SEOUL – When South Korea’s state development bank unveiled plans to create a ‘top 10 global airlines’ in mid-November by supporting a restructuring of the country’s two major carriers, it appeared to be a call for national pride – but not everyone bought it.

Inside Asiana Airlines, employees were shocked to learn that larger Korean Air Lines, their bitter rival, was to be their new owner as part of Seoul’s plan to help the domestic aviation industry. to overcome the pandemic.

“I feel empty. We’ve been trying to catch up with Korean Air for the past 30 years, but now we’re going to lose our company name. It’s frustrating,” an Asiana official said, asking not to be appointed. “[Korea Development Bank] CEO Lee Dong-gull said a few months ago that we can recover on our own, but now he says we should be sold to Korean Air because we cannot survive. It doesn’t make sense at all. “

The hint of disenchantment and culture shock to come is just one of the potential obstacles to making the most of the merger plan – one of the most sweeping efforts unveiled to date to reshape Asian aviation then. as carriers in the region face increasing losses from disrupted travel months.

KAL announced that it would buy new shares of Asiana worth 1.5 trillion won ($ 1.4 billion) as well as corporate bonds worth 300 billion won, thereby taking the head of an enlarged society. KDB will inject 800 billion won into Korean Air parent company Hanjin KAL in exchange for a 10.66% stake in the holding company and three directors.

KDB acted after a $ 2.2 billion acquisition deal between Asiana’s parent company, Kumho Industrial, and Hyundai Development Co. collapsed in September. KDB is one of Kumho’s main creditors.

KAL is strong in long-haul passenger services, connecting Seoul’s main airport, Incheon, to key destinations in the United States and Europe. Asiana has extensive networks in China. The two compete in the domestic market as well as travel to Japan and Southeast Asia.

But both are in financial difficulty because of the pandemic. KAL’s operating profit fell 94% to 7.6 billion won in the third quarter from a year earlier, with revenue down 52% to 1.6 trillion won. Meanwhile, Asiana posted 5.8 billion won in operating profit in the quarter, or about 45.1 billion won in operating loss from a year earlier. Asiana attributed this to improvements in freight service as well as low costs for fuel, human resources and other operations. Still, its revenue fell 53.2 percent to 731.1 billion won in the quarter.

This year’s disruption has exacerbated existing challenges, such as increased competition from low-cost competitors. The two also became collateral damage as financial problems surfaced elsewhere in the business empires of their conglomerate owners.

KAL’s financial health has been affected in the past by its support for Hanjin Shipping, a subsidiary that filed for bankruptcy in 2017. Asiana has also faced risks associated with the use of its assets as collateral for loans by Kumho Industrial.

While many industry analysts believe that a restructuring of the sector is necessary in the long term, some fear that the integration of the two largest South Korean airlines is an artificial solution that will do little to alleviate their problems. serious financial problems.

Both companies are heavily in debt. Asiana’s total debt reached 11.5 trillion won in September, with a debt ratio of 2,431.9 percent. Korean Air has a total debt of 22.7 trillion won and a debt-to-equity ratio of 693%.

“We believe that Asiana Airlines’ debt will continue to weigh on Korean Air,” said Yoo Seung-woo, analyst at SK Securities.

Jay Lee, credit analyst at Shinhan Financial Investment, agrees. “The biggest concern is the condition of Asiana Airlines. Asiana’s debt ratio has risen sharply over the past two years due to the accumulation of big losses,” Lee said.

Lee said Korean Air’s cash injection could lower Asiana’s debt ratio to 524 percent, but it’s still unclear whether the integrated airline could rebound after the merger.

Still, some hope the size of the new airline will give it a boost.

Kim Yu-hyuk, analyst at Hanwha Investment & Securities, said the merger would boost the company’s competitiveness in Asia and beyond while allowing it to reduce costs through an integrated operating system and eliminate duplicate landing slots as well as maintenance and repair services.

“With this agreement, we have a mega-airliner with a fleet of 245 planes. It is number 10 in the world in terms of revenue passenger-kilometers and third in terms of freight tonne-kilometers,” Kim said. . “The airliner will enjoy monopoly status in long-haul passenger and cargo services. We need to focus on [the fact that this will lead to] better performance and better profits. “

This hints at a problem that airlines face even before they complete their integration: the deal they will need to get from antitrust authorities in South Korea and beyond.

Joh Sung-wook, head of the country’s Fair Trade Commission, said on November 19 that the agency would examine whether the deal undermines competition in the industry. The combined share of the two airlines in the domestic passenger market is 62.5%.

KAL also needs antitrust clearance from other countries to complete the deal. For example, HDC asked five countries – the United States, China, Russia, Turkey and Kazakhstan – to approve its Asiana purchase agreement earlier this year before it collapsed in September.

The Transportation Department said KAL needed to maintain its size and routes after the merger to maintain its competitiveness, fearing it would have to abandon some routes due to antitrust concerns.

“KAL wants to acquire Asiana to strengthen its competitiveness by expanding it. Giving up too many roads will undermine its base,” Kim Sang-do, director of the ministry, told a press briefing.

Another risk is the objections of a major shareholder of Hanjin KAL. Korea Corporate Governance Improvement, an activist fund, opposes the deal, saying it undermines shareholder value. He filed a petition with a Seoul district court to stop the deal.

“KCGI awaits the court’s wise decision. We suggest open discussions to reshape the aviation industry,” the fund said in a statement.

If the deal goes through, it could draw the attention of rivals to their own financial woes related to the coronavirus pandemic – and make South Korea a testing ground for broader restructuring.

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