Korean Air steps closer to merger with EU approval

Passenger carriers of Korean Air and Asiana Airlines are parked at Incheon Airport. (Yonhap)

The European Union’s antitrust regulator on Tuesday granted conditional approval for the merger of Korean Air with its smaller domestic rival Asiana Airlines, leaving only the last approval from the US pending among the 14 relevant authorities.

The announcement comes after the nation’s largest air carrier submitted a revised merger plan to the European Commission in November last year, which entails selling off Asiana Airlines’ cargo business and turning over certain airport slots for four European city routes: Frankfurt, Paris, Rome and Barcelona.

“As the US approval is expected to finalize by the end of this year, we anticipate the fresh operation of a fully integrated airline by 2027, after a two-year integration process,” a Korean Air official told The Korea Herald.

In November 2020, amidst the worldwide spread of the pandemic, Korean Air boldly announced a bid of 1.8 trillion won ($1.34 billion) to acquire Asiana Airlines. During the height of the pandemic, the airlines had also pioneered the transformation of passenger planes into cargo carriers to mitigate pandemic-related losses, while other global competitors were simply reducing flights.

Upon the merger of Korean Air and Asiana Airlines, industry watchers predict their ranking to reach within the top 15 globally for passenger traffic and within the top 10 in terms of cargo transportation.

As of the third quarter of the previous year, Korean Air operated 156 aircraft, and Asiana Airlines operated 79 aircraft, totaling 235 aircraft for the potential merged entity. The number suggests its ability to compete with Air France, one of Europe’s largest airlines, which operates 255 aircraft.

But to finalize the merger agreement, Korean Air and Asiana Airlines must implement subsequent measures to fulfill their commitments about the cargo segment.

The steps include engaging an advisory firm to supervise the divestment of Asiana Airlines’ cargo freighter business, commencing the bidding process and identifying a final purchaser for the cargo business.

Presently, four domestic low-cost carriers are under consideration for acquiring the cargo business: Jeju Air, Eastar Jet, Air Premia and Air Incheon.

With the EU’s approval, the sales process is expected to commence earnestly from this month. Meanwhile, T’way Air has been appointed as the “remedy taker” on the designated European passenger routes.

Some industry critics view that the merger has ultimately eroded synergy and runs counter to the initial goal of normalizing Asiana Airlines due to the relinquishing of a crucial chunk of its freight transportation business. However, there are perspectives suggesting that such revisions and partial divestitures are necessary steps in today’s global economy.

“Since nations worldwide are embracing protectionist policies, Korean Air’s decision to sell out Asiana’s cargo business and give out partial slots is very natural and understandable,” Hwang Yong-sik, a business professor at Sejong University said. “In other words, the decision actively factors in the dynamics of the economies of scale. Despite enduring significant losses, Korean Air opted to value their benefits from a long-term perspective.”

Hwang viewed that obtaining the green light from the US will likely proceed rather swiftly, as many of the revision plans crafted in response to the EU’s conditional approval are in line with the possible concerns of the US.

However, US authorities may still demand several more revisions to the submitted plan, considering the substantial occupation of routes between Korea and the US currently held by the two airlines.

According to industry estimates, Korean Air, Asiana Airlines and Delta Air Lines collectively occupied over 80 percent of US routes at Incheon International Airport last year. Moreover, Korea’s Fair Trade Commission considers Korean Air and Delta Air Lines as a single combined operator when assessing antitrust concerns due to their joint operation of routes between the two countries, following the establishment of a joint venture in 2018.

As reported by a US-based media outlet in May last year, the US Department of Justice was considering a suit to thwart Korean Air’s acquisition, citing competition restrictions concerns for both passenger and cargo traffic. United Airlines, which previously had a joint operation with Asiana Airlines, is reportedly opposing the merger due to concerns on competitiveness issues on the routes.

Potentially resolving the matter through additional plans to sell off partial slots is not an unfamiliar prospect for Korean Air. Before EU’s approval, Japan, the United Kingdom and China had also requested corrective measures due to monopoly concerns before granting their approvals.

Korean Air submitted plans to divest seven slots bound for Japan and eight slots to China, to be transferred to low-cost airlines, provided they are willing to operate them. Seven slots per week at London Heathrow Airport are to be allocated to Virgin Atlantic in the UK.

After obtaining approval from US authorities, both airlines must address critical tasks still lingering, including minimizing passenger inconvenience and seamlessly resolving the transfer of services like existing airline mileage points, as told by the Korean Air official.

By Kim Hae-yeon ([email protected])