In-flight Meals Become 'Emergency Cash Source' for Aviation Industry... Korean Air Offers with Tears

High-Margin 'Aljjabaegi' COVID-19 Assets Up for Sale
"Must Reclaim Later"... Some Speculate Inclusion of Buyback Options

Due to the impact of COVID-19, the in-flight meal preparation area inside Korean Air's catering center was quiet on the 2nd as the airline industry suffers significant losses. Photo by Moon Honam munonam@

[Asia Economy Reporter Yu Je-hoon] The "in-flight meal and in-flight sales business," the highlight of air travel, has become a crucial cash source for the aviation industry. Korean Air, which has been experiencing unprecedented management difficulties due to the COVID-19 pandemic, chose to sell its in-flight meal business as the final piece of its self-help plan. Asiana Airlines also restructured its in-flight meal business when the group faced a liquidity crisis. Experts believe that once the cooled aviation market returns to normal, airlines will prioritize reclaiming their in-flight meal businesses.

According to the aviation industry on the 26th, Korean Air held a board meeting the previous day and deliberated and approved a plan to sell its in-flight meal tray business unit to the private equity firm Hahn & Company for 990.6 billion KRW. Accordingly, Korean Air’s in-flight meal tray business and assets will be transferred to a newly established company created by Hahn & Company. Korean Air plans to secure a 20% stake in the new company to establish a stable supply chain.

Korean Air’s in-flight meal tray business produces 71,600 meals daily and supplies them to over 30 global airlines. In October 2017, the daily supply reached a record high of 89,906 meals. The industry estimates Korean Air’s market share to be around 70-80%, making it by far the largest in South Korea. Moreover, Korean Air’s in-flight meals are recognized worldwide for their high quality.

So far, the total operating revenue (sales) of Korean Air’s in-flight meal tray business has not been disclosed, but last year’s business report shows external sales from the in-flight meal sector alone reached 91 billion KRW. Considering that more than half of the meals produced by Korean Air are supplied internally and that in-flight sales revenue also reaches about 200 billion KRW annually, the total sales scale of the in-flight meal tray business is estimated to be between 300 billion and 400 billion KRW.

Of course, this is a minor portion compared to Korean Air’s total sales (approximately 12 trillion KRW). Nevertheless, Korean Air shows some reluctance in selling the in-flight meal tray business because it is a representative cash cow. Generally, the profit margin of the in-flight meal tray business is known to be at least 10%, and up to 20-30%. This is a stark contrast to the airline transportation business, Korean Air’s core business, which hovers around a 5% operating profit margin.

As such, the in-flight meal tray business has been closely linked to the airline owners’ families. In Korean Air’s case, the in-flight meal tray business unit was once called the "Cho Hyun-ah Kingdom" along with the hotel business unit. When the management rights dispute intensified at the end of last year, rumors circulated that control over this business unit was also demanded.

Asiana Airlines’ in-flight meal sector is also closely related to former Chairman Park Sam-gu. In 2003, to overcome a liquidity crisis, Asiana Airlines established a joint venture with Germany’s Lufthansa called LSG Sky Chefs Korea (Lufthansa 80%, Asiana Airlines 20%). When Kumho Group faced another liquidity crisis, former Chairman Park turned his attention back to the in-flight meal business. After LSG refused indirect support, he established Hainan Airlines and Gate Gourmet Korea (GGK) to transfer the in-flight meal business rights. Subsequently, the Gate Group acquired 160 billion KRW worth of Kumho Holdings’ convertible bonds with warrants (BW). During this process, a shortage in in-flight meal supply occurred, severely damaging Asiana Airlines’ reputation as a major national carrier.

A source from a domestic airline said, "Although the profit margin of the in-flight meal sector is generally known to be 20-30%, the consensus is that it could be even higher," adding, "The reason airlines show movements related to in-flight meals during crises is because there is a significant reason behind it."

The industry also analyzes that Korean Air may reclaim the in-flight meal tray business once the market normalizes. Since the sale was an unavoidable measure due to government capital injection demands, it is possible that the contract includes related clauses.

Professor Lee Hwi-young of Inha Technical College explained, "The catering (in-flight meal) business yields high profits but is not essential for airline operations. Global major airlines that received large-scale bailouts from their governments maintain this business, but domestic airlines had no choice due to government support conditions such as capital expansion. It is a business unit that will definitely be reclaimed once the market normalizes."

The financial investment sector also believes that both parties may have considered a buyback option in the future. In a report released the same day, Daishin Securities estimated, "Korean Air sold the business at about 15 times its EBITDA (earnings before interest, taxes, depreciation, and amortization). It is presumed that a buyback option was included in case the aviation market and the company’s financial situation improve."

Meanwhile, the sale of the in-flight meal tray business remains a hot topic amid the ongoing management rights dispute. KCGI, a member of the shareholder coalition (the "three-party alliance") aiming to normalize Hanjin Group and opposing Chairman Cho Won-tae, previously stated, "It is hard to dispel suspicions about granting exclusive negotiation rights to a specific private equity fund instead of a competitive bidding process," and warned, "If the priority acquisition rights for a prime business unit are provided to secure friendly shares, we will hold them fully accountable." A source from the three-party alliance pointed out, "It cannot be ruled out that both sides may expand their shares through various financial techniques."

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