The little airlines that could hope to take on very big routes
Budget airlines could benefit from the Korean Air-Asiana merger as the regulators are requiring the soon-to-be-formed mega-carrier to shed some long-haul routes to prevent the monopolization of them.
Of the carriers most likely to obtain the these rights, one is a money-losing, 737-only airline and the other a company founded in 2017 that flies a single aircraft. To actually serve the routes, they will have to acquire and learn to operate massive and very expensive aircraft capable of reaching faraway destinations.
Korean Air Lines announced in November 2020 it would be buying 63.88 percent of Asiana Airlines and eventually merge with it, creating a global top 10 carrier in terms of routes.
The Fair Trade Commission (FTC) last December gave tentative approval to the merger, but only on condition that it hands over some routes to prevent monopoly. The formal decision will be made sometime in February.
Route rights are granted by countries and the Ministry of Land, Infrastructure and Transport allocates those routes to specific carriers.
The merging entities were found by the regulators to be monopolizing a number of long-haul routes — including flights connecting Incheon and Los Angeles, New York, Barcelona, Seattle and Sydney — and some of those traffic rights could be redistributed to other carriers.
Traffic rights have been re-distributed in the past for Mongolian routes. Korean Air Lines was the only local carrier to fly Incheon-Ulaanbaatar, but some slots were allocated to Asiana Airlines in 2019 after the FTC ruled it was a monopoly.
Carriers prepare with plane leases
Long-haul international flights have been the biggest revenue generators for airlines. In 2019 before the pandemic, Korean Air Lines booked 29 percent of its passenger revenue from U.S. routes and 19 percent from European routes. In terms of cargo, the figures were 42 percent and 23 percent.
Budget carriers only fly to domestic destinations and some nearby countries such as Japan, China or Singapore, and getting traffic rights to far-away destinations could offer expansion opportunities.
Only owning planes with short to mid-distance flight capabilities, they are scrambling to add bigger aircraft most commonly used for long-haul flights. Their deadline is 2024, when the merger is expected to be completed.
T'way Air flies Boeing B737-800s exclusively, which are most often used for short-to-mid-haul flights, The company will be adding one Airbus A330-300 to its fleet in February to fly to Sydney, Croatia and Honolulu. The Airbus is a 350-seater plane and has a flight range of 10,186 kilometers (6,330 miles), so it can be flown to Europe and the U.S. mainland.
Two more Airbus jetliners will be leased in the first half of this year and added to its fleet in the future.
"Deciding to lease an aircraft and actually receiving it can take less than a year if done fast enough," said a spokesperson for T'way Air. "We can finish preparing to fly long-haul routes before the merger of big carriers happens, and there shouldn't be any concerns that carriers won't be able to utilize the re-distributed traffic rights."
Air Premia, a budget carrier that started business in 2017, will lease two Boeing 787-9 Dreamliners this year. The plane has a flight range of 15,000 kilometers, which gives it global reach.
The airline currently operates one Dreamliner, and has ambitious plans to use the aircraft to start serving Los Angeles in May.
High costs and low profitability
Although opportunity presents itself, there is a heated debate whether it is the best decision for budget carriers to start long-haul flights. Leasing one or two large aircraft may not be the only cost they have to pay while financially struggling during the pandemic.
"Even if LCCs add one or two large-sized aircraft to their fleet, they don't have substitute aircraft in cases of malfunction or when the plane needs maintenance," said Lee Yun-cheol, a business professor at Korea Aerospace University, using the acronym for Low Cost Carrier. "They could aggressively add more aircraft and attempt to fly U.S. routes as LCCs, but operating an additional one or two flights doesn't create economies of scale or high profits."
"The aviation industry is struggling overall, and it could be dangerous for carriers to invest in areas of uncertainty in a time when they should be focusing on maintaining business and trying to survive."
T'way Air's net loss in last third quarter was 45.2 billion won from a year-earlier loss of 32.3 billion won.
Jeju Air, Korea's largest budget carrier, returned six leased aircraft to the lessor last year in an effort to keep debt under control.
"Excluding some carriers that have plans to introduce long-range A330s, local companies that have fleets centered on B737s will have a hard time trying to fly Europe-bound routes," said Kang Seong-jin, an analyst at KB Securities. "Considering some carriers can't even fully fly routes they currently have traffic rights for, there is little possibility that rival carriers who are given additional traffic rights will be able to immediately operate newly distributed routes."
Catering is one hurdle for the smaller carriers, considering their usual domestic flights and short-haul flights don't require them to serve meals. Training flight attendants about safety measures for larger planes is yet another barrier to entry.
T'way Air says it has been preparing by training its flight and cabin crew since last June to get used to the new A330. Maintenance workers were trained by Airbus in France from last November to December, and the carrier has built an A330 simulator center at Gimpo International Airport.
Who is the real winner?
When the FTC evaluated the Korean Air Lines-Asiana Airlines deal for possible monopoly, it took their subsidiary carriers into consideration as well. Air Seoul, a wholly-owned subsidiary of Asiana Airlines, and Air Busan, 44.17 percent owned by the carrier, were also counted into Asiana's market share. Jin Air, owned 54.91 percent by Hanjin KAL, which owns 27.7 percent of Korean Air Lines, was also factored into the equation.
Although the three subsidiaries aren't prohibited from receiving traffic rights, they aren't likely to be the first choices.
"The FTC combined the two full-service carriers and the three LCCs when determining if there could be a monopoly," said Nah Min-sik, an analyst at eBest Investment & Securities. "There is a low chance for carriers like Jin Air to be a beneficiary from the merger and traffic right re-distribution."
Jeju Air is taking a conservative approach. The company is one of the very few airlines that stated it will be focusing on short to mid-haul routes.
CEO Kim E-bae announced Jan. 24 that a total of 50 Boeing 737-8 Maxes will be added by end of 2027 for passenger flights. The plane is considered a mid-sized aircraft with around 200 seats, optimal for flights to Singapore or Malaysia due to a flight range of 6,500 kilometers.
The carrier currently flies 41 B737-800s, only able to fly to domestic destinations and to nearby countries.
Kim stated the company will "focus on enhancing competitiveness and taking the lead in short-to-mid-haul routes."
Even if traffic rights are redistributed to the airline, only owning mid-range planes will make is virtually impossible for it to fly newly distributed long-haul routes.
With some budget airlines unable to fly major long-haul routes and the merged entity forced to reduce the number of flights, foreign air carriers could be the only ones winning.
"Jumbo jets are needed for Paris or Los Angeles-bound flights, and LCCs can't fly such routes when they don't have the right planes even if traffic rights are redistributed," said Professor Lee. "If LCCs can't manage to operate those routes, then the FTC basically did nothing but put a muzzle on the merged carriers for the benefit of foreign carriers."
BY LEE TAE-HEE [email@example.com]