There has been speculation for some time about the merger of the two South Korean airlines. Now the COVID-19 pandemic has accelerated the takeover plans. According to agency reports, Korean Air (KE) intends to acquire its smaller Korean rival, Asiana, for 1.8 billion won (€1.37 billion). The country’s mostly family-controlled influential business conglomerates known as Chaebol are pushing the plans ahead.
Big is beautiful – and mostly successful. Based on this motto, South Korean flag carrier Korean Air announced plans to buy out its smaller competitor Asiana Airlines in an attempt to consolidate
the country’s aviation sector which was badly hit by the COVID-19 virus. KE’s move comes amid concerns of falling behind its intercontinental competitors taking advantage of a fragmented aviation
landscape in South Korea. "The main reason to acquire Asiana Airlines at this time is to stabilize and restructure the Korean aviation industry, which is suffering from the COVID-19 pandemic,
by streamlining route operations and reducing costs," the board of Korean Air said in a statement.
Banks and Chaebol support the takeover
Highly indebted Asiana belongs to the Kumho Asiana Group, a leading Chaebol that is eager to sell the airline because the parent company lacks liquidity.
To finance the acquisition, Korean Air intends to generate 2.5 billion won by issuing new shares in 2021. Hanjin KAL, the holding company of the Hanjin Group, will participate in the share transaction. Korean Air also belongs to the Hanjin transport and tourism group. The Korea Development Bank, too, intends to invest 800 billion won in Hanjin KAL to finance the takeover. The money will then be transferred to Korean Air via Hanjin KAL. The bank's investment will be funded by purchasing shares and convertible bonds.
Korean Air on way to becoming a heavyweight
According to Korean Air, Incheon Airport stands to benefit from the forthcoming merger: “More slots secured at Incheon International Airport, a transport hub in Asia, through the consolidation of the airlines, may lead to an increase in joint ventures with global airlines and greater transfer demand, which will also spur the growth of the domestic aviation industry,” Korean Air states in a release.
“Customers will be able to enjoy a wider range of choices in routes and schedules. They will also be able to benefit from more convenient transfer options, integrated mileage and enhanced safety in all areas.”
Provided the competition authorities okay the deal, which aviation experts believe will happen, carrier Korean Air will dominate the local passenger and cargo market and join the club of the leading 10 global airlines, based on its network, fleet, and capacity offered to the market. It will also increase its influence in the global SkyTeam Alliance, while competing Star Alliance will lose its member Asiana.
Cargo rates may rise
The forthcoming merger will also impact the cargo business, leading to capacity consolidation influencing the rate structure with prices tending to increase. It would be a U-turn because South Korean airlines suffered a sharp decline in cargo transportation in 2019, as they did in passenger traffic, due to deteriorated relations between South Korea and Japan. In 2019, South Korean airlines flew 3.9 million tons of freight, down 12% y-o-y. While Asiana Airlines shipped 840,000 tons (-14%), Korean Air recorded 1.46 million tons (-15%).
The decrease in cargo volumes is primarily a result of the tariff dispute between the U.S. and China, and the worsened relations between South Korea and Japan. At the same time, the air freight situation was aggravated by falling Korean IT exports such as smartphones or semiconductors which account for the largest portion of cargo revenues generated by Korean airlines for years.
After completion of the takeover, the consolidated Korean Air would have an annual cargo volume of 2.3 million metric tons, based on the results of both airlines last year. However, experts do not believe that all current Asiana cargo customers will switch to Korean Air Cargo; instead, they expect a partial migration to other carriers.
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