A Move towards Vertical Integration of LCC Affiliates
The author is an analyst of KB Securities. He can be reached at seongjin.kang@kbfg.com. -- Ed.
Acquisition of 54.9% stake in Jin Air positive
— Korean Air has decided to purchase a 54.9% stake in Jin Air from its parent Hanjin KAL. While the lofty price tag (at a premium to recent closing price) and potential cash outflow on investment activities for its LCCs (to be combined) may be negative, the regaining of exposure to the LCC business should be positive for share price.
Purchase of Hanjin KAL’s entire stake in move towards vertical integration of LCC affiliates
— Korean Air has decided to purchase Hanjin KAL’s entire stake (54.9%) in Jin Air for KRW604.8bn (KRW21,100 per share). Korean Air announced in its public disclosure that the purchase is intended for the creation of synergies via vertical integration of its LCC affiliates. Hanjin KAL, meanwhile, stated that the disposal is aimed at improving its financial structure.
Move for creating synergies, integration of LCCs, meeting cash needs of merged LCC
— We believe the acquisition is aimed at the following.
— (1) As stated by Korean Air and Hanjin KAL, the move may be aimed at pursuing synergies via vertical integration of its FSC and LCC businesses. According to media report (Invest Chosun, May 4), having the merged LCC as a subsidiary under Hanjin KAL had been considered, but the decision instead to have Korean Air as an intermediate holding company and the merged LCC as a subsidiary under Korean Air is likely to have been intended for the creation of synergies among airline affiliates.
— (2) The move appears to be for the integration of its LCC affiliates. Korean Air is currently in the process of acquiring and merging with Asiana Airlines. If the deal goes through, the LCC affiliates of Asiana Airlines (Air Busan and Air Seoul) would become subsidiaries to Korean Air, in addition to Jin Air. In becoming the largest shareholder to all three LCC affiliates slated to be combined, Korean Air would be able to streamline the integration process.
— (3) Korean Air, with strong capability for mobilizing capital, would be able to respond effectively to the cash needs of the merged LCC. While Hanjin KAL has cash holdings of KRW104.8bn, Korean Air has KRW4.1tn (based on standalone figures for cash & cash equivalents, short-term financial products as of end-1Q22). Although key LCC rival Jeju Air has plans for purchasing new aircraft from 2023, no such plans have been made for the merged LCC of Hanjin Group. For the three LCC affiliates to resume investments, funds would be required. Meanwhile, the unstable macro environment is likely to have been another reason behind the decision to have the LCCs under capital-rich Korean Air.
Regaining growth potential via LCCs outweighs cost concerns
— Acquisition of the stake in Jin Air should be positive for Korean Air’s share price.
— On the face of it, the purchase may indicate negative implications. The acquisition price is 27.5% higher than Jin Air’s closing price on Jun 13. Also, the resumption of investments in the LCCs could be burdensome for Korean Air.
— However, we believe greater significance should be placed on Korean Air regaining growth potential. Jin Air, originally established as a subsidiary of Korean Air, became a subsidiary to Hanjin KAL in 2013 following its spin-off from Korean Air. This has had a negative impact on Korean Air’s share price performance. LCCs have rapidly gained ground in the short-/medium-haul passenger transport segment, becoming a threat to existing carriers such as Korean Air. The return of Jin Air would mean for Korean Air the getting back of the LCC business as a growth engine, and therefore a tailwind for its share price.