Amid the COVID-19 Crisis... Growing Government Influence in the Aviation Industry

Concerns Over Negative Impact on Management Autonomy

On the 18th, the departure hall of Terminal 1 at Incheon International Airport is deserted due to the impact of the novel coronavirus (COVID-19). Photo by Mun Ho-nam munonam@

[Asia Economy Reporters Kangwook Cho, Jehun Yoo] Due to the aftermath of the novel coronavirus disease (COVID-19) crisis, government influence over the aviation industry is increasing. This is because the government has decided to provide at least 10% of the bailout funds as stock-linked securities acquisition to ensure 'profit sharing.' While this is an unavoidable choice since taxpayers' money is involved, there are considerable concerns that it could negatively affect corporate management autonomy.

According to financial authorities on the 21st, KDB Industrial Bank and Korea Eximbank plan to hold a Credit Committee and an Expanded Credit Committee respectively early next week to approve a proposal to support Korean Air with 1.2 trillion won. A creditor group official stated, "Negotiations related to Korean Air's self-rescue plan are expected to conclude by this week." This is a procedural step to implement the Korean Air support plan announced by the creditor group on the 24th of last month. At that time, the creditor group decided to support Korean Air with a total of 1.2 trillion won based on Korean Air's self-rescue plan, including a 200 billion won operating fund loan, acquisition of asset-backed securities (ABS) worth 700 billion won, and acquisition of perpetual bonds (with stock conversion rights) worth 300 billion won.

Earlier, on the 13th, Korean Air disclosed a decision to issue convertible bonds (CB) worth a total of 300 billion won targeting KDB (180 billion won) and Korea Eximbank (120 billion won). These are bearer, coupon-bearing, unsecured private placement perpetual bonds with maturity until June 22, 2050. According to the disclosure, Korean Air can redeem the CB early starting two years after issuance. Additionally, the creditor group has the right to convert the bonds into stock starting one year after issuance, from June 22, 2021. A creditor group official explained, "Korean Air can redeem the perpetual bonds early from two years after issuance, and the creditor group can request stock conversion from one year after issuance. Whether conversion occurs will be decided based on Korean Air's future management situation, stock price, and market conditions."

If the perpetual bonds are converted into equity, the creditor group will secure approximately 10.8% of Korean Air's shares, becoming the second-largest shareholder after the parent company Hanjin KAL (29.96%). Including the National Pension Service (8.94%), government-related shares would approach 20%. The industry views profit sharing as inevitable since taxpayers' money is involved, but there are concerns that it could negatively impact management autonomy depending on the situation. Some other airlines receiving support from the Industrial Stabilization Fund are also likely to be subject to the same conditions.

A business community official said, "During the previous shipping industry restructuring, there were many criticisms that the sale of profitable business units like the bulk shipping division and key assets such as terminals to improve financial structure weakened the fundamental strength," adding, "Such cases should not be repeated."

Under the current Korea Development Bank Act, KDB and others are prohibited from exercising voting rights on shares of companies in the period industry, but the enforcement decree of the same law allows voting rights to be exercised on matters that significantly affect fund recovery. Professor Hee-Young Heo of Korea Aerospace University said, "Although the authorities have publicly stated they will not exercise voting rights, it inevitably places considerable burdens on individual company management," and added, "The authorities should preemptively block any possibility of management interference by requiring the acquisition of preferred shares upon equity conversion."