Delta Air Lines has increased its stake in Hanjin KAL, parent company of Korean Air, to 11%. Delta previously held 9.21%. The cost of the new shares is thought to be approximately $49 million.
Delta Air Lines first invested in Korean Air last June when it purchased a 4.3% of parent company Hanjin KAL. Delta then upped this in September to just under 10%. Now, its upped it again to own 11%. The airline did make it clear it wanted approximately 10% of the company when it made its initial purchase.
However, it can’t go much further. According to South Korean law, the foreign airline cannot purchase more than 15% of the company. After this limit is passed, it would have to officially register as a business combination and this would cause legal inquiries.
Delta’s interest in Korean Air is not just to encourage its joint venture. Its also a self-preservation move. Korean Air is in the middle of a power battle for who has control. The leader of the Cho Family who owns Korean Air recently passed away and so issues of succession and who controls the airline are up for debate.
KCGI, an activist group and the second-largest shareholder, has been pressuring for change within the company. It says it wants improved governance but has not yet presented a clear plan. With Delta’s ever-increasing share being used to support the Cho family and airline Chairman Cho Won-tae, Delta is effectively preserving its assets in South Korea.
But it’s more complicated than that. There are also divides within the Cho family. The current chairman is the only son of the late Cho Yang-ho, the previous chairman. However, last year his sister said he is not following his father’s wishes. Currently, shares are split evenly between his three surviving children. Each has approximately 6.5% and their mother holds 5.3%.
While most other shareholders are refusing to comment on the disputes and will not openly take sides, Delta is clearly backing current chairman Cho Won-tae. If the family unites, with Delta’s backing, it does have the majority stake in the airline. However, with the family divided, if the other siblings unite, Delta and Chairman Cho could be defeated.
Why does Delta care so much?
Delta is one of the only shareholders willing to get involved in family matters; it’s not sitting on the fence. But that’s because it actually needs Korean Air more than most may realize.
Delta used to operate out of Tokyo Narita, but after years of threatening to close it down, it finally announced last year it actually would pull the plug. Unfortunately, since the liberalization of flight rights at Tokyo’s Haneda that began in 2010, and the start of flights directly to Asian destinations, Delta’s Narita hub just hasn’t been worth it.
Now, it uses its Joint Venture with Korean Air, based in Seoul, as its hub. And the airline is willing to pay to defend it. The joint venture includes over 290 destinations and has been very beneficial to both airlines.
So the future of Delta’s base in Asia is potentially riding on the outcome for Korean Air. Parent company Hanjin KAL will meet on 24 March to either re-elect or oust its chairman. So we will have to wait and see what the result will be.