The Future of Korean Air's Defense Sector

[Image source=Yonhap News]

[Asia Economy Yang Nak-gyu, Military Specialist Reporter] As Korean Air and Asiana Airlines merge under government leadership, attention is also focusing on the possibility of selling Korean Air's aerospace division, which is part of its defense sector. Although this merger is a measure to revive Asiana Airlines, which is facing financial difficulties, the possibility of selling the aerospace division cannot be ruled out if Korean Air's financial troubles continue due to the COVID-19 pandemic.

According to the defense industry on the 17th, Korean Air received 1.2 trillion won in support from KDB Industrial Bank and the Export-Import Bank in April, and plans to apply for about 1 trillion won from the Industrial Stabilization Fund by the end of the year. However, if financial difficulties persist, industry insiders expect Chairman Cho Won-tae of Hanjin Group will have no choice but to choose between flight operations and manufacturing.

So far, Korean Air has produced F-5 fighter jets and 500MD helicopters, and has carried out performance upgrades on F-15 fighter jets, as well as overhaul and maintenance of Apache Longbow (AH-64D), Black Hawk (UH-60), and Chinook (CH-47) helicopters. It has also obtained maintenance authority for the latest stealth fighter, the F-35. With this confidence, Korean Air has challenged the acquisition of Korea Aerospace Industries (KAI) shares every time KAI was up for sale, starting in 2006 and making attempts in 2003, 2009, and 2012.

However, the situation has changed. The aerospace division's sales reached 898.8 billion won in 2016 but decreased to 650.5 billion won in 2018. From Korean Air's perspective, which needs to secure cash liquidity, there is a growing expectation that the aerospace division may have to be sold. The defense company most likely to merge with Korean Air's aerospace division is its competitor, KAI. While KAI has secured contracts for the unmanned aerial vehicle (UAV) Songgolmae and the next-generation corps-level UAV, Korean Air is responsible for division-level UAVs (KUS-DUAS) and medium-altitude reconnaissance UAVs (MUAV).

There will be many competitive areas ahead. In addition to the next-generation division-level UAV, the Air Force's electronic warfare aircraft procurement project is expected to be domestically developed, leading to a competitive bidding process. The project is known to be worth about 2.5 trillion won. Competition will also arise for the replacement of the UH-60 Black Hawk utility helicopter. KAI insists on replacing it with the Korean-made Surion utility helicopter, while Korean Air advocates upgrading the existing UH-60, leaving the decision to the military.

Some speculate that Korean Air and Asiana's aircraft maintenance (MRO) divisions could be separated to form a new corporation involving defense companies such as KAI and Hanwha Aerospace. This could involve a physical division of the business unit, partial share sales, or an initial public offering (IPO) to secure cash liquidity.

Ahn Young-soo, head of the Defense Industry Research Center at the Korea Institute for Industrial Economics and Trade, said, "Last year, KAI ranked 54th among the 'Top 100 Global Defense Companies,' indicating that its competitiveness in the global market is still weak," adding, "If Korean Air's aerospace division merges with other defense companies, it could help improve competitiveness."

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