Q&A from President Woo Keehong’s Online Press Briefing on 31 March
on Korean Air’s Asiana Acquisition Progress.
With the global aviation industry continuing to suffer due to COVID-19, how do you see the global aviation industry’s outlook this year?
Passenger demand is expected to first recover in the domestic markets of countries with strong COVID-19 vaccination rates. However, recovery of international travel demand is expected to take considerable time, as countries’ entry restrictions must first be lifted.
We hope the global aviation industry can start to recover substantially from 2022, but it is very difficult to predict.
The IATA, meanwhile, predicts that international passenger demand will not recover to 2019 levels until 2024.
Our cargo sector expects to perform strongly in the first half of the year due to a continued shortage of passenger flight belly capacity, recovery in trade and shipping logistics problems.
However, the cargo performance will be slowed down in the second half as the capacity issues are expected to be alleviated with other airlines expanding their capacities and passenger flights starting to resume.
Despite COVID-19, Korean Air was one of a handful of airlines to achieve an operating profit last year. What are your strategies for this year?
In the passenger business sector, international flight capacity decreased by 77% compared to levels in 2019. We are focusing our operations on countries that allow the entry of Korean citizens and routes with cargo demand to minimize deficits.
In the cargo sector, we have increased the number of weekly cargo flights to about 144, more than 7% year-on-year, in response to increased demand. In addition, we operated more than 4,500 freight-only flights last year and continue to focus on increasing capacity.
This year, we will continue to work to reduce operating losses as much as possible. About 55% of our 8,000 to 9,000 employees working in Korea continue to go on rotational leave each month.
We will continue our self-rescue efforts such as slimming the organization, improving productivity, deferring aircraft deliveries, delaying investments, reducing costs, etc.
Korean Air has conducted due diligence on major parts of Asiana Airlines. Please share briefly on the progress.
Korean Air created 20 working groups consisting of 100 experts from different fields at the company, and together with advisory institutions, such as law firms and accounting firms, reviewed documents and conducted staff interviews at Asiana Airlines and its 10 affiliates for about three months from the beginning of December 2020.
We created the post merger integration (PMI) plan after thoroughly conducting due diligence with the support and cooperation of the Korea Development Bank and Asiana Airlines.
The PMI plan was submitted to the Korea Development Bank on March 17, and it is currently being modified and updated.
How are the approvals of the business combination report going? Are you making progress with each country after receiving approval from Turkey?
The business combination reports can be divided into two categories, and we are proceeding with the reports accordingly.
Nine countries require the submission of business combination reports, and among them, Turkey approved on February 4. We have submitted additional references to the Korean Fair Trade Commission after submitting the report, and we are also following up with other countries such as giving additional explanation and materials upon their request.
Business combination reporting is progressing smoothly without any issues. However, it is difficult to predict when the report will be approved by competition authorities in each country. We are working closely with consulting companies in each country to complete the approval process by the end of the year.
Can you share more details about the post merger integration (PMI) plan with Asiana Airlines, such as specific goals, integration schedules, etc.?
The PMI plan includes plans on how to integrate Korean Air, Asiana Airlines and the three LCCs, and how to efficiently operate affiliated contractors.
To integrate Korean Air and Asiana Airlines, dozens of projects must be carried out simultaneously such as safe operation preparations; integration of IT systems, organizational and accounting systems, frequent flyer mileage programs; and resolving global alliance issues. Therefore, we expect it to take approximately two years to complete the integration after Asiana is incorporated into a subsidiary of Korean Air.
In the integration process, various aspects such as the opinions from competition authorities, the lifting of restrictions on the holding company under the fair trade act and equity issues of each company require careful review.
In this regard, we cannot confirm specific plans at this time. The integration plan will proceed flexibly according to the situation.
What will governance structures look like for the integrated FSC and the integrated LCC?
Asiana Airlines will be incorporated as a subsidiary of Korean Air once the business combination reports have been approved. It will create a governance structure where Hanjin KAL (holding company) owns Korean Air (subsidiary), which in turn controls Asiana Airlines (sub-subsidiary). Korean Air plans to fully integrate with Asiana Airlines about two years after Korean Air completes the acquisition and Asiana Airlines becomes its subsidiary.
Since the aviation industry is a network-based business, synergy of networks, aircraft, and human resources will be very limited if two airlines operate independently. Full integration is the best way to maximize the synergy of acquisition, and it will be the only way to retain and secure employment in the long term.
