Having Overcome the First Hurdle, San-eun Accelerates Korean Air-Asiana Integration

Court Dismisses Application for 'Prohibition of New Share Issuance' Injunction
Challenges Remain in Workforce Restructuring and Corporate Merger Review

As the court's decision on Korean Air's acquisition of Asiana Airlines approaches, on the 30th, Korean Air and Asiana Airlines passenger planes were moving toward the runway at Gimpo Airport apron in Gangseo-gu, Seoul. The Seoul Central District Court is expected to deliver a ruling today or tomorrow on the injunction request filed by the activist private equity fund KCGI against Hanjin KAL to prohibit the issuance of new shares. If the court dismisses the injunction request, the acquisition process will accelerate, but if the injunction is granted, the acquisition is likely to be canceled. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Kangwook Cho] The Korea Development Bank (KDB), which is leading the integration of Korean Air and Asiana Airlines, has overcome a major hurdle. The court dismissed the 'injunction to prohibit new share issuance of Hanjin KAL' filed by KCGI (Kang Sung-bu Fund), which is in a management dispute with Chairman Cho Won-tae of Hanjin Group, paving the way for the full-scale restructuring of the aviation industry led by KDB.

According to the legal community on the 1st, the Seoul Central District Court Civil Division 50 (Presiding Judge Lee Seung-ryeon) dismissed the injunction application filed by Grace Holdings, an investment purpose company under KCGI, against Hanjin KAL to prohibit new share issuance.

This decision sided with KDB and Chairman Cho, who argued that the third-party allotment paid-in capital increase of Hanjin KAL against KDB was a measure for the business purpose of restructuring the aviation industry.

KDB, leading the integration of the two major airlines, expressed relief and stated that it will proceed with the integration smoothly together with Hanjin Group. KDB welcomed the court's wise judgment and said that it has gained great momentum in promoting the current aviation industry restructuring plan to overcome the COVID-19 crisis and prepare for a post-COVID resurgence.

In the financial sector, Chairman Cho's brinkmanship is seen as successful. After the no-deal end of the sale negotiations with HDC Hyundai Development Company, the preferred bidder, he chose Korean Air as the new acquirer within two months and emphasized that there is no alternative but to integrate the two major airlines to save Korea's aviation industry.

When Chairman Cho first announced the Asiana Airlines sale plan to Hanjin Group on the 16th of last month, he said that a paid-in capital increase in Hanjin KAL was inevitable to maintain the Hanjin Group holding company system. At an online briefing on the 19th of the same month, he urged, "Please look at the situation objectively and calmly without political bias," and stressed, "Although aware of suspicions of chaebol favoritism, this is a realistically unavoidable choice."

Subsequently, on the 23rd, KDB emphasized in a press release that it must participate as a shareholder in Hanjin KAL to faithfully perform the role of monitoring Hanjin Group's sound and ethical management. To monitor whether Hanjin Group's promise to secure employment for all Asiana Airlines employees is properly fulfilled, KDB must secure means to check the management of Hanjin KAL, including Chairman Cho.

On the 26th, KDB reiterated that the aviation industry restructuring plan is being promoted while adhering to the three principles of restructuring: responsible roles of major shareholders, sharing of pain by stakeholders, and preparation of sustainable normalization measures, in relation to the integration of the two major national airlines.

KDB plans to start the acquisition plan as scheduled by injecting funds into Hanjin KAL on the 2nd. First, KDB will invest 800 billion KRW in Hanjin KAL. Of this, 500 billion KRW will be used to participate in the third-party allotment paid-in capital increase, and 300 billion KRW will be used to acquire exchangeable bonds (EB) based on Korean Air shares. Through this process, KDB will secure a 10.66% stake in Hanjin KAL. Based on KDB's funds, Hanjin KAL will participate in a 2.5 trillion KRW paid-in capital increase of Korean Air and inject funds into Asiana Airlines.

Although KDB has overcome the first hurdle, there are still many challenges ahead. First is the success of Korean Air's rights offering. Even if KDB invests 730 billion KRW out of the total 1 trillion KRW through Hanjin KAL, it accounts for only about 30% of the 2.5 trillion KRW needed for integration. Therefore, the participation of Korean Air's minority shareholders in raising the remaining 70% is expected to determine the success of the acquisition.

There are also corporate merger review hurdles from the Fair Trade Commission as well as overseas authorities. As of the end of last year, the combined domestic market share of the two companies, including their low-cost carriers (LCCs), exceeds 60%. Moreover, this merger requires prior corporate merger reviews from authorities in the United States, the European Union (EU), China, and Japan. However, KDB expects corporate merger approval without major issues regarding monopoly concerns. Considering Asiana Airlines' crisis situation, it is anticipated to reach a conclusion similar to the approval of Jeju Air's acquisition of Eastar Jet and Hyundai Motor's acquisition of Kia Motors.

The issue of workforce restructuring and the variable of the third-party shareholder coalition remain unresolved challenges. Although KDB and Chairman Cho have firmly stated that "there will be no artificial restructuring," considering overlapping personnel and routes of the two airlines, workforce restructuring is widely expected to be inevitable. KDB has publicly requested dialogue with the Asiana Airlines Labor Union, Asiana Airlines Pilots Union, and Asiana Airlines Open Pilots Union. This is explained as an effort to timely reflect the opinions of the Asiana Airlines union, a key stakeholder, regarding employment stability.

Above all, criticism is mounting over whether merging two companies sustained by taxpayers' money is appropriate. If a mega airline is launched, it could double the risk of insolvency for both companies. Consequently, concerns about the "winner's curse" have emerged even before the deal is completed. As of the end of June, Asiana Airlines' debt ratio reached 2291%, with a capital erosion rate of about 56%. 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. Although maturity extensions are ongoing, the interest expenses on the large borrowings could further strangle both companies.

Regarding this, Chairman Cho said, "The integrated national airline to be born through this transaction will have the status and competitiveness of a top 10 global airline, 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.