Korean Air Overcomes Major Hurdle... What Lies Ahead (Comprehensive)

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 for its merger with Asiana Airlines following the Fair Trade Commission's conditional approval decision. However, challenges remain ahead with reviews from the United States and the European Union (EU), as well as the integration process of low-cost carriers (LCCs) such as Jin Air and Air Busan. Concerns have also been raised that the Fair Trade Commission'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 Fair Trade Commission conditionally approved Korean Air's acquisition of 63.88% of Asiana Airlines' shares. This comes about 13 months after Korean Air filed for the merger with the Fair Trade Commission in January last year.

The Fair Trade Commission 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 (number of takeoffs and landings per hour) and traffic rights transfers for 10 years on those routes, as well as behavioral measures restricting fare increases.

Due to the Fair Trade Commission's stringent decision, there are evaluations that the synergy of the merged airline may deteriorate. Min-sik Na, a researcher at Ebest Investment & Securities, explained, "Since Korean Air will allocate routes with high market share to other airlines, the merger and acquisition (M&A) synergy effect will be limited," adding, "If profitable routes are handed over to competitors, the pricing power weakens."

However, there are also forecasts that the impact may be minimal. It is because LCCs would find it burdensome to introduce large aircraft on the affected routes. Min-jin Bang, a researcher at Eugene Investment & Securities, said, "It seems like content that could partially damage the synergy of network strengthening and economies of scale from the Korean Air-Asiana Airlines merger," but added, "Introducing large aircraft to operate long-haul routes is a considerable risk strategy for LCCs."

For Korean Air, this is positive in that it has overcome a major hurdle for the corporate merger. Previously, Korean Air received merger approvals from essential reporting countries such as Turkey, Taiwan, and Vietnam. It was also notified by Thailand that it is not subject to prior review. For voluntary reporting countries, approvals were obtained from Singapore and Malaysia. The Philippines notified that it is not subject to reporting, thus concluding the procedure.

◇ More hurdles ahead 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 reporting countries but were reported proactively considering the possibility of merger investigations.

The industry expects the reviews in other countries to proceed smoothly. Since conditional approval was granted in Korea, it is analyzed that other countries will take this into account.

In the case of the United States and Japan, as they are aviation liberalization countries where traffic rights are not required for operations and route adjustments are relatively easy, it is expected that the reviews will pass smoothly. 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, exceeding a 60% market share, raising monopoly concerns and resulting in a failure to obtain approval. However, Korean Air and Asiana Airlines ranked first and second in passenger numbers domestically in 2019 but are 44th and 60th globally, so their impact is not significant internationally.

There are also concerns that the Fair Trade Commission's conditional approval could become a variable. Because the Fair Trade Commission conducted a very detailed review of the Korean Air and Asiana Airlines merger, other countries might consider this in their judgments. Professor Yong-sik Hwang of Sejong University said, "Since we approved it, other countries may accept it," but added, "If excessive conditions arise domestically, other countries might also carefully review it considering that." He further stated, "The Fair Trade Commission's approval is not crossing the 70% mark but rather signaling the beginning."

Even after reviews in other countries conclude, it is not the end. 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 won, with 400 billion won as a down payment and 300 billion won 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. Then, 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.