[Q&A] Ministry of Land, Infrastructure and Transport: "No Sharp Fare Increase Expected from Korean Air-Asiana Integration"

Kim Sang-do, Director General of the Aviation Policy Bureau at the Ministry of Land, Infrastructure and Transport, is explaining through a back briefing on the morning of the 16th at the Government Complex Sejong in Sejong City regarding Korean Air's acquisition of Asiana Airlines.
[Photo by Yonhap News]

[Asia Economy Reporter Lee Chun-hee] As the government pushes for the launch of a mega airline through Korean Air's acquisition and merger (M&A) of Asiana Airlines, it has solidified its stance to strengthen various regulations to prevent the negative effects of monopoly such as fare increases, while also maximizing support for workers' job security.

Kim Sang-do, Director of the Aviation Policy Office at the Ministry of Land, Infrastructure and Transport, stated at a press briefing on the 16th at the Government Complex Sejong regarding the "Measures to Enhance Competitiveness of the Air Transport Industry," which includes the Korean Air-Asiana Airlines M&A, "This is very positive, and through this integration, a large airline (FSC) ranked 7th worldwide and the largest low-cost carrier (LCC) in Northeast Asia will emerge."

Regarding the anticipated negative effects, Director Kim said, "We will actively manage so that synergy effects lead to increased consumer benefits," and mentioned plans to pioneer new networks by streamlining overlapping routes and to provide administrative guidance to prevent sudden fare hikes by the integrated FSC. On employment stability, he expressed the position that employment succession will occur without forced restructuring, and any surplus personnel will be deployed to develop new routes.

Below is a Q&A with Kim Sang-do, Director of the Aviation Policy Office.

Korean Air and Asiana Airlines aircraft parked at the apron of Incheon International Airport. [Image source=Yonhap News]

- It feels like the government asked Korean Air to take on the burden by acquiring Asiana Airlines because there was no suitable M&A target. Airlines are each facing difficulties due to COVID-19, and Korean Air's situation is not very good either. The Asiana acquisition was already canceled once due to risks in the airline industry, and if the COVID-19 situation continues, the airline industry might face even greater risks.

▲ The government thinks differently. Both Korean Air and Asiana Airlines are currently in difficult situations, with Asiana Airlines being particularly more troubled. Significant government support has been provided so far, and additional funding will be supplied next year. Managing and supporting the two airlines separately would greatly increase the government's burden.

Fortunately, Korean Air has expressed its intention to acquire Asiana Airlines. It is too uncertain for non-airline companies to operate airlines under the current circumstances. Korean Air, as an airline specialist, understands the industry situation better than anyone else, so it sees the acquisition of Asiana Airlines as an opportunity to overcome difficulties and grow into a large airline. Of course, the recovery of the airline market next year is still uncertain, and additional funding will be necessary. The Korea Development Bank (KDB) judged that it would be better to have Korean Air acquire Asiana Airlines rather than keeping two separate FSCs, as this would reduce the need for additional support, leading to the agreement.

- The merger of Korean Air and Asiana Airlines has both pros and cons. Currently, there is a management dispute at Hanjin KAL, and the three-party coalition (Cho Hyun-ah-KCGI-Bando Construction) reportedly holds more shares than the current management. There are clear downsides, but do you think it will pass the Hanjin KAL board of directors?

▲ I believe the KDB has conducted legal reviews and prepared countermeasures in case the three-party coalition opposes. I expect the KDB to release additional statements, so please refer to those.

- Consumers are very concerned when two large companies merge. When Hyundai Motor and Kia merged, there were many complaints about consumer benefits being ignored. Korean Air currently operates many routes alone, and for example, the Mongolia route is as expensive as traveling to Europe, and the price for Vladivostok, Russia, was high until LCCs entered.

▲ When the two companies integrate as FSCs, there could be negative effects such as route reductions, cancellations, and fare increases due to monopoly or oligopoly. However, Korean Air's acquisition of Asiana Airlines fundamentally aims to strengthen competitiveness through scaling up. A drastic reduction in routes would lead to a shrinking base.

