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MRO business merger

Korean Air, Asiana may merge MRO businesses after spin-off

Nov 13, 2020 (Gmt+09:00)

South Korea’s two largest airliners, Korean Air Lines Co. and Asiana Airlines Inc., may combine their airplane repair and maintenance businesses after spinning them off, amid talks of Korean Air seeking to absorb its local rival via an acquisition.

The Korean government is considering splitting off the two carriers’ maintenance and repair organization (MRO) divisions as separate entities and then merging  them into one to improve efficiency, according to government sources on Nov. 13.

The combined entity could also set up an MRO joint venture with defense companies, such as Korea Aerospace Industries (KAI) and Hanwha Aerospace Co., to achieve economies of scale, they said.

The Korean government eyes an MRO business merger of Korean Air, Asiana

“To fix Asiana’s high-cost business structure, its MRO services, which the company outsources for most of the needs, must be restructured first,” said a senior official at the state-run Korea Development Bank (KDB), Asiana’s main creditor. “To do so, separating the MRO operations of the two companies as new entities and then combining them into one is most efficient.”

MRO SPIN-OFF, PART OF M&A DEAL

The proposed merger comes a day after media reports on Thursday that Hanjin Group, which owns the South Korean flag carrier, in in talks with the KDB to take over a controlling stake in financially strapped Asiana.

A planned sale of Asiana collapsed in September when HDC Hyundai Development Co., the preferred negotiator at the time, walked away from a deal, citing the contingent debt of the beleaguered airliner. The troubled airliner is currently under creditor control.

As of June, Asiana’s debt totaled 12.84 trillion won ($11.53 billion).

Sources said on Friday that the government will hold a meeting of ministers next week to finalize the decision on Korean Air’s acquisition of Asiana. A government meeting is scheduled for Tuesday, but could be delayed for a further review of the issue, they said.

Upon a government endorsement, Hanjin KAL Corp., the holding company of Hanjin Group, will likely convene a board meeting to approve a rights offering plan to proceed with the Asiana takeover.

Industry watchers say the most likely scenario is that the KDB will initially inject funds into Hanjin KAL for a certain stake, and then the group will use the money to purchase 30.77% of Asiana up for sale. Korean Air will eventually take over the stake from its parent.

Korean Air is considering taking over local rival Asiana Airlines

GROWING GLOBAL MRO MARKET

Analysts said Korean airliners lag behind their rivals in the global MRO market, which is expected to grow at an average annual rate of 4.6% to $118 billion in 2027 from $75.5 billion in 2017.

To carve out a greater share of the growing MRO market, the Korean government designated KAI as a specialized local MRO operator in 2017. And the next year, KAI established its own MRO unit, Korea Aviation Engineering & Maintenance Service Ltd. (KAEMS) with a workforce of just 190 people.

Korean Air currently has a total of 5,000 maintenance and repair workers, including 1,900 MRO specialists. Meanwhile, Asiana outsources its MRO needs to Lufthansa Technik AG, the global market leader.

“Even Korea Air outsources the repair and maintenance work of its Boeing 777 cargo planes. Sometimes, Korean Air flies empty planes abroad just for MRO services,” said an industry official.

According to the transport ministry, the domestic MRO market reached 2.76 trillion won ($2.48 billion) as of 2019. Of this, 45.5%, or 1.26 trillion won, in MOR services were carried out by foreign companies.

“By launching a mega MOR operator encompassing public and private companies, Korea aims to enhance its presence in the global market,” said a local defense industry official.

Write to Kyung-Min Kang at Kkm1026@hankyung.com

In-Soo Nam edited this article.

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