Asiana Airlines Facing Liquidity Problems
Kumho Asiana Group chairman Park Sam-koo has decided to step down from all his posts to eliminate what is called an “owner risk,” a risk that stems from investor distrust in the owner of a company. He was forced to resign to regain investors’ confidence in his group.
Park has been showing his strong will to rebuild his disintegrated group even after his failure to buy back Kumho Tire Co. However, his efforts to improve the group’s financial structure have come to nothing due to a recent controversy over an audit report for Asiana Airlines Inc. As an independent auditor issued a qualified opinion on Asiana Airlines, investors’ confidence has been damaged and it has created skepticism about the airliner’s ability to achieve management normalization without external support.
Until now, Kumho Asiana Group has skated on very thin ice as it relied on debt financing. The expansion in its size through large merger and acquisition (M&A) deals led to a liquidity crisis of the group as a whole. Kumho Asiana’s liquidity crisis started from the acquisition of Daewoo Engineering & Construction Co. in 2006. Kumho Asiana Group had total assets of 3 trillion won (US$2.64 billion) at the time, but it bought Daewoo E&C, which was worth 6.40 trillion won (US$5.63 billion). The put-back options the group provided to financial investors (FI) in the acquisition deal put a massive burden on it. The situation was similar when the group acquired Korea Express, which cost 4.10 trillion won (US$3.60 billion), in 2008. After all, the group was forced to sell Kumho Tire, a company to which Park is strongly attached, and all it had was 3.90 trillion won (US$3.43 billion) worth of debt imposed on Asiana Airlines.
Kumho Asiana Group has been seeking to improve its financial structure and normalize its management repaying a large portion of its debt. The group secured liquidity by taking out loans using its stake in Air Busan Co. and a hangar in Incheon as collateral, issuing asset-backed securities (ABS), selling a stake in CJ Logistics Corp. and selling its headquarters building in central Seoul. Park even put up his personal wealth as collateral to the KDB, the main creditor.
With such efforts, Kumho Asiana Group’s debt dropped from 4.60 trillion won (US$4.04 billion) in 2017 to some 3 trillion won (US$2.64 billion) at the end of last year. This was because the group believed that it could take a leap again if it improves its financial structure by focusing on debt reduction. For its main subsidiary, Asiana Airlines, the fuel expenses fell in the second half of last year as international oil prices went down just in time. Moreover, there seemed to be a growing demand as the number of outbound travelers was expected to increase from 2.80 million in 2018 to30 million this year. With an increasing passenger demand, the sales grew as well and there was no problem with cash flow. In fact, Kumho Asiana Group announced in February this year that it recorded its highest sales at 6.85 trillion won (US$6.02 billion) last year and pledged to make an additional improvement in its financial structure by issuing 150 billion won (US$131.87 million) worth of perpetual bonds this month.
All these efforts went for nothing after Samil PricewaterhouseCoopers (PwC) issued a "qualified" opinion in the audit report as the airline failed to submit some financial statements for 2018 on March 21.It came after the auditor additionally asked the airliner to treat the maintenance costs for leased planes as allowances in accounting according to the revised external audit law. The stock trading of Asiana Airlines, which failed to receive an "unqualified" opinionwas once suspended. Samil PwC revised its opinion on the airliner’s 2018 financial statement from “qualified” to “unqualified” through the reaudit on March 26 but market confidence had already dropped. Asiana Airlines’ net loss for last year greatly rose from 10.40 billion won (US$9.14 million) to 195.90 billion won (US$172.22 million) in the process of additionally reflecting the maintenance costs into allowances.
Even when Kumho Industrial Co. and Kumho Tire went on strike in 2009, Park came under pressure to resign from the market but he survived. However, the market could no longer trust Kumho Asiana Group after it experienced the “no-meal fiasco,” which occurred after a change in caterer, last year and the latest incident in a row. The price of Asiana Airlines and Kumho Industrial shares plunged and there was a rumor that it would make Park take responsibility for the “qualified opinion” incident at the two companies’ shareholder meetings to be held on March 29.
In particular, Kumho Asiana Group came under pressure as there was even a rumor that the financial regulators were considering ways to include a certain ratio of marketable borrowing in the basis of main debtor group selection after the Asiana Airlines’ incident. An official from the business community said, “Asiana Airlines is like a bomb to the group, though it received an “unqualified” opinion. He seems to have made the decision to resign due to a sense of crisis that the group itself can be dissolved if Asiana Airlines which accounts for 60 percent of the total sales of the group collapses with the liquidity issue.”
As Park has decided to step down as group chairman and CEO of Asiana Airlines and Kumho Industrial, the group's holding company, South Korea’s two largest airliners need to suddenly speed up management succession to the third generation of the owner family. Both Hanjin Group chairman Cho Yang-ho who has lost his management rights of Korean AirLines Co. after the National Pension Service voted against Cho's reappointment and Park have to worry about the consequences. Since Cho has been removed from its board and Park has offered his resignation suddenly, it was insufficient to succeed the management rights to Korean Air president Cho Won-tae and Asiana IDT president Park Se-chang.
Chairman Park owns a 31.1 percent stake in Kumho Bus Lines Co., which controls Kumho Asiana Group, while the junior Park holds a 21 percent stake. President Cho has only a 2.34 percent stake in Hanjin KAL Corp., the holding company of Hanjin Group. An official from the business community said, “It must be not easy to carry out management succession under the current situation where owners stepped down from their posts. It will take a lot of time to initiate a succession process.”