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After Incurring Heavy Losses, Korail's Profits Soar Under New Leadership
Phoenix Line
After Incurring Heavy Losses, Korail's Profits Soar Under New Leadership
  • By matthew
  • July 29, 2015, 09:00
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The KTX Sancheon train.
The KTX Sancheon train.

 

Korea Railroad Corporation (Korail), the nation-wide railroad operator, is a state-owned corporation (SOC). Up until 2013, Korail had suffered a bad reputation for its chronic deficits and militant unions. In Oct. 2013, the amount of debt reached 17 trillion won (US$14.7 billion), and the debt-to-equity ratio was 470 percent, with estimated deficits amounting to 2.6 billion won (US$2.2 million). But under the leadership of new CEO Choi Yeon-hye, for the first time in history Korail achieved operating profits of 103.4 billion won (US$89.11 million) in 2014. This turnaround is quite surprising, and the entire country wants to know the details of this impressive feat.

When asked about the expertise behind the remarkable feat that Korail has achieved in the last couple of years, a company spokesman replied that the company has worked hard to resolve systemic management issues, which helped improve the company’s public image.

The area that Korail has made its highest priority has been safety. An official mentioned that operating mass transportation entails the coordination of numerous risk factors, including the potential breakdown of machines and human error. Korail launched a new office specifically focusing on safety. Also, by ensuring the safety of passengers, Korail reoriented its safety policy from reactive maintenance to “proactive management.” Using Big Data analysis, which identifies what types of maintenance are carried out in specific months, proactive management analyzes the precise reasons for past repairs. In such a way, Korail can prepare itself before a failure occurs. Such efforts have helped reduce the number of accidents from 2,359 in 2013 to 1,942 in 2014.

Another task that Korail has been focusing on was to generate a monetary surplus. The spokesman said, “To keep the viability of Korail as a corporation, generating profits was the essential precondition... SOCs are no exception.” When CEO Choi entered office in Oct. 2010, the debt-to-equity ratio had already far surpassed the preset limit of 300 percent, posting 470 percent. Korail was on the verge of bankruptcy following the cancellation of the Yongsan project at the time. But since 2014, Korail has adopted a Big Data-based revenue management system that helps reduce deficits and improve sales. The new system helps minimize the vacancy rate of seats in the trains. As a result, both the revenues and demand have increased by 3.8 percent and 1.8 percent, respectively.

Korail has also succeeded in reducing costs. Organizational control was weak, as the regional offices and stations are scattered around the country, which also resulted in poor management of costs and an imbalance in the workforce. Some regional offices suffered high sick leave rates, while others were flooded with staff. The central office told regional offices to disclose the relevant information to the best possible extent, and worked to correct the imbalances. In this way, Korail cut costs without artificially cutting the workforce.

Korail also made efforts to reduce purchasing costs. Purchasing parts and machines represents a large part of expenses. Korail recently found that small changes to terms and conditions can make a big difference. They increased the amount of direct buying. As for parts that require annual purchases, Korail switched to multiple-year contracts rather than one-year contracts, which helps to lower unit prices.

For handling inventory, Korail recently established the concept of a proper inventory ratio. In this way, Korail reduced waste by avoiding repeated purchases and piles of unused products in warehouses.

In the last couple of years, the management of Korail has also worked hard to improve its relationship with its union. Korail mentioned that in a bid to share the vision that the executives hold, they regularly sent out letters to workers with short illustrations to help understanding. Executives also accompanied a large number of employees – sometimes as many as 950 – on business trips and spent extensive hours together identifying and agonizing over issues with them. Because of these efforts, management could induce 21,000 employees out of 28,000 to agree to a measure to cut excess staff.

In addition, the sales of railways helped improve the financial status of the company by reducing 4.5 trillion won (US$3.9 billion) of debt and generating a cash income of 1.8 trillion won (US$1.6 billion). 

Overall, through these substantive efforts, Korail was recently ranked among the top 75 brands in the country. President Choi Yeon-hye was also recognized for her excellent leadership, being awarded for her role as the best “CEO for the Creative Economy.”