[KH explains] Korean Air-Asiana merger may gain traction, yet challenges linger

Asiana’s cargo business in search of new owner; US, Japan regulators pay keen attention to European Commission decision

Korean Air and Asiana Airlines' aircrafts at Incheon International Airport (Yonhap)

Korean Air's acquisition of Asiana Airlines got a step closer to getting antitrust approval from the European Commission, as the nation’s largest air carrier submitted a revised merger plan that includes a selloff of Asiana’s cargo operation and giving up more routes to European cities.

Industry watchers, however, say uncertainty remains about the high-profile 1.8 trillion won ($1.3 billion) deal that also awaits approval from Japan and the US.

“The chances are now higher for Korean Air to win the commission's approval as the company has fulfilled the remedies that the commission has asked for,” said an industry source familiar with the matter.

Earlier in May, the commission delayed its decision on the merger plan, citing antitrust concerns that the potential tie-up between the nation's top two air carriers could restrict competition in the markets for passenger and cargo air transport services.

“Korean Air would have not pushed ahead with the sale of Asiana’s cargo business if not for the commission’s request,” the source said. “It would be difficult for the commission to turn down Korean Air’s new remedies, which included what the commission requested.”

Immediately after Asiana's board of directors voted in favor of the selloff of the cargo business on Thursday, Korean Air submitted its new merger plan to the commission later in the day.

The revision also included its plan to divest some of its flights to four European cities -- Frankfurt, Paris, Rome and Barcelona. Korean Air expects the commission's decision to be made by the end of January 2024.

But Yoon Moon-gil, a business professor at Korea Aerospace University, stressed that the amendments do not guarantee the commission's approval.

“(We) cannot say definitively if the commission will approve Korean Air’s acquisition of Asiana Airlines at the moment,” Yoon said.

"The commission may even ask Korean Air to clarify which Korean air carrier is actually capable of taking over Asiana’s cargo business. The commission could ask for a letter of intent to make sure of the planned selloff."

In South Korea, low-cost carriers T'way, Eastar Jet, Air Premia and Air Incheon have emerged as potential buyers of Asiana’s cargo business. However, whether relatively small budget airlines would be able to take over the bigger cargo business with around 1 trillion won debt, still remains uncertain. T'way, the largest of the four, has reportedly said it is not interested in the acquisition.

While waiting for the commission's conclusion, Korean Air said it would speed up preparation to clear the antitrust hurdles in Japan and the US. The company aims to win approval from the two countries during the first half of next year.

The cargo business sale is expected to alleviate the US Department of Justice’s concerns over the acquisition’s potential impact on competition on cargo traffic between South Korea and the US.

Korean Air is also planning on giving its overlapping routes to a local air carrier, with Air Premier, a low-cost carrier here, cited as one of the several candidates to acquire the routes.

However, to win approval from the US, Korean Air may have to give up additional slots to its competitors, like the company has done in the UK and China, according to local reports.

Previously, Korean Air decided to give seven out of 17 slots at London's Heathrow Airport to British carrier Virgin Atlantic to win antitrust approval in the UK. In China too, the company agreed to hand over 49 airport slots to China as part of its approval process.

Korean Air may also face resistance from US-based air carriers such as United Airlines and American Airlines -- which are not allied with Korean Air, according to Yoon.

In Japan, Korean Air may face a different challenge. A local report said the Japanese authority might raise concerns over the acquisition’s potential impact on the budget airline market between Korea and Japan since Korean Air will own a total of three low-cost carriers after acquiring Asiana Airlines.

Korean Air currently owns Jin Air, while Asiana Airlines owns Air Busan and Air Seoul.

"Three years have already passed since the merger plan was announced. The deal should not be delayed longer," Yoon said.

"If the merger gets postponed further or fails in the worst case, the competitiveness of not only Asiana Airlines but also the nation's whole aviation industry will be damaged significantly."

By Shim Woo-hyun(ws@heraldcorp.com)