[Q&A] KDB Industrial Bank: "No Artificial Restructuring After Korean Air-Asiana Integration"

Choi Dae-hyun, Executive Vice President of the Corporate Finance Division at the Korea Development Bank, is answering questions related to the integration of Korean Air and Asiana Airlines during an online briefing held on the 16th.

[Asia Economy Reporter Kangwook Cho] Regarding Korean Air's acquisition of Asiana Airlines, the Korea Development Bank (KDB) announced on the 16th that there will be no artificial workforce restructuring even after the integration of the two companies. Additionally, to oversee the ethical management of the owner family, an Ethics Management Committee will be established and operated. It was officially confirmed that members of the Hanjin Group family, including Executive Director Hyunmin Cho of Hanjin Kal and Advisor Myunghee Lee of Jeongseok Enterprises, will not participate in the management of the airline subsidiaries.

The following is a Q&A session with Choi Dae-hyun, Vice President of Corporate Finance at KDB, conducted online on the same day.

- What is the reason for signing the investment contract with the current management of Hanjin Kal?

▲ Since they are currently in charge of management, they are the main parties to the transaction and contract. In preparation for the post-COVID-19 era, funds will be provided to Hanjin Kal, which functions as the control tower in the restructuring process centered on Korean Air.

Chairman Won-tae Cho of Hanjin Group has pledged to bear management responsibility, deeply recognizing the importance of the Korean aviation industry restructuring work, by putting up all the shares of Hanjin Kal he holds and all the shares of Korean Air to be acquired as collateral, and agreeing to step down from frontline management if integration promotion and management performance are inadequate.

KDB will annually evaluate the integration process and management performance of the integrated airline through a management evaluation committee. If the evaluation grade is poor, management actions such as dismissal will be taken. KDB will not unilaterally exercise favorable voting rights but will exchange opinions with the three-party coalition and other shareholders to enhance corporate value and ensure management transparency.

By making Hanjin Kal the contracting party and the subject of rights and obligations in the investment agreement and other contracts, the integration process is structured to proceed smoothly even if there are future changes in management rights.

- Why provide support through Hanjin Kal instead of Korean Air?

△ From Korean Air's perspective, large-scale fundraising is more effective through a rights offering involving Hanjin Kal, based on integration synergy in the capital market.

Additionally, if Hanjin Kal does not participate in Korean Air's rights offering, it will fall short of the 20% shareholding requirement for a holding company, and the shareholding ratio will further decline upon the integration of Korean Air and Asiana Airlines.

- Why is it an investment rather than a loan?

△ Considering that Korean Air holds a large proportion within the holding company Hanjin Kal and that dividends from Korean Air are a major source of income, borrowing large-scale funds through loans for aviation industry restructuring could cause insolvency of the integration entity.

KDB decided to participate directly as a shareholder in the integration process to induce responsible management from affiliated shareholders and executives, while faithfully performing the role of monitoring sound management, maximizing synergy from overcoming the COVID-19 crisis and the integration of the two companies.

- Is there a special reason to complete the transaction within this year? Why is it being pushed now?

△ Due to the prolonged COVID-19 situation, the possibility of normalization in the aviation industry is uncertain. Given Asiana Airlines' capital expansion and liquidity shortages of both companies, maintaining the two-airline system would require an additional 4.8 trillion KRW in policy funds by the end of 2021. Also, large-scale debt-to-equity swaps, additional capital reductions, and sales efforts for Asiana Airlines would likely cause enormous losses to creditors.

KDB's investment in Hanjin Kal will be implemented promptly within this year to resolve Asiana Airlines' capital expansion and liquidity issues by year-end, enabling Korean Air's large-scale rights offering to be conducted early next year, minimizing policy fund input through early market fundraising.

Furthermore, to seize the opportunity for the domestic aviation industry's resurgence after the COVID-19 crisis, it was judged necessary to immediately commence proactive industrial restructuring and fundamental competitiveness enhancement at this point.

- When did preparations for the integration begin?

