Asiana to off-load cargo business as it edges nearer Korean Air merger

A cargo plane of Asiana Airlines [ASIANA AIRLINES]

The board of Asiana Airlines, Korea's second-largest airline, on Thursday approved the sale of its cargo business following two intense debates, marking a significant step towards obtaining approval from foreign regulators for the impending merger with Korean Air.

The merger between Asiana Airlines and Korean Air has faced scrutiny from the European Commission (EC), who expressed concerns about the potential monopolization of European cargo routes post-merger. To address these concerns, Korean Air had come up with a solution of selling Asiana's cargo business following the completion of the merger.

Upon receiving the green light for the sale of the cargo business, Korean Air wasted no time and submitted its proposed remedies to EU authorities on the same day, expressing optimism that the move is "expected to set a positive momentum for the remaining corporate merger review."

Korean Air has been pursuing the merger with Asiana Airlines since November 2020, having gained approval from 11 out of 14 countries involved in the process. Final decisions from the EU, the United States and Japan are still pending, and failure to secure approval from any one of these jurisdictions could potentially lead to the merger being scrapped.

The board decision regarding the cargo business sale was reached after five Asiana board members reconvened to vote, following an eight hour discussion three days earlier. Major points of contention included worries about the cargo business sale constituting a breach of duty and whether one of Asiana Airlines' four external directors, a legal counsel from Kim & Chang, can exercise his rights as a shareholder, given the law firm has been providing advisory services to Korean Air regarding the merger. Ultimately, three voted in favor, one abstaining, and one was absent.

The divestiture has been considered a crucial step in winning a nod from the EC, and in the end providing much-needed financial support to Asiana Airlines and stabilizing the company.

As of the first half of the year, Asiana Airlines was grappling with a total debt of 12 trillion won ($8.9 billion), accompanied by a debt ratio of 1,741 percent. The company's financial woes were compounded by cash shortages due to factors like loan maturities, making the merger with Korean Air imperative for its very survival. The Korea Development Bank (KDB), the creditor of Asiana Airlines, had already infused approximately 3.6 trillion won of public funds into the company.

Nonetheless, the decision to sell the highly profitable Asiana Airlines cargo business, often referred to as its "cash cow," has not been without controversy.

The cargo business significantly contributed to the airline's revenue, accounting for 20 to 30 percent of its total income — and even surpassing 70 percent during the height of the Covid-19 pandemic when passenger flights were severely limited. Moreover, the business segment plays a critical role in transporting high-value products such as semiconductors and batteries from Korea.

Apart from the cargo business sale, concerns are also emerging regarding the potential impact of returning flight slots and traffic rights. As part of the merger approval process, Korean Air decided to return seven slots to Britain and 46 slots to China. Korean Air agreed on the remedial measure to be proposed to the EC regarding the transfer of slots on four European routes — Paris, Frankfurt, Rome, and Barcelona — to a domestic low-cost carrier along with selling Asiana's cargo business.

Addressing internal opposition due to job security concerns is also a challenge. Asiana Airlines' labor union on Thursday expressed regret over the board's approval, stating that it "lost an opportunity to thwart the merger, which lacks justification, rationale and consideration for national interests," adding that they will "use all available means to resist the merger."

Korean Air announced its commitment to conducting the sale of Asiana's cargo business "with a focus on employment continuity and stability." Additionally, it stated that they plan to provide liquidity support its smaller rival, which it "expects to mitigate some of the operational challenges faced by Asiana Airlines."

Korean Air has expressed its expectation to receive EC approval by the end of January next year.

BY SEO JI-EUN [seo.jieun1@joongang.co.kr]