In the case of LCCs, Jin Air, Air Busan, and Air Seoul will be integrated into one airline. We are still considering whether the integrated LCC will be a subsidiary of Korean Air or of Hanjin Kal, as Jin Air currently is.
We will decide on the timeline and direction after thoroughly reviewing details, such as required funds and restrictions under the Fair Trade Act.
What is your plan for redundant areas, such as ground handling operations, reservations, and ticketing?
The passenger seat capacity of both airlines will be maintained at the pre-COVID level when the market recovers from COVID-19. The ground handling contractors of each airline will be consolidated into one company, which will enhance operational efficiency and economies of scale.
We also hope to integrate Hanjin Information Systems & Telecommunication and Asiana IDT, IT partners of Korean Air and Asiana, respectively.
Topas and Asiana Sabre, Korean Air and Asiana’s respective partners have provided travel agencies with reservation/ticketing systems. As they have their own unique customers and overseas partners, we are considering maintaining them separately after the deliberation with the other parties.
Please tell us about the expected positive outcomes of the integration. How much synergy do you predict?
First of all, the merger allows us to establish an effective global passenger network around Incheon International Airport. It will support Incheon Airport’s growth and development as the hub airport of Northeast Asia.
Cargo will benefit in the same way. If the two companies’ aircraft and networks are effectively integrated, the connection network through Incheon International Airport will be strengthened, ensuring Incheon will become the logistics hub in Asia.
Customers can also enjoy various benefits, such as more destinations, a wider range of flight time choices, and more opportunities to gain and use mileage.
After we integrate and are fully recovered from the impact of COVID-19, we estimate a synergy effect of around KRW 300 to 400 billion per year. However, as integration requires considerable costs, we expect it to take about two years to reach a break-even point.
We will be able to increase profitability by streamlining redundant routes, strengthening connectivity, and maximising the benefits of our joint venture. In terms of costs, consolidation of facilities, staff, aircraft, terminals, sales organisations, etc. will increase economies of scale, and improve financial structures that can reduce interests and other financial costs.
Consumers are very curious about how Korean Air and Asiana Airlines mileage programs will be integrated. Is there an integration plan in place?
Due to legal constraints, it is difficult to get an accurate understanding of the scale of Asiana Airlines’ mileage program including mileage accumulation, usage performance, transactions with affiliates and unit price.
When more information becomes available, we plan to closely analyze Asiana’s mileage program and decide on the conversion rate based on Korean Air’s rates, and how to integrate the top customers of each company.
As it is an issue of much interest to many people, we will take proper procedures to ensure objective and fair results.
What is your plan for the brand after integration?
Before the full integration, the two carriers will operate as separate entities for two years after Korean Air acquires Asiana Airlines upon completing the business combination approval process.
There will be one brand, Korean Air, after the integration.
Korean Air and Asiana Airlines have some overlapping routes. How do you plan to adjust and operate them?
We plan to seek ways for the two carriers to work together such as through code sharing to improve customer service, but synergy will be limited until the full integration.
After integration, we will enhance competitiveness through adjusting flight schedules. We can increase efficiency by deploying 10% less aircraft while providing the same capacity, and use remaining aircraft for new destinations or flight schedules.
There are various fleet types at Korean Air and Asiana Airlines. How are you going to manage them to enhance efficiency after the integration?
Korean Air and Asiana Airlines currently have different fleet, and even different engine types for the same models. In this regard, it is necessary to simplify the fleet we operate.
However, simplification of the fleet and engines will not happen immediately after the integration, as aircraft deliveries and phase-out require significant lead time.
It will be relatively easier for Asiana Airlines to phase out their aircraft, as they have many leased aircraft with contracts that will end within 5 years. We will continue to simplify our fleet by retiring older aircraft over 20 years and introduce new models.
After integration, we will set up our fleet operation strategy based on a new network plan.
There are monopoly concerns related to the business combination report approvals. How do you plan to deal with this issue?
Korean Air and Asiana Airlines account for less than 40% of passenger slots at Incheon International Airport. This number is significantly lower than major global airlines’ share of slots at their respective international hub airports in Asia, Europe, and the United States.
The global aviation market is fully open to competition. Even though a certain carrier profits from monopoly, other carriers will enter the market and increase supply. As the aviation market provides customers with a wide range of options, I do not think the integration will cause monopoly issues in the Korean or global market.
