Korean Air and Asiana Airlines Reduce Risks

Partial Relief of Hanjin's 'Management Rights Dispute' and Asiana's 'Capital Erosion' Concerns Following Injunction Dismissal

As Korean Air's acquisition of Asiana Airlines is underway, on the 17th, Korean Air and Asiana Airlines passenger planes are parked behind the construction site of the 4th runway at Incheon International Airport. 2020. 11. 17

[Asia Economy Reporter Yu Je-hoon] Hanjin Group and Asiana Airlines have been able to alleviate their maximum risks as the court dismissed the provisional injunction filed by the private equity fund (PEF) KCGI against Hanjin KAL. Hanjin Group has eased one concern from the shareholder coalition (the three-party alliance) pushing for the normalization of Hanjin Group’s management by leveraging their superior shareholding, and Asiana Airlines has also managed to escape the year-end risk of capital erosion.

◆De facto conclusion of the management rights dispute = For Hanjin Group, the dismissal of the provisional injunction allows for the stabilization of management rights. Currently, the three-party alliance holds 46.7% of Hanjin KAL shares, while Chairman Cho Won-tae of Hanjin Group holds 41.1%, giving the alliance the upper hand. However, if Hanjin KAL proceeds with a third-party allotment capital increase, the shares would be 41.7% for the three-party alliance, 37.7% for Chairman Cho, and 10.66% for the Korea Development Bank (KDB), with the combined shares of Chairman Cho and KDB reaching 47%, which could overturn the current structure at once.

The three-party alliance has requested an extraordinary general meeting, but it is unlikely that the Hanjin KAL board will accept this. Even if the court orders a general meeting early next year, it is expected to be difficult to achieve the intended purpose (appointment of directors and auditors). Unless a significant additional share purchase is made, the management rights dispute is likely to enter a lull.

For Asiana Airlines, a catastrophe has been averted. As of the end of the third quarter, Asiana Airlines’ capital erosion rate reached 50.2%, and without additional capital injection, complete capital erosion by year-end is inevitable. In this case, it would be designated as a management item, credit ratings would fall, and a series of early repayment demands due to loss of benefit of term on various borrowings could lead to a catastrophe.

However, with this dismissal, the acquisition process is progressing smoothly, allowing Asiana Airlines to receive 600 billion KRW in support from Korean Air before year-end, consisting of a contract deposit (300 billion KRW) and perpetual convertible bonds (300 billion KRW), thus escaping the immediate crisis. The Korea Development Bank and Hanjin Group’s push for the third-party allotment capital increase despite various controversies is due to this urgent funding need.

However, being placed under the monitoring and supervision system of KDB is a considerable burden for Hanjin Group and Chairman Cho. KDB imposed 'seven major obligations' on Hanjin KAL and emphasized that if management failures continue, Chairman Cho’s management rights could be revoked. Chairman Cho is thus holding a double-edged sword.

◆Due diligence and restructuring... the biggest challenge for normalization = If the acquisition procedure proceeds as planned after the third-party allotment capital increase scheduled for tomorrow, Korean Air is expected to begin due diligence on Asiana Airlines as early as this week or by next week at the latest. Woo Ki-hong, President of Korean Air, stated, "We are already preparing for due diligence and have formed the related organization," adding, "We will conduct document-based due diligence first and, if necessary, proceed with on-site face-to-face due diligence."

In this process, the issue of workforce restructuring is likely to emerge as the biggest agenda. KDB and Hanjin Group maintain the position that "there will be no restructuring." Their logic is that overlapping indirect personnel between the two companies number around 1,000, which can be covered by natural attrition such as retirement. Chairman Cho also tried to dispel concerns by saying, "It is true that there are many overlapping personnel, but considering route development and service quality improvement, they can be sufficiently utilized."

However, inside and outside the industry, since both companies were large airlines, it is believed that there is significant overlap not only in flight operations, cabin crew, and maintenance but also in subsidiary areas. The combined number of employees of the two companies reaches 27,000, and including subsidiaries and partner companies, the workforce expands to 100,000. Labor unions of both companies are already opposing. The four unions of the two companies have formed a joint countermeasure committee and are demanding from the government ▲reconsideration from scratch through the formation of a tripartite labor-management-government council ▲and detailed discussions on employment stability plans.

An industry insider said, "Realistically, it will be impossible not to adjust personnel at all," adding, "Since employment maintenance is the justification for this integration and an obligation imposed by KDB, they will try to minimize the required adjustments in their own way."

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