Emerging as World's 10th-largest Airline
Korean Air will acquire Asiana Airlines to create the world's 10th largest airline, Hanjin Group announced on Nov. 16.
The deal between Korea's two top airlines will restructure the Korean aviation market amid an unprecedented crisis in the global aviation industry due to COVID-19.
Korean Air plans to acquire Asiana Airlines at 1.8 trillion won. To finance the deal, Korean Air plans to increase its capital by 2.5 trillion won by issuing new shares early next year.
According to the agreement with Korea Development Bank (KDB), the main creditor of Asiana Airlines, Hanjin KAL, the holding company of Hanjin Group, will receive a 800-billion won investment from KDB -- 500 billion won by issuing new shares to the bank through a third-party allotment and 300 billion won through the issuing of exchangeable bonds.
Hanjin KAL will lend the entire sum to Korean Air immediately after receiving it from KDB in order to support both airlines before Korean Air’s capital increase.
Of the 800 billion from Hanjin KAL, Korean Air will invest 300 billion won to acquire perpetual convertible bonds from Asiana Airlines and use an additional 300 billion won as a down payment for the 1.5-trillion won contract to acquire Asiana Airlines’ new shares. Korean Air’s initial investment will enable Asiana Airlines to secure the funding needed for operations until the end of the year, as well as improve its financial position by adding 300 billion won worth of perpetual convertible bonds to its capital assets.
The reason for KDB’s investment in Korean Air through Hanjin KAL is to ensure Hanjin KAL maintains its status as the airline’s holding company.
Hanjin KAL decided to receive KDB’s investment by issuing new shares, rather than borrowing the entire 800 billion won from the bank, to maintain a stable financial structure. It also chose the third-party allotment method to secure the capital quickly and safely.
Given the crisis the airline industry is currently facing, it is unavoidable to restructure the entire market, including Korean Air, Asiana Airlines, the low-cost carriers such as Jin Air, and relevant industries. KDB’s shares will be ordinary shares with a voting right, and KDB will monitor and make sure Hanjin KAL and Korean Air follow through with acquisition plans.
The main reason behind Korean Air’s decision to acquire Asiana Airlines at this time is to stabilize the Korean aviation industry, which is suffering from the COVID-19 pandemic, Hanjin Group said in a statement.
Considering that Korean Air’s financial status could also be endangered if the COVID-19 situation is prolonged, it is inevitable to restructure the domestic aviation market to enhance its competitiveness and minimize the injection of public funds, the group added.
Korean Air decided to acquire Asiana Airlines after much consideration and deliberation in order to pursue its founding mission to contribute to the nation through transportation, the group said. It added Korean Air will ensure job security for employees at both airlines as well as relevant industries and support the development of Korea’s aviation industry.
Once Korean Air completes its acquisition of Asiana Airlines, the airline is expected to be ranked as one of the top 10 airlines in the world. In general, countries with a population less than 100 million have a single full service carrier. However, Korea has two full service carriers, which gives it a competitive disadvantage compared to countries like Germany, France and Singapore with a single major airline. However, Korean Air’s acquisition and the expansion of its routes, fleet and capacity will give the airline the competitiveness to compete with global mega airlines.
The merger of the two airlines is expected to further enhance the competitiveness of the Korean aviation industry with more streamlined route operations and lower costs. More slots secured at Incheon International Airport, a transport hub in Asia, through the consolidation of the airlines, may lead to an increase in joint ventures with global airlines and greater transfer demand, which will also spur the growth of the domestic aviation industry.
Customers will be able to enjoy a wider range of choices in routes and schedules. They will also be able to benefit from more convenient transfer options, integrated mileage and enhanced safety in all areas.
Also, the acquisition will strengthen Incheon International Airport’s competitiveness as a major hub in Asia by enhancing its passenger and cargo network.