How high Korean Air could fly with Asiana merger

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How high Korean Air could fly with Asiana merger

Published: 01 Dec. 2024, 18:23 Updated: 01 Dec. 2024, 19:17

SARAH CHEA
[email protected]

Audio report: written by reporters, read by AI

Korean Air and Asiana Airlines' planes are stationed at Incheon International Airport. [YONHAP]

[NEWS ANALYSIS]

Korean Air's four-year-long effort to take over Asiana Airlines draws closer to fruition, offering the flag carrier tangible momentum to bulk up and put itself on the list of the top 10 mega-carriers.

The consolidation of the country's two biggest airlines comes ahead of anticipated improvement in flight demand — especially in premium travel — once the companies clear a few hurdles to successfully finish the merger, including a mileage issue and reliable plans to cope with Asiana's financial distress.

The European Union on Friday granted Korean Air a final green light for the proposed takeover upon the company’s fulfillment of all conditions regarding the redistribution of some European routes and the sale of Asiana's cargo business as suggested over concerns about a monopoly.

Though it still awaits a pending review for a decision from the United States, industry insiders expect the Department of Justice won’t likely contemplate legal action and the merger will be finalized within the year. Korean Air will maintain Asiana as a subsidiary for two years before fully subsuming the carrier.

Stephanie Pope, left, CEO of Boeing Commercial Airplanes and Walter Cho, Chairman of Korean Air, take a photo after signing an agreement to purchase 50 Boeing aircraft at the Farnborough International Airshow in July. [KOREAN AIR]

A rosy prospect with potential structural growth
The merger of the two full-fledged carriers will possibly place Korean Air among the 10 biggest airlines in the world, beating Japan Airlines to follow the footsteps of most big names, which were created through a series of mergers.

The new integrated airline will own a total of 238 aircraft, of which 203 are passenger planes, with some 27,500 employees including 9,000 flight attendants. Their combined revenues stood at 21.1 trillion won ($15.1 billion) as of last year, with an operating profit of 2 trillion won.

A simple calculation shows that the merged Korean Air will become the 11th-largest carrier in terms of distance flown by paying passengers on an airline, at around 124.7 billion kilometers (77.5 billion miles). Korean Air was the 18th-largest carrier in terms of total revenue by passenger-kilometers according to 2019 data from the International Air Transport Association (IATA), while Asiana sat at 32nd.

Industry watchers expect their ranking to be higher considering that the IATA has not released data after the Covid-19 pandemic and Korean Air’s buying spree of new aircraft in recent years. Korean Air recently inked deals to purchase 248 new aircraft from Boeing and Airbus.

The amalgamated carrier will have 186 operational routes with Korean Air’s 114 with Asiana’s 72.

"With all the uncertainties removed, the integrated Korean Air will be Korea’s only full-service carrier and it is reasonable to value it as a global mega-carrier,” said researcher Ahn Do-hyun from Hana Securities. “After the merger, stable sales growth is anticipated with Korean Air’s strengthened control in long-distance travel.”

Korean Air's Boeing 777-9 and 787-10 aircraft [KOREAN AIR]

It is also standing firmly behind an expected increase in both passenger and cargo flight demand, and the growing trend of premium travel, with customers willing to pay more for more comfortable and elevated services.

“Premium travel, one of the biggest trends in the airline industry for the next year, also presents an opportunity for Korean Air,” said analyst Jeong Yeon-seung at NH Investment & Securities. “Korean Air will accelerate efforts to meet premium customer demand by introducing the most modern aircraft and raising fuel efficiency.”

Delta Air Lines became the world’s largest airline through a merger with Northwest Airlines back in 2008, while Germany’s Lufthansa took over six airlines. United Airlines acquired Continental Airlines in 2010, and American Airlines merged with US Airways in 2013.

“The airline industry is one of the biggest sectors that can make use of economies of scale to become more profitable; as they get bigger, they get more advantages in price negotiations with customers and pay costs,” said researcher Park Su-young from Hanwha Investment and Securities. “Western airlines chose the ‘merger’ in times of crises, and they have shown improved profitability every time as a result.”

An Asiana Airlines’ plane takes off from Incheon International Airport [NEWS1]

Nettlesome hurdles to clear
To successfully conclude the merger, Korean Air faces some inevitable processes to resolve, with the mileage issue standing as the most urgent task.

The airline is obligated to submit a thorough plan on how and when to integrate the customer mileage of both carriers to the Fair Trade Commission within six months of the merger.

Industry watchers predominantly suspect the transition of Asiana mileage to Korean Air won’t likely come at a 1:1 ratio considering the dissatisfaction among Korean Air customers over financial implications as their mileage tends to be more costly to earn than Asiana's.

The value of Korean Air’s unused mileage comes in at some 2.5 trillion won as of now, while Asiana is at some 976 billion won.

“We’ve been cooperating with consulting firms to set the most fair and reasonable ratio for the customers,” said a spokesperson for Korean Air.

Asiana’s financial distress is also a big obstacle. The airline has some 12.5 trillion won in debt as of the end of September out of 13.2 trillion won of total assets, according to its regulatory filing. Its debt-to-equity ratio reached 1,847 percent while the accumulated net loss comes in at some 66.1 billion won this year through the end of September, while the operating rate stays low at 4.1 percent.

“Even if it can receive 470 billion won [from the sale of its cargo business] in the second half of 2025, it will likely swing to a loss again in 2026 without fundamental growth in the passenger flight business,” said Hana analyst Ahn.

Potential restructuring is also brought up as a risk, though Korean Air firmly said it “will have no contrived restructuring” even after the merger.

“The integrated airline will need a larger workforce, and we will maximize the utilization of the resource by training and relocating them.”

BY SARAH CHEA [[email protected]]