Kumho Asiana assures 30-year profits to Gate Gourmet in catering deal

Kumho Asiana Group’s management assured net profits for 30 years to Gate Gourmet when the South Korean conglomerate signed a deal for Asiana Airlines Inc.’s in-flight meals with the airline catering company.

Such an unusual guarantee of future profits was expected to ramp up losses of South Korea’s No. 2 airline to hundreds of millions of dollars that the country’s leader Korean Air Lines Co. will have to assume given its plan for the acquisition of the smaller rival.

The group’s management including the former chairman Park Sam-koo agreed that Asiana will guarantee net profits in 2016 when they signed the deal with Gate Gourmet, prosecution and industry sources told The Korea Economic Daily on Oct. 12.

AT LEAST $308 MILLION LOSSES FROM 30-YEAR PROFIT GUARANTEE

The agreement was revealed in 2019 when Gate Gourmet Korea, a joint venture between Gate Gourmet Switzerland and Asiana, filed an arbitration suit against the airline in the International Chamber of Commerce in Singapore to request payments of the guaranteed net profits.

The ICC ruled Asiana must pay 42.4 billion won ($35.4 million), including the difference between the paid amount and the guaranteed profits for the first two years under the agreement, as well as damages from the delayed payment. South Korea’s prosecution estimated Asiana to suffer at least 370 billion won ($308.3 million) in losses in the 30 years.

Kumho Asiana was known to have agreed to make a compulsory payment to Gate Gourmet every year if Asiana carries a certain number of passengers. The profit guarantee was also understood to have included a clause for compensation of a certain amount of money if the number of passengers does not meet the level.

The ICC made the ruling because the organization recognized a ‘package deal’ between the Kumho Asiana’s management and Gate Gourmet, sources analyzed. The group has been suspected of signing the in-flight meal supply contract on the condition of the catering company’s acquisition of 20-year bond with warrant (BW) without interest worth 160 billion won issued by Kumho Holdings (currently Kumho Buslines), the group’s holding company, in 2016.

ASIANA EXECUTIVES EXCLUDED

The group management intentionally excluded Asiana’s executives during the talks for the supply contract and it did not report the assurance of the net profits to the carrier’s board of directors.

Prosecutors confirmed that the deal was signed without Asiana’s executives such as a former president Kim Soo-cheon at the time, deciding not to indict Asiana and clearing Kim of the charges.

Korean Air, which agreed to take over Asiana for 1.8 trillion won last year to create the world’s seventh-largest airline, was keeping an eye on the impact of the profit guarantee since the South Korea’s top carrier is supposed to assume losses of the competitor after the merger.

TO REBUILD KUMHO GROUP

Kumho Asiana sought the profit guarantee in a bid to rebuild Kumho Group in 2015. The group management had planned to re-acquire shares in Kumho Industrial, Asiana’s largest stakeholder, to restore the lost control during the debt workout program. Asiana’s in-flight meal business emerged as a key source of funds for the plan.

In 2016, about two years before the expiration of an in-flight meal supply contract with LSG Sky Chefs, a subsidiary of German airline Lufthansa, the group proposed to sign a new deal with catering companies including the old supplier that provides financial supports to Kumho Holdings.

Gate Gourmet accepted the proposal by acquiring the 20-year BW worth 160 billion won. Based on the deal, both companies established Gate Gourmet Korea, a joint venture. The group management guaranteed definitive profits when they were in talks for the deal.

Asiana’s executives and board of directors were not aware of the guarantee since they were excluded during the process for the catering and BW deals.

“That was a simple deal to change a contractor that was not related with the BW deal at all,” the group explained to the board of directors. The profit guarantee has not been reported in the minutes of the board meetings.

Gate Gourmet requested Asiana to pay profits as assured, but the airline’s executives rejected the request since they were not aware of the agreement. Gate Gourmet Korea brought the issue to the ICC in Singapore in June 2019. The ICC in February this year ruled in favor of Gate Gourmet Korea, seeing the BW deal and the catering contract as a package. The organization was said to have recognized the guaranteed profits from the meal supply contract as a benefit from the BW it acquired without interest.

KOREAN AIR NOT TO BREAK ACQUISITION DEAL

The ruling is unlikely to become a factor to break Korean Air’s agreement to take over Asiana since the arbitration case was filed before they agreed on the merger. Still, the decision was known to have surprised both of the carriers since it was a “perfect” victory for Gate Gourmet.

It is not easy to ask Kumho Asiana to take more responsibility since Korean Air is slated to buy new shares issued by Asiana, not existing shares held by the group. Korean Air is expected to prepare steps, closely watching Asiana’s countermeasures.

“It will be impossible to invalidate the (acquisition) deal since they already set the merger price and the issue was a risk that could be grasped in the acquisition process,” said a source familiar with the two airlines. “If the ongoing criminal cases against Kumho group executives clarify the guarantee was agreed without Asiana Airlines’ consent, they can argue the agreement is invalid.”

Write to Jun-ho Cha and Hyo-Joo Ahn at chacha@hankyung.com
Jongwoo Cheon edited this article.