AVIATION BUZZ

MERGER MANTRAS :

THE KOREAN AIR- ASIANA AIRLINES MERGER

In this episode of Merger Mantra, which looks at Global alliances and mergers, we study the Korean Air- Asiana Airlines merger.

In 1988, when Korean air had a stranglehold and a monopoly over Korean air traffic, the government introduced Seoul Air International to the South Korean aviation industry to break the monopoly held by the sole airline in the country, Korean Air.

Now, operating as Asiana Airlines, this once breakthrough entrant is meeting an ironic end as the Korean Government permitted Korean Air the ability to acquire the airline back in 2020.

The Korea Economic institute reports that on 22nd February 2022, "the Korea Fair Trade Commission (KFTC) conditionally approved the merger of the two largest air carriers in South Korea—Korean Air and Asiana Airlines. This approval comes nearly a year and a half since Korean Air’s announcement that it would buy a nearly 64% stake in its sole major domestic competitor for $1.6 billion and form the 10th largest airline in terms of international passenger volume"

Thus the airline that was brought into existence, to challenge the flag carrier KAL's monopoly would become a subsidiary of the flag carrier.

Thankfully, for travellers in South Korea, the industry is no longer a one-airline show, and the host of low-cost airlines that have entered the industry in the 21st century, could play a critical role in determining whether this merger between Korean Air and Asiana Airlines goes through smoothly. To understand the role that the rest of the South Korean aviation industry plays in this merger story, we look at what got us to this point in the first place.

TOO MANY FULL-SERVICE AIRLINES FOR ONE MARKET?

The current status of the aviation industry in South Korea highlights the problems of overcapacity and irrational competition that have plagued the industry since the latter half of the 2010s. Given the size of the market, with the number of annual passengers hitting 100 million in 2023, the first time since 123 million in 2019, and the rapid rise of low-cost carriers over the last decade, along with the intensifying competition from foreign airlines, South Korea has no real need for two full-service carriers.

To add on, Asiana and Korean Air have considerable overlap, with both airlines operating large long-haul networks from hubs at Seoul Incheon Airport with aircraft as large as the Airbus A380 and massive regional networks within the Asia-Pacific with aircraft like the A321neo. In recent times, overcapacity problems have been unsurprising throughout Asia and have significantly impacted airline profitability as airlines compete bitterly for intercontinental traffic, with the competition only intensifying on regional routes with budget airlines.

According to Korean Air officials during the announcement of the acquisition, it was unavoidable to restructure the entire market, including Korean Air, Asiana Airlines, the low-cost carriers (LCCs), and other relevant industries, given the crisis at the time of overcapacity, coupled with the difficulties introduced by the COVID-19 pandemic. While Korean Air and Asiana will continue to operate as separate entities for some time before the Asiana brand ceases to exist, the Korean Air-owned Jin Air and Asiana-owned and partly-owned Air Seoul and Air Busan LCCs will also be a part of the merger and become one single LCC. Therefore, the Korean Air Group will consolidate under one prominent full-service airline and one significant LCC subsidiary.

This kind of consolidation is not unheard of in the Asian aviation sector. In recent times, there have been several other East and Southeast Asian airline groups that have similarly consolidated brands. In 2017, Singapore Airlines merged one of its LCCs, Tigerair, with its other LCC, Scoot, consolidating its profile to one full-service airline and two LCCs. However, in 2021, Singapore Airlines further consolidated its brands by merging its regional carrier SilkAir into the parent airline, leaving one major full-service airline in Singapore Airlines and one prominent LCC with Scoot. Other examples of such consolidation include Japan's ANA merging its LCCs Peach and Vanilla in 2019, leading to Vanilla's disappearance, and Hong Kong's Cathay Pacific and the absorption of their low-cost region arm Cathay Dragon.?

So, such consolidation mergers are nothing new to the Asian aviation industry, so why has the merger between Korean Air and Asiana Airlines not been completed yet, especially since it was announced in 2020??

