditional approvals will call for splitting off certain services.

What will happen to LCCs controlled by Hanjin KAL and Asiana Airlines?

Hanjin KAL owns 60 percent of Jin Air, while Asiana Airlines has Air Busan and Air Seoul as its subsidiaries. They will be merged into a single budget carrier, and loyalty programs will be integrated. When the three LCCs are operated under one airline, its sales are expected to surpass that of Jeju Air, currently the biggest budget carrier in Korea.

How many airlines are operating in Korea?

In Korea, there are two FSCs — Korean Air Lines and Asiana Airlines — and nine LCCs. Those nine carriers are Jin Air, Air Busan, Air Seoul, Jeju Air, T’way Air and Eastar Jet, and the newly launched Fly Gangwon, Aero K and Air Premia. Aero K and Air Premia are yet to receive an Air Operator Certificate from the Ministry of Land, Infrastructure and Transport. The certificate allows an airline to use its aircraft for commercial purposes.

How will Korean Air Lines finance the acquisition of Asiana Airlines?

Government-owned KDB will invest 500 billion won in Hanjin KAL and buy 300 billion won of the company’s exchangeable bonds. Hanjin KAL will then buy 730 billion won of new shares to be issued by Korean Air Lines. The airline is increasing its capital by 2.5 trillion won. The 730 billion won is proportionate to Hanjin KAL’s 29.27 percent stake in Korean Air Lines.

Korean Air Lines will then use 1.8 trillion won of the newly raised capital to become the biggest shareholder of Asiana Airlines. Its plan is to purchase 1.5 trillion won of new Asiana Airlines shares and 300-billion-won worth of perpetual bonds.

In short, the money is being transferred from KDB to Hanjin KAL, to Korean Air Lines and eventually to Asiana Airlines. The circuitous route through a company with founding-family shareholders has led to suggestions of favoritism and the propping up of a dynasty with tax money.

Partly allaying concerns are the highly restrictive terms demanded by the bank. KDB wants three new independent directors appointed to the board and will pick the company’s auditor. It will also have the right to veto management decisions and make key human resources calls, including the firing of top managers.

Why did the previous deal to acquire Asiana Airlines by Hyundai Development Company (HDC) fall apart?

Kumho Industrial notified HDC of the termination of the acquisition deal in September. This was because HDC delayed the deal and demanded further due diligence from the airline.

In December last year, an HDC-Mirae Asset Daewoo consortium agreed to acquire a 30.77 percent stake in Asiana Airlines from Kumho Industrial, as well as new shares to be issued for 2.5 trillion won. HDC said that because the airline has taken on so much debt since the deal was first signed, it wanted to conduct additional due diligence.

Before the deal was scrapped, creditor KDB blamed HDC for only making demands in writing. It argued that HDC refused its requests to engage with in-person discussions on the matter. HDC is trying to reclaim its 250-billion-won down payment.

What are the benefits of the acquisition?

A single legacy carrier means it can secure more routes and operate more efficiently, lowering costs for the airline’s operation. As of November, there are 48 international routes where Korean Air Lines and Asiana Airlines compete. Korean Air Lines operates 53 routes that don’t overlap with Asiana Airlines, while Asiana Airlines operates 14 of such routes. The mega-carrier could disperse the timing of the overlapping routes, offering more options to transit passengers.

Based on its stronger presence in the market, the mega-carrier could also form joint ventures with overseas airlines. This would enable them to enjoy a combined network of destinations. Korean Air Lines signed a major agreement with Delta Air Lines in 2018.

What are some of the challenges for the acquisition?

One of the biggest concerns is employment. Unions of both Korean Air Lines and Asiana Airlines argue the acquisition could result in layoffs — despite promises made by KDB and Hanjin KAL Chairman Cho Won-tae to keep jobs at both companies. About 800 to 1,000 jobs are duplicated.

The acquisition is also being challenged by Korea Corporate Governance Improvement (KCGI). It leads a coalition challenging Cho Won-tae’s control of Hanjin KAL. The coalition owns around 46 percent of Hanjin KAL. Cho Won-tae and his allies own around 41 percent of Hanjin KAL.

That calculation assumes that Delta Air Lines, which owns 14.9 percent of the stock, will support Cho. Delta has never commented on how it will vote.

The KCGI coalition argues the acquisition is simply Cho Won-tae’s attempt to control Korean Air Lines and acquire Asiana Airlines purely using public funding.

It says that the transaction could easily be funded with the sale of a few buildings or the selling of stock to the public.
The coalition believes that KDB will vote with Cho, meaning that the chairman and his allies could have more votes than the KCGI group, assuming Delta coordinates with the grouping.

What would a mega-carrier mean for travelers?

Travelers can enjoy integrated loyalty programs. This means passengers who own Asiana Airlines mileage points can use those points to purchase plane tickets offered by Korean Air Lines.

Despite there being only one FSC, some believe it won’t result in the increase of airline ticket prices because air travel is an international business. Although there will be only one mega-carrier in Korea, it will be facing competition on the same routes from global airlines, according to Professor Hur Hee-young, who teaches business at Korea Aerospace University.

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