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Hanjin KAL, owners of Korean Air, have announced that together with Korean Air they have decided to acquire Asiana Airlines a, with the deal between the top two airlines of Korea described as providing significant momentum to the restructuring of the Korean aviation market amid the unprecedented crisis faced by the global aviation industry due to COVID-19.

In what appears to be a rather complex deal, Korean Air says it plans to acquire Asiana Airlines at KRW 1.8 trillion and in order to secure this amount, Korean Air plans to increase KRW 2.5 trillion worth of capital by issuing new shares early next year.

The added that according to the agreement with Korea Development Bank, Hanjin KAL will receive a KRW 800-billion investment from Korea Development Bank, KRW 500 billion by issuing new shares to the bank through a third-party allotment and KRW 300 billion through the issuing of exchangeable bonds, to acquire Korean Air’s new shares next year, adding that Hanjin KAL will lend this KRW 800 billion to Korean Air immediately after receiving it from the bank, in order to support both airlines before Korean Air’s capital increase.

In addition, it appears that of the KRW 800 billion from Hanjin KAL, Korean Air will invest KRW 300 billion to acquire perpetual convertible bonds from Asiana Airlines and use an additional KRW 300 billion as a down payment for the KRW 1.5-trillion contract to acquire Asiana Airlines’ new shares. Korean Air’s initial investment will enable Asiana Airlines to secure the funding needed for operations until the end of the year, as well as improve its financial position by adding KRW 300 billion worth of perpetual convertible bonds to its capital assets.

The parties say that the reason for Korea Development Bank’s investment in Korean Air through Hanjin KAL is to ensure Hanjin KAL maintains its status as the airline’s holding company and Hanjin KAL decided to receive Korea Development Bank’s investment by issuing new shares, rather than borrowing the entire KRW 800 billion from the bank, to maintain a stable financial structure. It also chose the third-party allotment method to secure the capital quickly and safely.

Korean Air says that given the crisis the airline industry is currently facing, it is unavoidable to restructure the entire market, including Korean Air, Asiana Airlines, the low cost carriers such as Jin Air, and relevant industries, with Korea Development Bank’s shares will be ordinary shares with a voting right, and Korea Development Bank will monitor and make sure Hanjin KAL and Korean Air follow through with acquisition plans.

The main reason behind Korean Air’s decision to acquire Asiana Airlines at this time is to stabilize the Korean aviation industry, which is suffering from the COVID-19 pandemic. Considering that Korean Air’s financial status could also be endangered if the COVID-19 situation is prolonged, it is inevitable to restructure the domestic aviation market to enhance its competitiveness and minimize the injection of public funds.

Korean Air says it decided to acquire Asiana Airlines after much consideration and deliberation in order to pursue its founding mission to contribute to the nation through transportation. Following its mission, the carrier will ensure job security for employees at both airlines as well as relevant industries and support the development of Korea’s aviation industry, adding that once Korean Air completes its acquisition of Asiana Airlines, the airline is expected to be ranked as one of the top 10 airlines in the world. In general, countries with a population less than 100 million have a single full service carrier.

However, Korea has two full service carriers, which gives it a competitive disadvantage compared to countries like Germany, France and Singapore with a single major airline. However, Korean Air’s acquisition and the expansion of its routes, fleet and capacity will give the airline the competitiveness to compete with global mega airlines.

The merger of the two airlines is expected to further enhance the competitiveness of the Korean aviation industry with more streamlined route operations and lower costs. More slots secured at Incheon International Airport, a transport hub in Asia, through the consolidation of the airlines, may lead to an increase in joint ventures with global airlines and greater transfer demand, which will also spur the growth of the domestic aviation industry.  Customers will be able to enjoy a wider range of choices in routes and schedules. They will also be able to benefit from more convenient transfer options, integrated mileage and enhanced safety in all areas.

The acquisition will strengthen Incheon International Airport’s competitiveness as a major hub in Asia by enhancing its passenger and cargo network.

A report by John Alwyn-Jones