Korean Air takeover of Asiana to create single national carrier

Korean Air takeover of Asiana to create single national carrier

Caption: Korean Air takeover of Asiana to create single national carrier

Korean Air agreed Monday to acquire a majority stake in indebted rival Asiana Airlines as part of a South Korean government effort to stabilize the nation’s aviation industry from the devastating effects of the coronavirus pandemic.

The industry consolidation is designed to increase the competitiveness of both carriers at a time of limited travel demand by streamlining route operations, lowering costs and increasing the chance to acquire more takeoff and landing slots at Incheon International Airport, which could lead to joint ventures with global airlines and more interline passenger traffic, officials said.

Under the restructuring plan, Korean Air will buy 1.8 trillion won ($1.6 billion) of new Asiana shares and convertible bonds for a 64% stake in Asiana. The state-owned Korean Development Bank (KDB) will help underwrite the deal by investing 800 billion won ($723.5 million) in Hanjin KAL, a travel industry holding company and Korean Air’s parent. To fund the deal, Korean Air plans to issue $2.3 billion worth of shares next year, with any remaining proceeds going toward debt.

Hanjin KAL, which also owns low-cost carrier Jin Air, said it opted to accept the KDB’s investment rather than borrow funds to keep debt levels at a sustainable level.

The transaction is expected to be finalized in the second half of 2021, Reuters reported.

The move follows several failed attempts by Asiana’s owner Kumho Industrial to sell its controlling stake. A KDB cash injection in September enabled Asiana to keep flying.

Airlines collectively are on track to lose more than $100 billion this year, with international traffic at only about 12% of last year’s level and revenues gutted by more than 80% since the pandemic forced worldwide restrictions in movement and border closures, according to the International Air Transport Association. Many airlines are only able to stay afloat with the help of government bailouts, while several others such as Aeromexico and Avianca are seeking bankruptcy protection.

Korean Air lost $306 million in the third quarter as passenger sales fell 53%, but had an operating profit of $6.5 million thanks to its large cargo operation. That financial performance is far better than at most passenger airlines that are being financially battered by the loss of passenger traffic. Korean Air’s freighter fleet, one of the largest in the world, has been operating at maximum levels since the pandemic began and the airline repurposed many grounded passenger planes for cargo operations to utilize their lower-deck and cabin space, even removing seats from some planes to create more room for cargo.

Although Korean Air is weathering the coronavirus crisis better than most peers, a long drought in robust passenger travel volumes could make survival more difficult and the company didn’t want to fight over a limited domestic market with Asiana.

Officials noted that countries with a population of less than 100 million have a single full-service carrier. Korea, with two carriers, is at a competitive disadvantage compared to countries such as Germany, France and Singapore with a single major airline. The combination will expand Korean Air’s route network, fleet and capacity, vaulting it into the top tier of global airlines in terms of passenger volume. Customers, including cargo shippers, will enjoy a wider range of choices in routes and schedules, as well as transfer options.

KBD officials said part of the motivation for propping up the merger is to prevent layoffs, so Korean Air will likely eliminate 800 to 1,000 jobs through attrition. The two brands will operate independently until they can be integrated, at which point Asiana will be phased out, according to the Reuters report.

Asiana Airlines recently became the first airline to modify an A350 twin-aisle plane with a mini-pallet system developed by Airbus (CXE: AIR) to increase the efficiency of cabin loading amid a supply shortage for cargo airlift.

Engineers removed 283 seats and installed the cargo pallet system on the floor to firmly secure cargo loads, increasing cargo capacity by 5 metric tons to 23 tons.