Normalization Requires Funding of over 1 Tril. Won
The majority shareholder of Asiana Airlines Inc. is under pressure from creditors, including Korea Development Bank (KDB), to hand over managerial control to a third party. Yet the company’s management claims that the company will be normalized again if it overcomes the short-term liquidity crisis.
Asiana Airlines rang up 1.76 trillion won (US$1.55 billion) in sales in the fourth quarter of last year, up 6.4 percent from a year earlier, but it had an operating loss of 175.01 billion won (US$154.27 million) due to higher oil prices.
Competition in the passenger market, which is the company’s principal source of income, is also getting fierce. As the Ministry of Land, Infrastructure, and Transport recently issued licenses to three new low-cost carriers (LCCs), the number of LCC operators in South Korea has increased to nine. The figure is the same with the United States, which has a larger population than South Korea. It is higher than Germany with five and France with one.
Asiana Airlines president Han Chang-soo announced “three top priority projects” on April 1, including asset sales, closedown of non-profitable routes and restructuring. However, the company has already come up with many normalization plans as it has gone through a liquidity crisis over the past few years. Last year, it sold off the Kumho Asiana Group building in Gwanghwamun, Seoul, for 418 billion won (US$368.28 million) and shares in CJ Logistics for 94 billion won (82.82 million).
The company can additionally sell off its six other affiliates, such as Air Seoul, Air Busan, Asiana Development, Asiana Airport, Asiana IDT and Kumho Resort, but market analysts say that sales of these companies would not bring in much money in reality. Out of these, Asiana IDT, Air Busan and Air Seoul are considered the most lucrative assets. However, Asiana Airlines can see its future competitiveness undermined when it sells off all these affiliates.
Accordingly, creditors believe that it would be better to hand over the reins of Asiana Airlines to a third party than trying to find measures to normalize it under the current management. Asiana Airlines was planning to issue 100 billion won (US$88.11 million) worth of asset-backed securities (ABS) in the second quarter of this year but the company can no longer issue new ABS as it received a qualified opinion from its auditor Samil PricewaterhouseCoopers Coopers last month.
An official from the investment banking (IB) industry said, “Normalization of Asiana Airlines requires an injection of at least 1 trillion won (US$881.06 million) of funds at once. It cannot be normalized by selling off the group’s affiliates or taking out loans using chairman Park Sam-koo’s personal wealth as collateral.”
Former Kumho Asiana Group chairman Park Sam-koo announced to give up his management rights. The ball is now in KDB chairman Lee Dong-gul’s court. KDB and Asiana Airlines signed a memorandum of understanding (MOU) for financial structural improvements on April 6 last year and this will expire this week.
The problem is that it is also difficult for KDB to leave Asiana Airlines in trouble. If the company files for court receivership because of the liquidity crisis in the worst-case scenario, its 8,600 employees and executives will lose their jobs and 3.44 trillion won (US$3.03 billion) of its loans will become insolvent, adversely affecting the entire economy.
However, it is also hard for creditors to carry out a creditor-led voluntary business normalization program or workout. This is because Asiana Airlines has 1.50 trillion won (US$1.32 billion) worth of marketable debts, including ABS, and the figure is much higher than 420 billion won (US$370.04 million) of debts from financial institutions. When the company goes under the workout program, debenture holders may hold Asiana Airlines’ passenger planes at overseas airports as a hostage as they fear they cannot get their money back. The receivership is not the government’s favorite option as restructuring is led by the court.
Asiana Airlines is also aware of this situation is expected to engage in an intense tug-of-war with KDB. Some say that KDB and other creditor banks will be forced to provide additional support in the end if Asiana Airlines takes a firm stand.