Korean Air-Asiana Short-Term Debt Hits 10 Trillion Won... Concerns Over 'Double Insolvency' (Comprehensive)

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

The Kumho Asiana headquarters 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 Kangwook Cho] The state-run Korea Development Bank (KDB) is set to make a large-scale cash investment to support Korean Air's acquisition of Asiana Airlines. Instead of Korean Air, which is struggling financially including with the Aircraft Industry Fund, KDB will participate as an investor in the acquisition. This plan aims to reorganize the aviation industry by orchestrating a mega merger and acquisition (M&A) deal amid the prolonged crisis in the airline industry 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 three-party coalition (former Korean Air Vice President Cho Hyun-ah, KCGI, and Vantone Construction) currently in a management dispute with Hanjin Group Chairman Cho Won-tae. Additionally, there are growing concerns that the method of Korean Air acquiring Asiana Airlines using government funds could create a 'negative synergy effect' that only adds to the existing financial troubles.

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

On the 16th, KDB announced that it had signed an investment contract worth a total of 800 billion KRW with Hanjin KAL to promote a plan to enhance competitiveness in the air transportation industry centered on the integration of Korean Air and Asiana Airlines. KDB will inject 500 billion KRW into Hanjin KAL through a third-party allotment paid-in capital increase and acquire 300 billion KRW worth of perpetual convertible bonds (CB) to provide funding. Through this, Hanjin KAL will participate in Korean Air's paid-in capital increase of 2.5 trillion KRW for the acquisition of 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, Vice President of KDB, explained, "The background for promoting the integration of the two major airlines is 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 is uncertain."

KDB has already injected large-scale funds into the two airlines. Asiana Airlines has already exhausted 3.3 trillion KRW received from creditors including KDB and recently received an additional 240 billion KRW from the Aircraft Industry Fund. Korean Air also received 1.2 trillion KRW from KDB and the Export-Import Bank of Korea in April and is currently undergoing application procedures with creditor banks and the Aircraft Industry Fund.

This approach is similar to the method used during the merger of Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering. At that time, a separate holding company was created, and KDB transferred its Daewoo Shipbuilding shares to the holding company and received shares in the holding company in exchange, effectively transferring Daewoo Shipbuilding's management rights to Hyundai Heavy Industries.

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

The creditors are currently discussing and reviewing plans to rationalize and consolidate the 'profitable' transpacific and European routes operated by both companies. Currently, Korean Air 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 emergency management in 2015, Asiana Airlines has partially reduced routes to Russia, India, and China to improve its financial structure, but still incurs significant operating costs on unprofitable long-haul routes. Therefore, the creditors are understood to be pushing for Korean Air to focus on long-haul routes such as North America and Europe, while Asiana Airlines concentrates on Asian routes including China, Japan, and Southeast Asia. Given the lack of suitable acquisition candidates for Asiana Airlines and the scale of the domestic aviation industry, there is a consensus that maintaining two national airlines is unnecessary, making this a practical alternative.

However, there are many obstacles to the success of this big deal. For the merger of the two companies with international routes, approval from the Korea Fair Trade Commission (KFTC) as well as overseas antitrust authorities is required. 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 likelihood of the KFTC rejecting the merger is low. Similar to the KFTC's approval of the Jeju Air-Istar Air merger, if Asiana Airlines is deemed a company that cannot be rehabilitated, the merger with Korean Air may be allowed. Especially, the creditors believe that antitrust concerns will be somewhat alleviated if overlapping routes are rationalized or consolidated.

Three-Party Coalition Opposes... Labor Union Concerns Over Inevitable Workforce Reduction

The strong opposition from the three-party coalition, which holds about 46% of Hanjin KAL shares and is the major shareholder, is also a key issue. The coalition opposes KDB's third-party allotment paid-in capital increase in Hanjin KAL. If KDB becomes a major shareholder of Hanjin KAL, it is likely to act as an ally of Chairman Cho's side (which holds 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. The overlapping workforce is estimated to be about 800 to 1,000 people, mainly in management and indirect departments. Six unions from both companies, including Asiana Airlines pilots' union, plan to hold an emergency meeting soon to demand participation in the acquisition process.

In response, KDB stated, "Considering natural attrition and the workforce needed for integration and new businesses, we believe there will be no artificial restructuring. We have received a commitment from the Hanjin family on this matter." They also emphasized, "This will be fully incorporated into the Post-Merger Integration (PMI) process, and we will prioritize ensuring employee succession and preventing job insecurity during the process."

Concerns Over 'Winner's Curse' in Merging Two Companies Supported by Public Funds

Above all, there is strong criticism about whether it is appropriate to merge two companies sustained by taxpayers' money. The emergence of a mega airline could multiply the risk of insolvency for both companies. Even before the deal is completed, concerns about the 'winner's curse' are emerging. 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 nearly 10 trillion KRW. Although maturity extensions are possible, the interest expenses on the large borrowings could further squeeze both companies. Moreover, due to the spread of COVID-19, passenger demand for both airlines is almost nonexistent. Korean Air, facing liquidity shortages, plans to request additional support from the Aircraft Industry Fund soon. In this case, the total taxpayer money injected into the two airlines would exceed 7 trillion KRW. If KDB participates in Hanjin KAL's paid-in capital increase and becomes a major shareholder, the government will effectively control both Korean Air and Asiana Airlines. Therefore, if another liquidity crisis occurs, additional financial support may be required, leading to a situation akin to pouring water into a bottomless pit.

Lee Dong-gull, Chairman of KDB, said, "The integrated national airline to be created through this transaction will have a status and competitiveness among the top 10 in the global aviation industry, enabling efficient response to the COVID-19 crisis and establishing a foundation to leap forward as a world-class airline after the end of the pandemic."

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