Asiana Airlines Fettered by Excessive Aircraft Leasing Costs

Despite Asiana Airlines’ efforts to improve its financial structure, an accounting firm has called its management sustainability into question. The company’s net loss in 2018 increased by as much as 10 times from the preliminary estimate of 10.40 billion won (US$9.17 million) to 105 billion won (US$92.59 million). Its operating profit also dropped from the preliminary estimate of 178.3 billion won to 88.6 billion won. Accounting companies expect that the company’s costs will grow further when its financial statements are audited again. What hobbled the airliner is an excessive cost for leasing aircraft, a result of its short-sighted push to increase sales volume.

Samil PricewaterhouseCoopers (PwC) issued a "qualified" opinion on March 22. The auditor gave the negative opinion because it believed that the South Korea's No. 2 air carrier did not reflect the costs for leasing aircraft into its accounting books properly.

As of the end of June last year, 50 out of the 82 jets operated by Asiana Airlines were leased. The airliner’s leased planes accounted for 61 percent of the total, which was three times higher than 17 percent of Korean Air Lines Co. Korean Air had 28 leased planes out of the total of 164. Asiana Airlines has leased out a large number of jets to serve many destinations around the world in competition with global leading airliners.

The leased planes sucked money out of Asiana Airlines’ profits. Kiwoom Securities Co. estimates that Asiana Airlines pays as much as 2.80 trillion won (US$2.47 billion) for aircraft leases a year. The figure is about 40 percent of its total sales. A lessee must return a leased aircraft to a leaser after restoring it to its original state. Maintenance is a must so a lessee has to spend money on maintenance services. Accordingly, Samil PwC thought that Asiana Airlines failed to treat the maintenance costs as allowances in accounting. In this regard, Asiana Airlines said it can deal with the costs at once when the company returns the leased planes.

It is still unclear whether Asiana Airlines can make a profit even if it can extend the maturity of 950 billion won (US$837.74 million) of loans that will mature this year or repay them. The company will see its profits plunge when international oil prices go up and the won becomes weaker in addition to astronomical expenses for operating leases.

Currently, Asiana Airlines is juggling debts. The company raised 150 billion won (US$132.28 million) of funds by issuing perpetual bonds, which are hybrid bonds that have characteristics of both equity and bond and are lower in repayment order than subordinated bonds. However, its financial conditions are reaching the danger level. The company cannot even depend on its parent company. Kumho Asiana Group has already lost market confidence due to a high debt ratio. The group tried to decrease its debt ratio which reached 364.3 percent at the end of last year. The figure dropped 30 percentage points compared to 2017 but the amount of debts still came to 3.95 trillion won (US$3.49 billion). This was why Samil PwC expressed a doubt on the company’s sustainability.

If the problem worsens, the Korea Development Bank, which signed a memorandum of understanding (MOU) on financial structure improvement with Asiana Airlines in April last year, can start to collect debts.