The arrangements for the tie-up between South Korea’s two big airlines continue apace. In November 2020, Korean Air announced it would spend US$1.3 billion buying a 63.9% stake in local competitor Asiana. The deal would see a single South Korean full-service airline in the skies. It would be one of the world’s biggest airlines and could fundamentally alter the aviation market in and around South Korea.
Korean Air wants to enhance competitiveness by reducing competitiveness
Korean Air argued the merger would enhance the competitiveness of the Korean aviation industry. However, it would see the new juggernaut airline control around 42.2% of all seats sold on domestic routes. In addition, the beefed-up Korean Air would own around 37.5% of international seats sold in and out of South Korea. In contrast, in 2019, Korean Air operated 22.2% of international and 22.9% of domestic seats.
Almost immediately after the announcement, passengers on both airlines saw some benefits. In mid-December, Korean Air and Asian kicked off an Inter-Airline Through Check-In. This allowed passengers to transfer their baggage to their final destination, get a boarding pass, and assigned a seat for the connecting flight while checking in with the first airline.
Korean Air plans to pay for their Asiana stake via a US$730 million investment from the state-owned Korean Development Bank. The remainder plus some extra would come from shareholders.
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Some dissent from big stockholders
But this month, Korean Air has faced some headwinds from at least one of its shareholders. The National Pension Service (NPS), which owns 8.11% of Korean Air, said last week it would veto changing the articles of incorporation, which would increase the number of authorized shares from 250 million to 700 million.
“Korean Air made the decision without due diligence, and the contract may be disadvantageous for Korean Air,” the Business Korea news site reported NPS saying.
Business Korea said Korean Air wanted to change the number of issued shares from 250 million to 700 million by changing its articles of association. The airline told us,
“According to the agreement with Korea Development Bank, Hanjin KAL will receive a KRW 800-billion investment from Korea Development Bank — KRW 500 billion by issuing new shares to the bank through a third-party allotment and KRW 300 billion through the issuing of exchangeable bonds. Hanjin KAL will lend this KRW 800 billion to Korean Air immediately after receiving it from the bank in order to support both airlines before Korean Air’s capital increase.”
However, NPS was in the minority. At a stockholder’s meeting held after the NPS announcement, 70% of shareholders approved changing Korean Air’s articles of association. With that obstacle out of the way, the airline must now file antitrust documents this week to authorities in South Korea, the United States, the European Union, China, and Japan.
By mid-March, Korean Air will offer more shares for sale to its shareholders to raise funds for the Asiana merger and announce plans for a post-merger integration plan. On the surface, it might look like a clear run for Korean Air following the tick of approval from shareholders. However, antitrust bodies may not be wowed by the Asiana deal.
Does the Asiana merger raise antitrust issues?
Woo Kee-hong, Korean Air’s President, has publicly said he doesn’t expect any problems. But the fact that an enlarged Korean Air will dominate airline travel within and to and from Korea must raise some antitrust concerns.
A bumped up Korean Air will not only dominate the skies and around Korea, but it will do so by a country mile. Then there’s the small matter of slots and who owns them at busy South Korean airports like Incheon in Seoul, Gimhae in Busan, and Jeju Airport. Korean Air will have the majority of those slots. All up, it’s not the kind of market position antitrust regulators look favorably on.
But Asiana is in financial strife. The merger is a financial lifeline for the smaller airline. In the event the deal is blocked, Asiana may collapse. Antitrust regulators may see the Korean Air buyout as the lesser of two evils.
What do you think? Are you in favor of the Korean Air merger with Asiana? What will it do to competition? Post a comment and let us know.