Korean Air and Asiana Airlines' Short-Term Debt Reaches 10 Trillion Won... Concerns Over the 'Winner's Curse'

San-eun to Prioritize 500 Billion KRW Investment in Hanjin Kal via Third-Party Allocation Rights Offering
Supports Funding by Acquiring 300 Billion KRW EB
Concerns Over 'Negative Synergy' from Compounding Insolvencies
Obstacles from Three-Party Alliance and Union Opposition
Inevitable Controversy Over Public Funded Merger Validity

The headquarters of Kumho Asiana in Jongno-gu, Seoul, where the acquisition plan of Asiana Airlines by Hanjin Group was discussed at the Ministerial Meeting on Strengthening Industrial Competitiveness on the 16th. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Jo Gang-wook] As the government officially acknowledges the merger plan with Korean Air as an alternative for handling Asiana Airlines, a major airline ranked within the world’s top 10 is expected to emerge if the big deal is finalized. The Industrial Bank of Korea (IBK), Asiana Airlines’ main creditor bank, is pushing for the merger by making a large-scale cash investment to support Korean Air’s acquisition of Asiana Airlines. This approach involves IBK participating as an investor in the acquisition on behalf of Korean Air, which is struggling financially and receiving support from the Corporate Restructuring Fund. This plan aims to reorganize the aviation industry by facilitating a mega merger and acquisition (M&A) deal amid the prolonged crisis in the airline sector caused by the COVID-19 pandemic.

However, there are many hurdles to overcome, including opposition from employees concerned about workforce restructuring, antitrust issues, and resistance from the third-party coalition (former Korean Air Vice President Cho Hyun-ah, KCGI, and Bando Construction) currently in a management dispute with Hanjin Group Chairman Cho Won-tae. Additionally, there are growing concerns that using government funds for Korean Air to acquire Asiana Airlines could exacerbate existing financial troubles, creating a significant 'negative synergy effect.'

IBK Signs 800 Billion KRW Investment Contract with Hanjin KAL... Korean Air Becomes Largest Shareholder of Asiana

On the 16th, IBK announced that it had agreed to sign an investment contract worth a total of 800 billion KRW with Hanjin KAL to promote measures aimed at enhancing competitiveness in the air transportation industry centered on the integration of Korean Air and Asiana Airlines. IBK will inject 500 billion KRW into Hanjin KAL through a third-party allotment of paid-in capital increase and acquire 300 billion KRW worth of perpetual convertible bonds (EB) to provide financial support. Through this, Hanjin KAL will participate in Korean Air’s paid-in capital increase of 2.5 trillion KRW for acquiring Asiana Airlines, and Korean Air will invest a total of 1.8 trillion KRW through Asiana Airlines’ new shares (1.5 trillion KRW) and perpetual bonds (300 billion KRW), becoming the largest shareholder of Asiana Airlines.

Choi Dae-hyun, IBK’s Deputy Governor, explained, “The background for promoting the integration of the two major airlines lies in the recognition that without fundamental efforts to enhance competitiveness such as restructuring the airline industry due to intensified global competition and the prolonged COVID-19 crisis, the normalization of domestic national airlines’ management after the end of COVID-19 remains uncertain.”

Expectations for Synergies from Route Rationalization, Operating Cost Reduction, and Interest Expense Savings

Additionally, creditors are currently discussing and reviewing plans to rationalize and consolidate the ‘profitable’ transpacific and European routes operated by both companies. Korean Air currently operates 29 routes, including 14 in North America and 15 in Europe, while Asiana Airlines operates 11 routes, including 5 in North America and 6 in Europe. Except for one or two routes, Asiana Airlines’ North American and European routes overlap entirely with Korean Air’s. Since declaring an emergency management plan in 2015, Asiana Airlines has partially trimmed routes to Russia, India, and China to improve its financial structure, but still incurs substantial operating costs on unprofitable long-haul routes.

However, there are many obstacles to the big deal’s completion. For the merger of two companies with international routes, approval must be obtained not only from the Korea Fair Trade Commission but also from overseas regulatory bodies for corporate merger reviews. If Korean Air and Asiana Airlines merge, their combined market share for international and domestic passengers last year would exceed 70% and 60%, respectively. However, since the merger is government-led, the prevailing view is that the Fair Trade Commission’s merger review is unlikely to fail. Especially, the creditor group believes that antitrust concerns will be somewhat alleviated by rationalizing or consolidating overlapping routes.

Third-Party Coalition Opposes... Labor Union Concerns over Inevitable Workforce Reductions

Strong opposition from the third-party coalition, which holds about 46% of Hanjin KAL shares and is the largest shareholder, is also a key issue. The coalition opposes IBK’s third-party allotment paid-in capital increase in Hanjin KAL. This is because if IBK becomes a major shareholder of Hanjin KAL, it is highly likely to act as an ally for Chairman Cho’s side (holding about 41% of shares) in the management dispute.

Labor union opposition is another variable. If the merger proceeds, route adjustments, fleet reductions, and business restructuring will be necessary, making workforce reductions inevitable for both companies.

Concerns over ‘Winner’s Curse’ in Merging Two Companies Sustained by Public Funds

Above all, there is strong criticism about whether it is appropriate to merge two companies sustained by taxpayers’ money. If a mega airline is launched, it could multiply the risk of insolvency for both companies. Consequently, concerns about the ‘winner’s curse’ have emerged even before the deal is finalized. As of the end of June, Asiana Airlines’ debt ratio stood at 2291%, with a capital erosion rate of about 56%. Its current liabilities due within one year amount to 4.7979 trillion KRW, and combined with Korean Air’s short-term debt, the total reaches a staggering 10 trillion KRW. While maturity extensions are possible, the interest expenses associated with the large borrowings could further strain both companies.

Lee Dong-geol, Chairman of IBK, stated, “The integrated national airline that will be created through this transaction will secure a position and competitiveness at the top 10 level in the global airline industry, enabling efficient response to the COVID-19 crisis and establishing a foundation to leap forward as a world-class airline after the pandemic ends.”

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