Green Light for Credit Rating Improvement in the Aviation Industry?

Korean Air's Acquisition of Asiana
Alleviates Downward Pressure Including Profit Structure Improvement

[Asia Economy Reporter Minji Lee] The airline industry, which had been flagged with credit rating warnings due to the impact of the novel coronavirus infection (COVID-19), is drawing attention as to whether it can improve its ratings through the merger and acquisition of Korean Air and Asiana Airlines.

According to the financial investment industry on the 18th, Korea Credit Rating announced that it will review the credit ratings of Korean Air and Asiana Airlines. Other credit rating agencies have also begun rating the credit ratings related to Korean Air's acquisition of Asiana's shares. This appears to be in consideration of the possibility of expanding the status as a national airline and improving the profit structure through industrial restructuring. Sooyoung Park, senior researcher at Korea Credit Rating's Corporate Evaluation Headquarters, explained, "With capital expansion and the launch of an integrated full-service carrier (FSC), the urgent downward pressure on the creditworthiness of Korean Air and Asiana Airlines will be alleviated," adding, "We will review the credit ratings considering the third quarter operating results and the prolonged COVID-19 situation."

Regarding the acquisition of Asiana Airlines, the fact that the financial burden on Hanjin Group is not significant is expected to have a positive effect on the credit rating evaluation. KDB Industrial Bank is injecting 800 billion KRW to acquire convertible bonds of Hanjin KAL, the parent company of Korean Air, and participate in a paid-in capital increase, and Hanjin KAL plans to use these funds to support Korean Air. Accordingly, Korean Air decided on a paid-in capital increase of 2.5 trillion KRW at the board meeting on the 16th, which will be used for Asiana Airlines' third-party allotment capital increase (1.5 trillion KRW) and the purchase of perpetual convertible bonds (300 billion KRW). Asiana Airlines is expected to use 500 billion KRW of the inflow funds to repay borrowings, and the remaining 1.3 trillion KRW will be used to cover monthly cash burn until the deal is finalized in the second half of next year.

Asiana Airlines, which had been drifting for a long time after the contract with the HDC Hyundai Development & Mirae Asset Daewoo consortium fell through, is expected to see a reduction in financial burden if Korean Air's large-scale paid-in capital increase takes place. Until now, Asiana Airlines has failed to secure clear competitiveness between Korean Air and low-cost carriers (LCCs), lacking sufficient price competitiveness. Most of its funds were procured through external borrowings, resulting in an unstable financial structure. The debt ratio reaches 2300%, and short-term borrowings amount to 2.56 trillion KRW. Although it will take a long time to get on the path of financial improvement, it is interpreted that Asiana Airlines will benefit from improved market position, eased competition, and enhanced operational efficiency together with Korean Air.

The external environment is also positive for the time being. Vaccine development is accelerating, and it is expected that performance will be maintained through air cargo until passenger flights, the core of sales, return to normal. Korean Air recorded an operating profit of 8 billion KRW in the third quarter, falling short of the market expectation of 36 billion KRW, but it is judged that performance will improve from the fourth quarter due to seasonal effects. Air cargo rates and volumes are surging, and benefits from vaccine transportation are also expected.

Senior researcher Park said, "In the case of Asiana Airlines, the pressure to downgrade credit ratings increased as capital expansion through a paid-in capital increase became impossible after the cancellation of the share sale contract, but the downward pressure will be alleviated by Korean Air's acquisition," adding, "The importance of FSC will increase as government-led industrial restructuring is taking place to strengthen medium-term industrial competitiveness."

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