KFTC to Approve Merger Deal Conditionally
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Focus should be on the easing of uncertainties than on negatives posed by merger details
— The Korea Fair Trade Commission (KFTC) has given conditional approval for the merger between Korean Air and Asiana Airlines and is expected to make its final decision in 2022. Merger details are likely to involve business restrictions, but since these issues have already been covered by the media, we do not see the conditional approval hurting Korean Air’s share price. Rather, the easing of uncertainties may prove to be positive.
Merger to be approved by KFTC on the condition that slots and traffic rights be reduced; Still under review overseas
— According to domestic media reports on Dec 29, KFTC has reached a preliminary decision to approve the merger between Korean Air and Asiana Airlines on the condition that a number of restrictions be placed. According to Yonhap News and other sources, the two companies will be required to relinquish a portion of their airport slots and traffic rights (to be reallocated to other airlines). Fare restrictions, flight (supply) reductions, and service cutbacks for some routes are also likely to be included. KFTC is expected to begin its review in late January 2022 and reach a final decision after further deliberation. The merger is also under review by antitrust authorities of seven other nations (U.S., E.U., China, Japan, U.K., Singapore, and Australia).
KFTC’s approval to reduce uncertainties; Domestic competitors to benefit
— The announcement of KFTC’s decision (a crucial part of the merger) should eliminate uncertainties over Korean Air’s acquisition of Asiana Airlines (albeit not all, since the earnings impact of KFTC’s terms remain unclear and the merger also needs to be approved by authorities overseas).
— Meanwhile, competitors of the two airlines may enjoy unsolicited gains. The reallocation of traffic rights would be of significance only for routes to and from countries that not have not signed open skies agreements with Korea (several in Europe, China, some in Southeast Asia, and Japan). The reallocation of rights for routes to and from China, Southeast Asia, and Japan would benefit other domestic airlines. The reallocation of routes to and from Europe, however, would benefit only companies preparing to introduce the A330 (capable of long-haul flights); entry into these markets would be difficult for most domestic airlines, considering that their fleets consist mainly of the B737 (short-haul aircraft). Also, competitors are unlikely to rush to begin operating new routes as they struggle to make full use of existing ones (i.e., sluggish passenger demand).
Deal negatives already priced in; Business environment positives to garner attention
— Our rating for Korean Air aside, we have outlined the negative aspects of the Asiana Airlines acquisition in earlier reports: (1) share value is likely to be subject to dilution given the need for massive capital increases for funding the purchase; and (2) even if the merged entity is granted a monopoly over certain routes, given strict industry regulations, it would be difficult for it to generate earnings that exceed the combined profits of the two entities prior to the merger.