THE INVOLVEMENT OF THE COMPETITION COMMISSION

A host of LCCs in the South Korean market, like T'Way, Air Premia, and Jeju Air, provide stiff competition to full-service airlines like Korean Air and Asiana. Therefore, it is no surprise that the South Korean Competition Commission approved the merger as there was still plenty of competition and choice in the domestic market. The same applies to regional markets from South Korea, such as Japan, whose Competition Commission also approved the merger due to the choice brought by South Korean LCCs. However, long-haul markets like the European Union and the United States are raising alarm about the merger, as these markets are primarily served by full-service airlines like Asiana and Korean Air. Therefore, the merger takes away all competition from the market.

The United Kingdom also initially raised concerns about the merger but was won over as Korean Air worked with its fellow SkyTeam partner, Virgin Atlantic, to launch flights from London Heathrow to Seoul Incheon. Thus, the number of airlines operating the route remained the same, leaving passengers with the same amount of choice as before. Similarly, Korean LCCs are now being used to win over the remaining EU and US Competition Commissions, which is working.

KOREAN AIR GETS THE EU NOD OF APPROVAL

In February 2024, the European Union Competition Commission approved the merger of Korean Air and Asiana Airlines only after ensuring that the two airlines must undertake various measures to fulfill their commitments related to the cargo segment. However, in addition to the cargo-related deals, Korean Air agreed to the Competition Commission's demand to surrender the routes operated by Asiana Airlines to other South Korean airlines. These routes included Seoul to Paris, Frankfurt, Barcelona, and Rome. The approval came as LCC T'Way stepped up to the occasion, announcing flights to Paris from Seoul in time for the Paris 2024 Olympics, with Rome flights launching in August, Barcelona in September, and Frankfurt in October.

Under the EU deal, Korean Air has to provide T'Way with slots, traffic rights, and access to suitable aircraft. T'Way CEO Hong-Geun Jeong said Korean Air will lease five A330-200 aircraft to T'Way and provide 100 pilots and maintenance support. Although these aircraft carry fewer passengers than the airline's three existing A330-300s, they can fly the extended distance to Europe currently needed to avoid restricted Russian airspace.?

A CONCLUDING LOOK AT THE MERGER

The Korean Air and Asiana Airlines merger is almost at the end. The group is now left with obtaining approval from the US Competition Commission, which it expects to receive by the end of the year. This will be the most challenging approval to receive as the US Department of Justice was considering a suit to thwart Korean Air's merger plans, citing competition restrictions concerns for both passenger and cargo traffic. United Airlines, which had a joint operation with fellow Star Alliance airline Asiana Airlines in the past, is an apparent opposer of the merger due to concerns about competitiveness issues on the routes to Seoul from the United States.

However, potentially fixing the matter through additional plans to sell off partial slots to other South Korean airlines is a familiar prospect for Korean Air. The airline group can use similar tactics as it did with the EU through other South Korean airlines or partner airlines as it did with the United Kingdom, both of which had also requested corrective measures due to monopoly concerns before granting their approvals. What does end up happening to gain the approval of the US is up to speculation right now, but it would not be surprising to see the approval followed by an announcement that we'll be seeing Air Premia's brand new Boeing 787-9 in US skies.

?

?

This article was written by Angad Khosla for Avialaz Consultants and has been edited by Sanjay Lazar . Angad is a graduate of George Washington university and is currently an analyst in the USA.?

Avialaz Consultants an aviation consultancy and research organisation, which was co-founded by Sanjay Lazar, an author and Harvard Law Professional with 37 years’ experience in aviation, law, public speaking, and leadership coaching.

He is available at @lazar1 on Linked-In & @sjlazars on X (formerly Twitter)

His book ‘On Angels’ Wings — Beyond the bombing of Air India 182' is a number 1 #Bestseller available on Amazon.in