Some adjustments may be necessary. Currently, Korean Air and Asiana Airlines operate routes to the Americas three times a week on the same days (Monday, Wednesday, Friday) and at the same times, which limits consumer choice. After integration, Korean Air would operate on Monday, Wednesday, Friday, and Asiana Airlines on Tuesday, Thursday, Saturday, enabling daily flights and increasing consumer benefits. The government will also deploy surplus personnel to develop new routes or increase flights on necessary routes to prevent consumer harm rather than abruptly cutting routes.

Fares for international flights cannot be arbitrarily set. The upper limit is determined by air service agreements, and within that, fares are divided into various types. Prices vary greatly depending on conditions such as direct airline purchase or travel agency purchase and timing. It is unlikely that the person sitting next to you paid the same fare. As online purchases become more active, I believe consumers will rarely suffer unfair fare damage. International routes are highly competitive, with foreign airlines holding about 30% market share, so significant fare increases are unlikely.

Additionally, policy-wise, if excessive fares are charged or increased on specific or monopoly routes, the government will maintain appropriate levels through slot and traffic rights allocation. The Ministry of Land, Infrastructure and Transport is most concerned about consumer harm from the Korean Air-Asiana Airlines integration. We are devising countermeasures and will do our best to prevent any consumer damage.

On the morning of the 16th, when the Hanjin KAL board meeting was held, officials were moving at the Korean Air Seosomun building in Jung-gu, Seoul. On that day, the Korea Development Bank decided to invest 800 billion KRW to promote Korean Air's acquisition of Asiana Airlines. The bank plans to inject 500 billion KRW into Hanjin KAL, the parent company of Korean Air, through a third-party allotment capital increase and to acquire exchangeable bonds (EB) worth 300 billion KRW.
[Image source=Yonhap News]

- (For the acquisition) the Fair Trade Commission (FTC) approval is also required. Has there been any prior discussion?

▲ The Ministry of Land, Infrastructure and Transport has not directly negotiated with the FTC. However, the financial authorities may have consulted during their review. Some media have reported related content, and there have been cases such as Jeju Air's acquisition of Eastar Jet and HDC Hyundai Development Company's attempt to acquire Asiana Airlines. We expect no major issues regarding monopoly market dominance. We will monitor related trends during the corporate merger review and pursue consultations if necessary.

- Previously, the Ministry of Land, Infrastructure and Transport maintained the position of keeping two major FSCs. Who proposed this acquisition first, and what was the prior process? Did KDB propose first and the ministry review it, or was it a joint effort?

▲ Simply put, after the acquisition by HDC Hyundai Construction failed, KDB sought a new acquirer. They consulted with potential companies, but it was difficult unless it was an airline. Considering the current difficult situation and the need for support, there was no indication of willingness to acquire from non-airline companies. Most foreign cases involved M&A between airlines. After reviewing various factors, this plan was judged to be the best to prepare for the post-COVID era and was pursued accordingly.

- From a consumer perspective, there are mileage issues between the two companies. How will these be resolved upon integration? Will the Ministry assist with bilateral approvals or route coordination? What is the M&A schedule going forward?

▲ Mileage will be used jointly after integration. Currently, Asiana Airlines has limited mileage usage options, causing consumer inconvenience. In the future, Asiana Airlines mileage can be used at Korean Air's partners, increasing consumer benefits. We need to review consultations with foreign authorities, but if agreements are made for multiple airlines, the government will designate the national carrier. Since the corporate entities will be integrated, I expect no major difficulties. The ministry will handle administrative matters later.

Regarding the schedule, if the agreement between the two companies is signed around today, a deposit will be paid as usual, followed by interim payments, and then the corporate merger review will proceed. Korean Air needs to confirm which countries and how many are involved in the review. Usually, Korea processes it within 90 days, with possible extensions for unavoidable reasons. Typically, it can be resolved within six months to a maximum of one year. Korean Air expects the acquisition contract to be completed by the second half of next year.

Jin Air aircraft. (Provided by Jin Air) [Image source=Yonhap News]

- Regarding the integration of Jin Air, Air Busan, and Air Seoul, will Jin Air merge the other two companies? Will a completely new company be created? What is the secondary hub at regional airports?

