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Airline acquisition

Korean Air bid to acquire Asiana faces challenges, activist opposition

Nov 13, 2020 (Gmt+09:00)

The owner of Korean Air Lines Co.’s reported bid to acquire local rival Asiana Airlines Inc. faces several hurdles, including painful job cuts, rising acquisition costs and concerns over the creation of an air industry monopoly in South Korea.

Industry watchers say that a merger of the country’s two largest airliners will inevitably lead to massive job cuts, stirring up opposition from their workers to the deal.

As of June, Korean Air had 18,681 workers on its payroll, while Asiana had 9,079 employees. The two companies operated 173 airplanes and 86 airplanes, respectively, resulting in combined assets of 40 trillion won ($36 billion) at the end of the first half.

Korean Air aims to take over local rival Asiana Airlines.

“If the two companies keep their respective routes after a merger, what’s the point of the deal?,” said an official at the state-run Korea Development Bank, the main creditor for both airlines.

On Thursday, several local media outlets reported that Hanjin Group, which owns the South Korean flag carrier, is in talks with the KDB to take over a controlling stake in financially strapped Asiana.

All parties involved in the negotiations have declined to confirm such reports, but government sources said on Friday that it will convene a meeting of ministers next week to finalize 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.

If realized, the deal combining the two full-fledged carriers would see the creation of one of the world’s top 10 airliners.

Sources said if the deal progresses as planned, the government will have Korean Air focus on long-haul routes from Korea to the Americas and Europe, with smaller Asiana operating shorter Asian routes. To do this, Asiana’s current 100 long-haul routes would need to be reshuffled.

“Air routes are decided at the government level between the relevant countries. Airlines can’t exchange routes with each other. Korean Air may have to apply for such routes again,” said an industry official.

A route reshuffle will likely result in cuts in the number of pilots and flight attendants. Asiana's creditors once considered a 10% job cut at the carrier before putting it up for sale.

RISING TAKEOVER COST

Shares of Asiana finished up 7.8% at 4,290 won on Friday on expectations of a takeover by Korean Air.

But Hanjin Group shares fell on market concerns that Asiana’s rising share price will cost them more than they had planned for the aquisition.

Korean Air closed down 2.6% at 23,950 won. Its parent, Hanjin KAL Corp., shed 8.3%, the biggest percentage fall in six months, to 77,800 won.

Market watchers expect Asiana’s shares to continue their ascent for the time being, providing a financial burden for Hanjin, which aims to acquire a 30.77% stake in Asiana from the KDB.

A planned sale of Asiana collapsed in September when then-preferred negotiator HDC Hyundai Development Co. walked away from a deal, citing contingent debt at the beleaguered airliner.


HDC Hyundai Development had offered 4,700 won per Asiana share, putting its bid price at 322.8 billion won.

MONOPOLY CONCERNS

A merger of the two airlines, which already dominate the local industry, will create a bigger company with revenue close to 15 trillion won, raising concerns over a monopoly.

A combined entity is expected to take more than 70% of the Korean air industry’s international passenger routes and cargo lines. Industry officials said the new company will virtually monopolize the long-haul routes, which low-cost carriers avoid.

Korean Air’s acquisition of Asiana is subject to approval by the Fair Trade Commission, the country’s fair trade watchdog.

Korea has maintained two full-service carriers since 1988, when the government granted Asiana an air permit.

OPPOSITION FROM ACTIVISTS

Korean Air’s move to acquire Asiana comes amid an ongoing feud over the control of the country’s No. 1 carrier between Hanjin Chairman Cho Won-tae and a three-party shareholder alliance led by activist fund Korea Corporate Governance Improvement (KCGI) and Cho’s elder sister, Cho Hyun-ah.

KCGI, the second-largest shareholder of Hanjin KAL, on Friday made clear its opposition to the proposed acquisition of Asiana.

“The KDB’s fund injection into Hanjin to assist its acquisition of Asiana will only help the incumbent management consolidate its control over Korean Air,” said the three-party shareholder alliance in a statement.

Kang Sung-boo, head of KCGI, said on Thursday Hanjin’s rights offer to the KDB through a third-party share placement scheme may not be possible under the current law.

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

In-Soo Nam edited this article.

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