Korean Air may sell core assets estimated at $2.4 bn to ease cash crunch

Hanjin Group, parent of Korean Air Lines Co. Ltd., is considering selling three core businesses of the carrier -- in-flight meal service, mileage program and maintenance operations -- which could fetch around 3 trillion won ($2.4 billion), as part of self-rescue efforts.

The parent group is now studying the possible sale of the three business divisions to solve the airline’s liquidity shortage, according to airline and financial industry sources on April 26.

Korean Air has been under pressure to come up with painstaking self-rescue measures, since the state-run Korea Development Bank (KDB) announced a plan last week to inject 1.2 trillion won into the carrier.

KDB estimates that Korea Air would suffer cash shortfalls of 3.8 trillion won this year, as the coronavirus pandemic led to a sharp decline in aircraft traffic and the grounding of planes.

Korean Air’s self-rescue plans should include offering “sellable” assets, KDB demanded. The lender had rejected the airline’s earlier proposal to sell 37,000 square meters of undeveloped land in central Seoul. The land has remained unsold since it was put on the market last year.

The three business divisions that may be put up for sale are worth 5 trillion to 6 trillion won in assets, including liabilities and could bring about 3 trillion won, based on the Korean Investors’ estimate.

It is unclear whether the country’s flagship carrier will offer to sell all the three businesses, or some of them.

The in-flight food division, worth hundreds of millions of dollars, is expected to be the first one up for grabs. It is likely to generate a steady stream of cash flows once Korean Air returns to business normalcy and seems easy to spin off, compared to the other two divisions.

In 2003, Asiana Airlines Inc. hived off on-board meal service to an 8:2 joint venture with Germany’s Lufthansa Group. After the partnership expired in 2018, the South Korean carrier handed over the business to a 6:4 venture, named Gate Gourmet Korea, with China’s HNA Group.

MILEAGE SERVICE

The mileage service division, if sold, is likely to fetch billions of dollars given that it can sell mileages to credit card companies for cash.

Accrued mileages under Korean Air’s frequent flyer program, Skypass, are worth 2.4 trillion won as of the end of 2019 which are booked as liabilities.

Air Canada, Virgin Australia, Air Asia and Aeromexico had hived off their mileage businesses and sold part of, or all their stakes in the spun-off units.

Virgin Australia’s frequent flyer scheme was valued at $1.4 billion when it bought back the remaining 35% stake in Velocity, a joint venture for the scheme, from Affinity Equity Partners in December 2019.

Korean Air’s mileage program is estimated to be worth more than Virgin Australia’s.

Last year, Korean Air considered selling the maintenance, repair and overhaul (MRO) operations which have domestic low-cost carriers as customers. South Korea’s Hanwha Group and a number of private equity firms had shown interest in the operations.

KDB’s 1.2 trillion won bailout package for Korean Air, unveiled on April 24, is broken down into buying 700 billion won in securities collateralized by income receivables from cargo flights; purchasing 300 billion won in perpetual bonds that can be converted into shares in the airline; and extending a 200 billion won loan.

KDB expects the cash injection will help Korean Air tide over the liquidity crunch at least during the first half of this year.

If the bonds are converted into shares, KDB will hold a 10.8% stake in the carrier.

Write to Sang Eun Lee at selee@hankyung.com