The ongoing merger process between Korean Air and Asiana Airlines, which has persisted for three years, has crossed a significant threshold. Korean Air’s proposal to divest Asiana Airlines’ cargo division has been approved by the board of Asiana Airlines, a strategic move to meet the requirements set by the European Union (EU) authorities. However, the final stages of the merger, which include approval from regulatory bodies in the United States and Japan, as well as the sale of the cargo business, remain challenging tasks ahead.
According to the aviation industry sources on Nov. 2nd, Asiana Airlines passed the proposal to sell off its cargo business division in a temporary board meeting with three affirmative votes, one absence, and one abstention. This followed the resignation of an internal director who had opposed the cargo divestiture on Oct. 29, and the deferral of a decision at a board meeting held on Oct. 30.
As a result, the two airlines have for now averted a merger collapse. Had Asiana Airlines opposed the sale of its cargo business, obtaining EU approval for the merger would have been virtually impossible, according to industry insiders. In mid-May, the European Commission (EC) distributed a preliminary report that suggested the merger could lead to reduced competition in cargo transport services between Europe and Korea.
Despite the decision to sell the cargo business, Asiana Airlines still faces numerous challenges. Firstly, there are not many potential buyers for the cargo division domestically. The industry is eyeing some low-cost carriers (LCC) as candidates; however, the associated debt, estimated to be around 1 trillion won, could pose a significant burden for the buyer.
The significant decline in cargo fares due to COVID-19 poses another obstacle. The drop in fares could decrease the attractiveness of the business acquisition, as lower profitability lessens the appeal. A senior official in the major aviation industry stated, “Although cargo fares have been rebounding recently, they are still about 60% lower than the high points during the COVID-19 era.”
The EC’s stringent approval process also remains an issue. The EC has currently halted its in-depth investigation into the merger. The Commission plans to resume the review once the required reports are submitted. Korean Air is determined to submit a final corrective plan as soon as possible and obtain the EC’s approval.
But even with the EC’s eventual approval, the final merger of the two airlines will require a green light from authorities in the United States and Japan as well. The concern is that these countries may demand Korean Air return slots and routes due to monopoly concerns. Korean Air had previously agreed to return seven slots to British LCC Virgin Atlantic and 46 slots to China in the event of a merger. A slot is a time in which an airplane can take off or land, and are essential for airline profitability as they dictate flight operations regardless of the carriers’ rights to operate on specific routes. Industry insiders anticipate that prime routes such as Incheon-New York and Incheon-Chicago could be on the list for return.
There are concerns that the merger could be “half-baked” due to the cargo sale and route returns. Given that the cargo business accounts for more than half of Asiana Airlines’ revenue and returning routes to foreign countries could diminish competitiveness. Indeed, in the previous year, 53.1% of Asiana Airlines’ total revenue came from the cargo sector. There is also criticism that excessive returns could lead to a national loss of wealth since routes, slots, and traffic rights are all national assets.
Meanwhile, as the acquisition process drags on, voices opposing the merger are emerging from the aviation industry. The Asiana Airlines union and the National Public Service and Transport Workers’ Union criticized the merger in front of the Government Seoul Complex on Oct. 23, claiming that “the merger of Korean Air and Asiana Airlines is not for national interest, public convenience, or the development of the aviation industry,” but ultimately leads to the dismantling of Asiana Airlines. The union extended its employeewide anti-merger signature campaign to Oct. 27 from the initially planned Oct. 16 to 20. They plan to convey their position to the EC through the public transportation union.
In response to Asiana Airlines’ board agreeing to the cargo business sale, Korean Air expressed optimism, stating, “We expect that the remaining merger review process will gain positive momentum from this decision.”
Korean Air said, “With the final corrective action proposal submitted to the European competition authorities, we strive to obtain approval as soon as possible and also expedite the remaining competition authorities' review processes.” Regarding the sale of Asiana Airlines' cargo business, it was added, “The sale will be pursued with the condition of employment succession and maintenance.”
According to Korean Air, the corrective action plan submitted to the EC includes measures to restore competitive conditions, supporting entry of other domestic airlines into four overlapping EU routes (Paris, Frankfurt, Rome, Barcelona) in the passenger business. In the cargo sector, it includes the plan to divest the cargo business division of Asiana Airlines. Further details were not disclosed due to the confidentiality obligations of the EC and the ongoing merger review process that could be affected.
Following the approval by Asiana Airlines’ board, Korean Air submitted the corrective action plan to the EC, with an aim for approval by the end of January next year. For the review by U.S. competition authorities, Korean Air plans to resolve antitrust concerns through discussions with the U.S. Department of Justice. After completing discussions on the corrective action plan with Japanese competition authorities, a formal report will be submitted.