Korean Air merger at crossroads ahead of Asiana’s potential cargo unit sale

[Photo by Yonhap]

The merger of Korean Air Lines Co., South Korea’s national flag carrier, and smaller local rival Asiana Airlines Inc. is facing a critical juncture, with Asiana set to hold a board meeting on Monday. If the board opposes the sale of Asiana’s cargo business, the merger will likely fall apart as it will be difficult to secure the European Union (EU)’s approval for the merger. If this turns out to be the case, the main creditor bank will have to find a way to keep Asiana alive.

Even if the sale of the cargo business is approved, Korean Air will have to transfer some of Asiana’ European routes and spend at least a year in obtaining the final approval from EU competition authorities, with approvals from U.S. and Japanese competition authorities to follow. Regardless of the outcome, there are growing calls in the market for the government, the main creditor bank, and Korean Air to have a ‘Plan B.’

According to sources from the airline industry on Sunday, Asiana Airlines plans to hold an extraordinary board meeting on Monday to consider whether to agree to Korean Air’s remedial measures that will be submitted to the European Commission (EC).

Asiana’s board of directors consists of six members, including two inside directors and four outside directors, and four affirmative votes are required to pass the motion. With the board members differing in their opinions, it is difficult to predict the outcome and market observers are closely observing the board’s decision as difficulties of all sizes are inevitable in the process of reorganizing the airline industry.

“Several complex issues are intertwined, and it seems that a tough decision will have to be made,” an Asiana board member, who requested anonymity, said. “We will make the best choice considering the interests of the company, shareholders, and the country.”

If Asiana’s board opposes the sale of the cargo business, it might be difficult for Korean Air to submit a corrective plan to the European Commission. To avoid wasting the more than 3.6 trillion won ($2.65 billion) in public funds that Korea Development Bank (KDB) has injected into Asiana over the years, another approach may be necessary.

The key is whether Asiana can survive on its own. As of the end of June 2023, Asiana’s debt stood at about 12 trillion won and its debt ratio hit 1,741 percent at the end of last year. Nevertheless, the Korea Fair Trade Commission did not recognize Asiana as an ‘unviable’ company and conditionally approved the merger with Korean Air in 2022.

The former presidents of Asiana Airlines also recently conveyed their opinion to Asiana’s board of directors that the airline has the potential to survive on its own, as it completed repayment of 700 billion won in borrowings to its lenders in July 2023. Asiana’s labor union also argues that the airline’s performance has been improving year on year since 2019.

Creditors, including KDB, have made it clear that there will be no ‘additional support’ in a bid to secure approval for the sale of the cargo business, but if Asiana goes through the liquidation process like Hanjin Shipping Co., market resistance is expected to be strong. Observers believe that creditors may have no choice but to consider the possibility of additional capital injections or capital structure adjustments to improve the airline’s financial position. In July, the company repaid 700 billion won of short-term loans borrowed from KDB and the Export–Import Bank of Korea, and a 240 billion won loan from the Key Industry Stabilization Fund (KISF) operated by the KDB that is due to mature this month, depleting most of its liquidity. Given Korean Air’s outstanding perpetual bonds and high interest costs, creditor support seems inevitable.

For final approval from EU competition authorities, Korean Air will need to finalize the sale of Asiana’s cargo business, which is expected to be an arduous process. “The company has not disclosed the extent to which its existing business capabilities, such as flight crews, maintenance personnel, and cargo owners, are subject to the sale, making it difficult to estimate the price,” according to an official from a low-cost carrier (LCC) that considered the acquisition of the cargo business.

Approval from U.S. and Japanese competition authorities is a further challenge, and Korean Air has offered to transfer slots and traffic rights to obtain approval from foreign competition authorities. To win approval from the United Kingdom, Korean Air decided to transfer seven of its slots at Heathrow Airport to Virgin Atlantic, a U.K. LCC and return 46 slots to China. However, there are concerns that obtaining approval from EU, U.S., and Japanese competition authorities will require Korean Air transferring additional routes to competitors, leading to capital outflow. There are also concerns that the United States may file a lawsuit against Korean Air on antitrust grounds, potentially leading to further complications.

Korean Air is also mulling whether to allow Asiana to use the 700 billion won in down payment and interim payment held in an escrow account, but there are concerns even if Korean Air carries out this option. If Asiana uses Korean Air’s funds for final approval and the merger approval from foreign competition authorities falls through due to other issues further down the process, the burden of repayment will fall squarely on Asiana.

The issue of employment resulting from the sale of the cargo business is also expected to cause conflicts. Korean Air’s internal policy is to negotiate the sale of the cargo business under the premise of ‘job security and improved treatment,’ but the general labor union and some Asiana pilots are strongly opposed to the sale.