Restructuring Subsidiary Governance and Integrating Mileage Programs: Challenges Ahead for Korean Air

Mega Carrier Launches in 150 Days
Korean Air Pursues Liquidation of Asiana T&I
Potential Delays in Mileage Program Integration
Hoban Group's 20.15% Stake Adds Uncertainty

There are now 150 days left until Korean Air and Asiana Airlines are officially merged into a single company. While the market is watching closely as a mega carrier is about to emerge, there are still several unresolved issues. Chief among them are the restructuring of affiliate governance and the integration of mileage programs.

Boeing 777-300ER aircraft. Korean Air

According to industry sources on July 21, Korean Air is accelerating the overhaul of its affiliate governance structure ahead of the merger of the two airlines scheduled for December. In accordance with the deadline set by the Fair Trade Commission, the restructuring must be completed by December 11, five days before the scheduled merger date of December 16.

This is a follow-up measure after Asiana Airlines became a subsidiary of Korean Air in December of last year, which, in turn, made the company a second-tier affiliate (grandchild company) of Hanjin KAL. According to current fair trade laws, a grandchild company must own 100 percent of its domestic affiliates for compliance. However, Asiana Airlines holds only 58.4 percent of Air Busan, 76.2 percent of Asiana IDT, and 80 percent of Hanjin Sabre, thus falling short of the requirements. Asiana T&I, jointly owned by these three grandchild companies, is also on the list for restructuring.

Korean Air is considering liquidating Asiana T&I to eliminate the capital relationship. The company is also exploring the option of acquiring the stakes Asiana Airlines holds in the three companies via block trading after hours or over-the-counter transactions. In this scenario, the three companies would become direct grandchild companies of Hanjin KAL, thereby addressing regulatory issues. Given the tight schedule, Korean Air has prepared several scenarios, including requesting the Fair Trade Commission to extend the grace period and directly acquiring the relevant shares.

The integration of mileage programs, which is of significant consumer interest, also remains an unresolved task. Korean Air submitted a merger plan to the Fair Trade Commission last year but was required to supplement the plan twice. The Fair Trade Commission is reported to have called for more specific details regarding the supply of bonus seats and the usage of mileage for seat upgrades. Korean Air has stated that if approval is not received by the time of the merger, both airlines may have to continue to operate their separate mileage programs. Even after the merged airline is launched, it is possible that consumers may experience a delay in the actual integration.

The other key variable being watched by the industry is management rights. Hoban Group has increased its stake in Hanjin KAL to 20.15 percent, trailing Chairman Walter Cho of Hanjin Group and his related parties, who together hold 20.56 percent, by just 0.41 percentage points. While Hoban has stated its investment is for simple financial purposes, some in the market see this as part of a long-term strategic move.

Chairman Kun-tae Cho of Hanjin Group is answering questions from reporters at the press conference for the unveiling of the new CI held on the 11th at Korean Air headquarters in Gangseo-gu, Seoul. Photo by the Airport Photographers Association

At present, the prevailing view is that Chairman Cho's management rights are stable. If friendly stakes held by Delta Air Lines and Korea Development Bank as well as LX Pantos are included, the voting rights approach nearly 50 percent. Even if Hoban were to further increase its stake, it would be difficult to overturn the gap.

The key variable is the stake held by Korea Development Bank. The bank secured a 10.58 percent stake in Hanjin KAL by participating in its capital increase in 2020 to support Korean Air’s acquisition of Asiana Airlines. As the merger of the airlines will fulfill the policy objective, a sale of this stake to recover public funds is a likely subsequent step.

However, the market generally believes that Chairman Cho and his allies should have little difficulty defending this stake. Existing friendly parties, such as Delta Air Lines, could further increase their stakes, and there is also the option of securing new financial investors. For these reasons, many expect the current governance structure to likely remain in place even after the merger.

This content was produced with the assistance of AI translation services.