As for the cargo sector, Korean Air accounts for 30.2% of cargo transportation out of Korea as of 2019, and 47.6% when combined with Asiana Airlines’ 17.5%. Major cargo carriers, including FedEX, DHL, UPS, are expanding their terminal at Incheon Airport to increase the transportation out of Korea. In addition, our cargo sector is competing with airlines in neighbouring countries such as China, Hong Kong, and Singapore.
Where will the integrated LCC headquarters be located? Some are saying that it will be located in Busan.
Jin Air, Air Busan and Air Seoul will be integrated into an LCC that can realize economies of scale.
An airline’s operating base is very important. Air Busan is an airline with a strong network based out of Busan, and Jin Air and Air Seoul have good networks out of Incheon. The integrated LCC will enhance the Northeast/Southeast Asia network from Incheon and Busan.
By consolidating these three airlines, it can become a top-level low-cost airline not only in Korea, but also in Asia.
It is still too early to disclose the location of the integrated LCC headquarters at this time.
Business partners and contractors are worried about what lies ahead for them in the acquisition and integration of Korean Air, Asiana and their LCCs. What are your plans for dealing with business partners?
Once the industry has recovered from COVID-19, we plan to make full use of employees, most aircraft, rights to routes and airport slots of Korean Air, Asiana Airlines and the three LCCs. After integration, passenger and cargo capacity will further increase due to growth of Incheon Airport and the increased competitiveness of the integrated airlines.
This means that the business and personnel of partner companies will continue to be needed.
After integration, we will select partners and contractors for the newly incorporated airlines according to fair and transparent standards, which are currently applied to Korean Air’s partners.
What is your plan regarding the possibility of MRO integration or creation of a separate entity?
Let me clarify that we are going to operate the MRO business as an internal part of the company, not as a separate corporation.
This is to ensure quality and safety, and allow us to carry out urgent maintenance tasks in a timely manner.
We expect MRO demands to increase after airline consolidation, and we will strengthen maintenance capabilities and facilities accordingly.
Korea’s MRO market is estimated to be about KRW 2.8 trillion won as of 2019, of which KRW 1.3 trillion won is spent on maintenance conducted by overseas MRO companies.
In the mid to long term, we will further develop maintenance capabilities in high-efficiency/high value-added businesses, such as engine maintenance and component maintenance. Also, by expanding facilities, we plan to secure more domestic volume from the overseas demand. Through these efforts, we expect to contribute to the domestic MRO industry and create more jobs in the market.
What is your position about monopoly concerns and possible fare increases after integration?
The global aviation market is fully open to competition; thus it is not possible to raise fares unilaterally. Furthermore, all airfares must be approved by the government, and airlines cannot charge more than authorised fares.
Korean Air will never abuse its position in the market to raise prices. We will use the integration to further enhance customer services and continue safe operations.
Also, we will closely work and cooperate with the Ministry of Land, Infrastructure and Transport regarding its activities to monitor and stabilise airfares.
There are concerns about workforce restructuring. How is integration possible without personnel restructuring?
Let me reiterate that there will be no restructuring of the workforce.
After consolidation, direct manpower is needed at the current level as we will not reduce operation capacities after the COVID-19 crisis.
After conducting due diligence, we have confirmed the overlapping of about 1,200 indirect personnel due to the integration. This will not be a problem considering the number of natural reductions such as retirement.
Workforces will be flexibly managed without personnel restructuring such as through the transfer of departments. We will also communicate closely with each labor union for a successful transition.
The liquidity issue has been alleviated due to the successful capital increase, but Korean Air’s debt ratio is still high. What is your financial plan for liquidity?
After the successful capital increase, Korean Air’s debt ratio has improved to 300%. Accordingly, the airline’s credit rating is expected to be raised, and we do not have any concerns about liquidity.
Korean Air will issue corporate bonds in April for the first time since COVID-19, and we expect positive responses in the market. We believe that financial markets and investors are confident with the business and financial stability of Korean Air and the future integrated airlines.
KRW 1.5 trillion from Korean Air’s capital increase will be injected.into Asiana after the acquisition. Accordingly, liquidity issues of Asiana and its affiliated LCCs will be alleviated. We will continue to monitor the market conditions and thoroughly manage the liquidity status.
Korean Air is also managing its liquidity and financial structure keenly through deferring new aircraft deliveries, employees’ rotational leave, and various cost-cutting efforts.
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