Korean Air-Asiana Merger Overcomes Major Hurdle but Faces Ongoing Challenges

Conditional Approval by Fair Trade Commission
US and EU Reviews... LCC Integration Still Pending

[Asia Economy Reporter Hyunseok Yoo] Korean Air has overcome a major hurdle in its merger with Asiana Airlines following the conditional approval decision by the Korea Fair Trade Commission (KFTC). However, challenges remain ahead with reviews from the United States, the European Union (EU), and the integration process of low-cost carriers (LCCs) such as Jin Air and Air Busan. Concerns have also been raised that the KFTC's stringent conditions could undermine the synergy effects of the merged airline.

◇ Korean Air obtains conditional approval = According to the aviation industry on the 23rd, the KFTC conditionally approved the business combination in which Korean Air acquires 63.88% of Asiana Airlines' shares. This comes about 13 months after Korean Air filed the business combination notification with the KFTC in January last year.

The KFTC judged that the merger of the two airlines could lead to competition restrictions such as fare increases on 26 international and 14 domestic routes. Accordingly, it issued corrective orders including structural measures such as slot (the number of takeoffs and landings allowed per hour) and traffic rights transfers for 10 years on those routes, as well as behavioral measures restricting fare increases.

There are evaluations that the KFTC's stringent decision may deteriorate the synergy of the merged airline. Min-sik Na, a researcher at Ebest Investment & Securities, explained, "Since Korean Air will allocate routes with high market share to other airlines, the M&A synergy effect will be limited. If profitable routes are surrendered to competitors, the pricing power weakens."

Nonetheless, from Korean Air's perspective, this marks a significant milestone in the merger process. Previously, Korean Air received business combination approvals from essential notification countries such as Turkey, Taiwan, and Vietnam. It was also notified by Thailand that it is not subject to prior review. For voluntary notification countries, approvals were obtained from Singapore and Malaysia. The Philippines informed that it is not a notification target, thus concluding the procedure.

◇ More hurdles with foreign approvals and LCC integration = Korean Air is awaiting review results from six countries including the United States, China, the EU, Japan, the United Kingdom, and Australia. The UK and Australia are voluntary notification countries but were reported proactively considering the possibility of business combination investigations.

The industry expects the reviews in other countries to proceed smoothly. Since conditional approval was granted in Korea, other countries are likely to take this into account.

In the case of the United States and Japan, as aviation liberalization countries, traffic rights are not required for operations, and route adjustments are relatively easy, so the reviews are expected to pass without difficulty. However, China remains a variable. China may impose restrictions to protect its domestic aviation industry.

Regarding the EU, which blocked the merger of Korea Shipbuilding & Offshore Engineering and Daewoo Shipbuilding & Marine Engineering, the prevailing view is that approval will be granted. Last year, the two companies secured orders for 47 out of 78 LNG (liquefied natural gas) carriers ordered worldwide, holding over 60% market share, raising monopoly concerns that led to the rejection. However, Korean Air and Asiana Airlines ranked first and second in passenger numbers domestically in 2019 but are 44th and 60th globally, so their influence is not significant on a global scale.

There are also concerns that the KFTC's conditional approval could become a variable. Since the KFTC conducted a very detailed review of the Korean Air and Asiana Airlines merger, other countries may consider this in their judgments. Professor Yong-sik Hwang of Sejong University said, "Since we approved it, other countries may accept it as well," but added, "If excessive conditions are imposed domestically, other countries might also conduct thorough reviews considering that." He further stated, "The KFTC's approval is not crossing the final hurdle but rather signaling the beginning."

Even after foreign reviews conclude, the process is not over. After the reviews, Korean Air plans to participate in Asiana Airlines' third-party allotment capital increase to acquire shares. The total amount involved is 1.5 trillion KRW, with 400 billion KRW as a down payment and 300 billion KRW as an interim payment already paid. Upon completion of the capital increase, Korean Air will acquire a total of 63.9% of the shares. Subsequently, it will operate as a subsidiary for about two years before merging into a single company. Following this, the LCC subsidiaries Jin Air, Air Busan, and Air Seoul will also be merged. Only after all these processes are completed will the truly integrated airline be realized.

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