▲ Korean Air and Asiana Airlines will integrate their FSCs, and Jin Air, Air Busan, and Air Seoul will integrate their LCCs. The form and method of LCC integration will be determined during the PMI planning process after the Korean Air-Asiana Airlines integration is completed. Decisions on the form and brand name will be reviewed then.

The secondary hub is based on the acquired company's local region, considering regional expectations and the preservation of existing companies. Not all airlines will base operations at Incheon International Airport. Large airlines will focus schedules at Incheon Airport, while the integrated LCC will base operations at regional airports and operate newly. This will be reviewed during the detailed integration plan with creditors by Korean Air.

- Employment is also a key issue. Restructuring and layoffs seem inevitable after the merger, but the ministry's explanation is only that it will be "better than now." Are there specific support or employment retention measures? Also, what role and authority does the Ethics Management Committee have?

▲ Employees of both airlines may have concerns about restructuring and workforce reductions. Currently, Korean Air and Asiana Airlines' workforce can be divided into indirect and direct sectors. The indirect sector includes management support, HR, and planning. The direct sector relates to aircraft operations.

Aircraft operations aim to realize economies of scale by Korean Air leveraging Asiana Airlines' foundation, so drastic reductions are unlikely. Employment of maintenance technicians, pilots, cabin crew, and flight dispatchers will be maintained, and any surplus personnel will be absorbed through redeployment to new route development. Thus, no reductions are expected through direct sector reassignment.

The indirect sector has about 1,100 employees at Korean Air and 800 at Asiana Airlines. Although 800 may be considered for adjustment due to similar functions, Korean Air currently plans no forced restructuring. Korean Air's annual retirement and natural attrition is about 600, and Asiana Airlines' about 400, totaling around 1,000. Not all 800 roles overlap, and Korean Air operated 80 aircraft before, but functions will increase, requiring additional Asiana Airlines staff. The actual surplus is much less than 800 and even less than retirement and attrition numbers. Korean Air expects overlapping personnel to be resolved within a year without employment instability.

Currently, employment retention subsidies are provided to airlines with the condition of maintaining at least 90% employment. Because of this condition, there is no need to adjust overlapping personnel, and subsidies will continue only if employment is maintained, so employment instability is not expected for the time being.

On the afternoon of the 16th, when the government and the Korea Development Bank officially announced Korean Air's acquisition of Asiana Airlines, Choi Hyun, Chairman of the Korean Air Pilots Union (second from the left), was conversing with representatives of the Asiana Airlines Open Pilots Union at the Korea Private Aviation Pilots Association in Gangseo-gu, Seoul. Representatives from the labor unions of Korean Air and Asiana Airlines gathered here to discuss future measures.
[Image source=Yonhap News]

The Ethics Management Committee was established because KDB and the government recognized that Korean Air has a poor public image due to owner-related risks, and if such issues recur, they could harm the integrated airline's image and management activities. An independent external Ethics Management Committee will be formed. The chairperson will be an external member, and the committee will consist of 5 to 7 members, with at least 5 being external. External members will hold the majority to ensure transparent and sound operation. Measures will be taken to prevent owner risks, and if they occur, responsible actions will be enforced.

- With fewer LCCs, competition decreases and fares may rise. Although you say the increase will be limited and countermeasures will be taken, it doesn't really resonate. Are there standards to reduce prices through economies of scale? Since public funds are involved via KDB, shouldn't there be proposals for price adjustments?

▲ International fares are set through bilateral consultations to determine fare ceilings. Airfares are gradually increased annually reflecting inflation and cost increases, but Korea has not raised the ceiling in the past 10 years. For example, on the Seoul-LA route, if the maximum fare for first class, business class, and economy class is set, assume business class is capped at 3 million KRW. Airlines submit plans within this cap to the ministry, which reviews and approves increases. Foreign airlines generally offer lower prices than domestic carriers.

There is a fare ceiling, and if airlines charge the maximum fare, passengers sensitive to price will choose cheaper foreign airlines, while those valuing better service will choose domestic airlines. Foreign airline boarding is increasing, providing checks and balances. The government manages fare ceiling increases and annual fares. If fares are set at the ceiling on monopoly routes, consumer harm may occur, so penalties will be applied through traffic rights allocation to maintain appropriate levels.