△ As the sale process with HDC Hyundai Development Company faced difficulties and concerns about the sale's failure increased, a contingency plan was prepared to closely respond to future changes.

After the final breakdown of sale negotiations with Hyundai Development around September 10, acquisition intentions were inquired with Hanjin Group, leading to the current integration efforts. Opinions were also sought from five major affiliated groups and other groups engaged in aviation, but they expressed no interest due to various financial difficulties and industry uncertainties caused by COVID-19.

Hanjin Group shared the vision for restructuring the aviation industry to overcome the domestic aviation crisis and fundamentally improve competitiveness. Considering the damage to the domestic aviation industry and related workers due to the prolonged COVID-19 crisis, integration preparations were made as swiftly as possible to avoid delays.

- What are the measures to ensure ethical management of affiliated shareholders and executives?

△ Although internal systems exist, as a result of this deal, an independent Ethics Management Committee will be established with considerable authority to oversee ethical management of Hanjin Kal, key executives, and affiliated shareholders. The affiliated shareholders have pledged to actively cooperate with the committee's recommendations and will not participate in the management of airline-related subsidiaries. The affiliated shareholders include Hyunmin Cho and Myunghee Lee.

- How will you respond to legal actions such as the injunction request by the three-party coalition?

△ Considering that the integration of the two major national airlines aims at restructuring the domestic aviation industry and strengthening competitiveness, and the urgent situation faced by the aviation industry and related workers due to the prolonged COVID-19 crisis, it is judged that there will be no major obstacles to proceeding with the integration process as planned.

This project is also significant from the perspective of national competition and public convenience, and it is expected that the three-party coalition will see long-term shareholder value increase. Therefore, cooperation with the three-party coalition, a major shareholder for successful implementation of the integration, is anticipated, and if necessary, consultations will be conducted as fellow shareholders.

- What is the relationship between Asiana Airlines' equal capital reduction and this transaction?

△ The equal capital reduction was a measure to eliminate capital erosion. It is largely unrelated.

- How will the existing shares of Asiana Airlines' major shareholders be handled in the future?

△ The old shares held by Kumho Industrial have already been provided as collateral to creditors. Since they were set as collateral for the additional 3.3 trillion KRW support to Asiana Airlines, after the integration process is completed, they will be sold on the market and used for debt recovery.

- What are the plans for the low-cost carriers (LCCs) owned by both companies?

△ Specific plans have not yet been announced. However, Hanjin plans to gradually integrate the three companies: Jin Air, Air Busan, and Air Seoul. They aim to expand scale and reorganize the domestic LCC market. Operational efficiency and consumer benefits are expected to improve through adjustments of overlapping routes, schedule diversification, and fleet simplification. This is also expected to promote regional airport activation and development of a second hub airport by expanding international and domestic routes from regional airports, integrating overlapping time slots, and developing late-night schedules to enhance route schedule convenience.

The integrated LCC currently operates aircraft in the 5 billion KRW range. It will become the largest LCC in Northeast Asia and is expected to be the second largest in Asia after AirAsia. The timing and forms of this will depend on various factors such as slots at regional airports and their utilization.

- What about workforce restructuring after the integration?

△ The overlapping workforce between the two companies is estimated at about 800 to 1,000 people, mainly in indirect positions such as management. Considering natural attrition and personnel needed for integration and new businesses, no artificial restructuring is expected. This commitment has been secured from the Hanjin family. This will be fully incorporated into the PMI, and efforts will be prioritized to ensure employee succession and prevent employment insecurity during the process.

- What impact will the integration have on consumers?

△ The global aviation market is currently highly competitive. The possibility of consumer disadvantages such as fare increases or service quality deterioration due to monopoly is considered low. Rather, route diversification, schedule variety, and mileage integration are expected to enhance consumer benefits. For short- and medium-haul international and domestic routes, competition with foreign airlines and LCCs remains strong, indicating that the combined market share will not be dominant. Mileage integration will be reviewed including future usability and is planned to be implemented accordingly.

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