Competitors Unlikely to Take away Landing Slots, Flight Licenses
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Korea Fair Trade Commission’s decision to be positive for stock
— On Feb 22, the KFTC approved the proposed merger between Korean Air and Asiana Airlines with conditions. The decision is expected to bolster Korean Air stock, as the conditions appear unlikely to have a negative impact on the company.
If additional airline for any route emerges then landing slots, flight licenses must be returned; temporary restrictions on increases in flight fare
— The KFTC concluded that the merger would restrict competition for 26 international routes and 14 domestic routes. If an additional airline wishes to operate flights for the routes within 10 years after completion of stock acquisition by Korean Air, the merged company must return some landing slots and flight licenses (to operate in certain countries). Until the return is made, increases in flight fare for the route(s) are to be restricted and no. of seats, seat pitch and service quality must be unchanged.
Competitors unlikely to take away landing slots, flight licenses; special circumstances can be reflected in pricing
— In our view, the merger conditions will not negatively impact Korean Air based on the following:
(1) A domestic competitor is unlikely to take away landing slots and flight licenses. Currently, there are no budget carriers or only a limited number capable of operating long-haul routes (e.g., Seoul-New York, Seoul-Los Angeles). In addition, the operation of long-distance routes requires new business, which would require the establishment of flight connection networks, attraction of transit passengers and operation of cargo flights. As for Southeast Asia routes, large carriers have already been losing market share to low-cost carriers, so the merger conditions should not pose a new threat.
(2) A foreign competitor is unlikely to take away landing slots and flight licenses. For international routes, the no. of flights is typically allocated equally between the two countries of destination. For Korean carriers (i.e., Korean Air, Asiana Airlines) that account for over 50% of total flights on a certain route, foreign carriers have likely already decided not to increase their allocated no. of flights.
(3) Operating conditions have been established for the merger to be approved. To prevent adverse effects in the event of entry of a new competitor, the KFTC has imposed conditions on the merged company, including restrictions on fare increases, route supply and service quality. However, the merged company is allowed to reflect special circumstances such as the pandemic in pricing. Thus, the merger conditions should not have an immediate impact on Korean Air earnings. Accordingly, our view that higher fares should accelerate improvement in Passenger Business earnings as flight demand recovers remains intact.
Conditions for overseas approval to be limited to price restrictions; fading regulatory uncertainties to boost stock price
— We see limited possibility for regions that have not yet ruled on the merger (e.g., U.S. and E.U.) to block the deal or approve it with overly demanding conditions. If the no. of flights for Korean Air is restricted on routes where other carriers are already unwilling to increase operations, this should result in a decrease in total no. of flights for the route. Thus, even if foreign authorities give conditional approval, the conditions are likely to be limited to behavioral remedies (e.g., price hike restrictions).
— The KFTC’s decision should stimulate Korean Air stock trading. Despite its recent rebound, the stock has retreated 11% since Oct 5, 2021, which is when the antitrust regulator announced its plan to complete a review of the merger. During the same period, stocks of East Asia airlines have gained 18.4% (average). The potential return of flight licenses has weighed on Korean Air. As regulatory uncertainty has been removed, the approval should be a positive for the stock.