A Korean Air, Under Chmn. Cho, Positioned Well Financially Ahead of Merger

Chairman Cho Won-tae of Hanjin Group.

Korean Air has gotten a lot of “love” from financial markets, in particular for the brainchild of the merger, Chairman Cho Won-tae of Hanjin Group.

The historic M&A with Asiana Airlines is evaluated to be on the right track on the back of the superb financial results of Korean Air.

With a recent upgrade to its credit outlook, Korean Air is in a better position with a favorable demand prediction ahead of the issuance of corporate bonds worth a maximum of 400 billion won, scheduled for early June.

Industry sources said on May 20 that Korea Ratings retained the credit ratings of unsecured bonds of Korean Air and Hanjin KAL to “A “and “A-,” respectively and dramatically upgraded their credit rating outlook from “stable” to “positive.”

The upgrade of their credit rating outlook leads to the possibility of another upgrade in the next year or two, indicating that Korean Air is moving toward “AA-,” a standard for high-quality bonds.

The merger is likely to see Korean Air solidify its business fundamentals, with subsequent synergetic effects and expanded market dominance.

A view of Korean Air Boeing 787-10. (Photos: Korean Air)

Kim Jong-hoon, a senior researcher with Korea Ratings, said, “Despite the financial hit from the pending acquisition of Asiana Airlines, Korean Air is predicted to retain excellent financial stability without wavering, and the merger is analyzed to have synergetic effects multiplied by realizing economies of scale through the integrating of aircraft fleets and route networks, the operating of flexible routes, and cost efficiency by adjusting duplicated functions.”

Korean Air’s corporate bonds with a maturity of two and three years are given treatment corresponding to “AA”-class high-quality bonds.

The move is owed to the national flag-carrier’s exclusive cash-generating capability and the boosting of investment sentiment on the back of the restoring of its steep business performance in post-pandemic.

Korean Air dramatically lowered the cost of raising capital by issuing bonds with a maturity three years lower than the average market interest rate.Riding the wave of momentum, Korean Air could test the waters for a maximum of 400 billion won worth of corporate bonds slated for June 1.

The merged entity is forecast to accelerate efforts to raise funds on more favorable conditions than before the merger. Amid a favorable market response, the merged Korean Air will be launched earlier than planned.

The merger entity is to be launched as a global top-10 mega carrier on Dec. 17, following the approval from an interim shareholders’ meeting and a process related to the stock purchase rights.

After the aircraft fleets and routes of the two airliners are integrated, the merged entity is expected to maximize profitability by operating fleets flexibly according to demand.

The synergetic effects include absorbing transfer demand, integrating two-tier mileage programs, and maximizing passenger attraction through single brand marketing.

With a shift into a single national flag-carrier and a full-service carrier, the merged entity is expected to leverage its negotiation power in global markets.

Korean Air is expected to save around 200 billion in annual costs through synergetic effects, such as lowering unit prices via the purchase of large amounts of aviation fuel and securing airport slots and omni-directional supply chain management.

As Korean Air has fully repaid 3.6 trillion won in public funds, extended by the government and credit amid the pandemic, the Korean aviation industry has been evaluated to have successfully completed its restricting.

Ahead of the launch of the merged entity, Korean Air has reported its best-ever financial results. Korean Air posted 4,515.1 billion won in consolidated sales in the first quarter of this year, a 14 percent year-on-year surge, renewing the best-ever Q1 business performance.

The merged entity saw its Q1 operating profit jump 47 percent year-on-year to 516.9 billion won and net profit standing at 242.7 billion won.