Korean Air begins due diligence on Asiana Airlines

The proposed union between South Korea’s two leading airlines is nearing the finish line as Korean Air Lines Co. begins due diligence on Asiana Airlines Inc. This comes as the companies' improved performances alleviate concerns over potential insolvency.

Hanjin KAL Corp., the parent company of Korean Air, plans to wrap up the acquisition within the year, following merger clearance from the country’s antitrust regulator and integration plan approval from the airlines' main creditor, the state-run Korea Development Bank.

ON-SITE DUE DILIGENCE TO CONTINUE FOR TWO MONTHS

Last November, Korean Air announced its plans to acquire the debt-laden Asiana Airlines to keep the country’s No. 2 airline afloat; in a deal that would create the world’s seventh-largest airline.

Korean Air’s acquisition committee, accompanied by its legal and financial advisors, has begun conducting on-site due diligence on Asiana Airlines, according to the airline industry on Jan. 11.

Over the next two months, the company’s working group will visit each of Asiana Airlines’ operations to verify the due diligence reports and detect warning signs of financial distress that may not be on paper.

Earlier, Korean Air's due diligence team requested a vast amount of information from Asiana Airlines, including data on its affiliates, such as the low-cost carrier Air Seoul and the facilities management business Asiana Development Inc. Distressed assets or assets that do not have a considerable synergy effect are likely to be sold off or restructured.

“Korean Air and Asiana Airlines are both under creditors' supervision, so they don't have the capacity to take on distressed assets," said an industry official, adding that the due diligence on Asiana Airlines will be much more intensive than the general approach.

An integration plan will be submitted to the KDB after two months of due diligence. Once the plan is approved, the integration process will kick off immediately.

CONCERNS OVER INSOLVENCY TO BE ADDRESSED

Korean Air's $1.6 billion acquisition of Asiana Airlines is unlikely to face serious hiccups as it is a government-led deal. Yet, a few hurdles remain, which include obtaining clearance from the Korea Fair Trade Commission (KFTC).

Hanjin KAL plans to file for a merger review to the KFTC on Jan. 14, in which the antitrust regulator will examine anti-competitive issues that may stem from the deal.

Although the two airlines are the country's leading market players, the KFTC is expected to bear in mind the surrounding circumstances, as demonstrated in a preceding case.

Last April, the regulator approved low-cost carrier Jeju Air Co.’s acquisition of the cash-strapped Eastar Jet Co. because Eastar was deemed unsalvageable.

Aside from the KFTC approval, Hanjin KAL will also submit an integration plan to KDB for approval by Mar. 17. KDB is most concerned about the possibility of the airlines becoming insolvent, which will need to be addressed by offering detailed measures on how the two companies will maximize their union.

Industry watchers say KDB’s approval may be as tough as the antitrust regulator's review. It will need to consider the opposition from the airlines' labor unions, the suffering airline industry due to the COVID-19 pandemic, and competition with major foreign airlines.

INCREASED AIR FREIGHT RATES LEAD TO IMPROVED PERFORMANCES

Airfreight rates have been on a steady uptrend since November 2020. Last December, the airfreight rate from Hong Kong to North America reached $7.50 per kilogram, higher than the $6.40 from the second quarter.

The securities industry estimates Korean Air’s operating profit in the fourth quarter of 2020 to be in the 120 billion won ($109 million) range, thanks to its cargo business performing well amid a drastic cut in passenger flights.

Asiana Airlines also swung to an operating profit in the fourth quarter of 2020, industry sources say.

Industry watchers expect airfreight rates to rise further once COVID-19 vaccine transport begins.

Write to Jae-kwang Ahn at ahnjk@hankyung.com
Danbee Lee edited this article.