Pneumonia Outbreak Amid Sibling Rivalry... Korean Air Faces Turbulence

Net Loss for 2 Consecutive Years with Debt Ratio Nearing 900%
Financial Improvement Slowed Amid Management Dispute

[Asia Economy Reporters Jeongsoo Lim, Hyunseok Yoo] Korean Air, already embroiled in a management rights dispute, is now facing the added challenge of the novel coronavirus (Wuhan pneumonia) outbreak. With a debt ratio nearing 900% urgently needing improvement, the airline is being pushed to the brink of a credit rating downgrade amid internal and external adversities. Korean Air’s borrowings due within one year (including current portion of long-term debt) approach 4.4 trillion KRW.

◆Inevitable Performance Deterioration Due to Decline in Travelers= Korean Air has recorded net losses for two consecutive years. Except for a brief return to profitability in 2017, it has not escaped net losses since 2013. As of the third quarter of last year, cumulative net losses amounted to 626.9 billion KRW. If the novel coronavirus situation prolongs, turning a profit this year will be difficult.

Korean Air’s performance also worsened during the Severe Acute Respiratory Syndrome (SARS) outbreak. In the second quarter of 2003, when SARS spread, international passenger traffic at Incheon International Airport dropped by over 30% on average. The number of foreign arrivals also decreased by about 30%. This led to a shift from profit in the first quarter to losses in the second quarter.

This time, the impact is expected to be greater. The proportion of Chinese travelers has significantly increased, so the decline in travelers due to the novel coronavirus is expected to be larger. Additionally, heightened caution regarding the virus is anticipated to cause a sharp drop in travelers from all overseas regions. The Japanese routes, which were stagnant due to last year’s trade disputes, have yet to recover. Jaehyun Ryu, a researcher at Mirae Asset Daewoo, said, “Due to the nature of infectious diseases, there are limits to predictions based on past comparisons, but an overall sharp decline in passenger demand is inevitable,” adding, “The performance deterioration will accelerate in the first half of the year, compounded by the base effect from Japan.”

◆Debt Ratio Approaching 900%... Large-Scale Capital Increase in 2017 Rendered Ineffective= Expectations for financial structure improvement have also dimmed. Korean Air’s standalone debt ratio rose to 862% in the third quarter of last year. The debt ratio, which had decreased to 538% following a large-scale paid-in capital increase and perpetual bond issuance in 2017, increased by over 300 percentage points in less than two years due to consecutive large net losses and increased borrowings.

Equity capital, which was close to 3.67 trillion KRW in 2017, shrank to about 2.7 trillion KRW. During the same period, liabilities increased from 1.98 trillion KRW to 2.33 trillion KRW due to changes in accounting standards for operating leases. The consolidated debt ratio has surpassed 900% and is heading toward 1000%. Furthermore, with plans to introduce new aircraft worth 6.4 billion USD (approximately 7.7 trillion KRW), borrowings are expected to continue rising. A credit rating analyst commented, “Without large-scale capital increases or asset sales to improve the financial structure, financial improvement is difficult to expect.”

◆Possibility of Credit Rating Downgrade 'Up'= The worsening financial situation has increased the likelihood of another credit rating downgrade. Korean Air’s credit rating had fallen to BBB but was upgraded one notch to BBB+ following capital increases and perpetual bond issuance. If the rating falls again, it will return to BBB.

Korea’s three major credit rating agencies have stated that they will consider a downgrade if Korean Air’s net debt to EBITDA ratio exceeds six times. As of the end of the third quarter last year, this ratio was already close to seven times. The downgrade triggers set by NICE Investors Service and Korea Ratings have also been exceeded.

Analysts believe Korean Air recorded operating losses in the fourth quarter of last year as well. Due to large-scale new aircraft investments and performance deterioration caused by the novel coronavirus, improving the financial situation is considered difficult. A credit analyst at a securities firm said, “The trend is increasingly toward a downgrade rather than an upgrade in creditworthiness.”

◆Short-Term Repayment Burden of 4.4 Trillion KRW= The deterioration in creditworthiness is expected to increase the burden of debt repayment. Korean Air’s borrowings (including current portion of long-term debt) that must be repaid or refinanced within one year amount to 4.3542 trillion KRW. Additionally, from this year onward, more than 1 trillion KRW of new capital securities (perpetual bonds) will sequentially reach their effective maturity. Although Korean Air’s perpetual bonds have maturities of over 30 years, if not redeemed early, the cost of capital rises sharply, making the effective maturity only 2 to 3 years.

While debt maturities are approaching, raising large-scale funds is difficult. Although a recent corporate bond issuance of 60 billion KRW was successful, it is challenging to gather demand exceeding 100 billion KRW. An investment banking (IB) industry official said, “There is no securities firm willing to underwrite Korean Air’s corporate bonds on a large scale,” and added, “If creditworthiness worsens again, it will be difficult to find funding solutions.”

The IB industry views accounts receivable securitization based on new aircraft investments as the only funding alternative. An industry insider said, “Although financial improvement through asset sales such as the LA Wilshire Hotel is urgently needed, the management rights dispute has entangled the company, significantly delaying actual financial restructuring efforts.”

This content was produced with the assistance of AI translation services.