[월간중앙] CEO Periscope (1)-Chairman Cho Won-tae to merge with Asiana Airlines on the risk of life

Hanjin Kal’s takeover of Asiana with the help of Korea Development Bank, declares “no artificial restructuring”
Beyond the Corona 19 crisis, we need to speak with results, overcoming preferential disputes, persuading the union, and the checks of the trilateral alliance.

“It’s difficult because it’s a sensitive part, but we’re also watching it.” This is what Cho Won-tae, 46, chairman of Hanjin Group, said at a press conference on June 3, 2019. In response to the question about the acquisition of Asiana Airlines, Chairman Cho did not dismiss, saying,’We do not consider it at all.’ It wasn’t small, but until then, the market saw a very low possibility of realization, for three reasons: ▷Asiana Airlines’ insolvency cannot be determined ▷Korean Air’s financial situation is not very good, ▷Government regulation due to monopoly A Korean Air official I met at this time affirmed that “acquiring Asiana means that even Korean Air will fall into a swamp of insolvent.”

In fact, Korean Air’s intention to take over Asiana Airlines was not encouraging. On November 12, 2019, Korea Development Bank, the main creditor bank of Asiana Airlines, selected Hyundai Industrial Development and Mirae Asset Daewoo Consortium as the preferred negotiator. The consortium spent 2.5 trillion won in the sale bid. Hyundai Industrial Development Chairman Chung Mong-gyu signed a stock purchase contract with Asiana Airlines on December 27th.

Chairman Cho did not express much regret for the news of Asiana’s finding a new owner. At a press conference held in Manhattan, New York on November 20, 2019, he said, “The existing competitive landscape is likely to remain the same.” “As Asiana Airlines’ financial structure will improve, we are also preparing to improve our financial structure quickly and respond.” Only. He added, “I haven’t really thought about restructuring, but I think I should throw it away if it doesn’t make a profit.” It was a view that in a crisis situation, we should focus on ways to reduce inefficiencies, not when expanding economies of scale such as M&A (mergers and acquisitions).

However, with the Corona 19 crisis that struck in 2020, everything has changed. The aviation industry suffered fatal internal injuries. Hyundai Industrial Development announced that it will postpone the acquisition schedule indefinitely just one day before the scheduled acquisition date (April 30) of Asiana Airlines. Subsequently, on June 9, the creditors were asked to’recheck the acquisition at the origin’. On June 25, the head of the Industrial Bank of Korea, Dong-geol Lee, who led the sale of Asiana Airlines, suggested that “the acquisition conditions can be relaxed”, but no compromise was reached. Hyundai Industrial Development did not back down from the position that’Asiana Airlines should be re-inspected’. Eventually, on September 11, creditors such as Korea Development Bank and Kumho Industrial, the parent company of Asiana Airlines, dealt with the acquisition negotiations with Hyundai Industrial Development as a’no deal’.

Low-cost airlines (LCC) were also in a position to worry about their survival. Asiana Airlines’ subsidiaries, Air Seoul and Air Busan, have amplified uncertainties. Jeju Air announced its intention to take over Eastar Jet, but it was eventually destroyed. Since then, Eastar Jet employees have been unable to avoid hopeful retirement and layoffs. Lee Sang-jik, the founder of Eastar Jet and virtually the majority shareholder, left the Democratic Party on September 24, who was suspicious of overdue wages, embezzlement, and assignment. He still serves as an independent lawmaker.

The biggest difficulty facing the aviation industry was in the current of the times when the industry itself was regarded as a declining industry. I faced the essential question,’Will people go on a trip in economy class on an airplane that cannot be distanced even after Corona 19 someday?’ Even in the stock market that controls the industry, the stock prices of Korean Air and Asiana Airlines, the No. 1 and 2nd airlines, were not showing visible resilience (until the merger news came out). In a situation where the aviation industry could not be reorganized and the situation was terrible, the government was the most deceived. The Korea Development Bank invested 2.4 trillion won in the name of the key industry stabilization fund. To prevent the bankruptcy of Asiana Airlines, the nation’s blood tax was poured out. Unless Asiana was disposed of by private companies, it was a plate that had to be filled with tax without promise.

Conglomerates such as SK and Hanwha have expressed difficulty in acquiring Asiana from early on. An SK executive dismissed rumors from the stock market, saying, “The group doesn’t seem to believe that the aviation industry has a vision for the future.” An anonymous Hanwha executive also asked, “Does it make sense for the scenario that there is a Hanwha Aerospace (aircraft engine manufacturer) that is interested in airlines?” In a situation where the buyers do not appear, even though they have to sell them as soon as possible, Lee Dong-geol, director of the Asiana sale operation, made a’mistake’. This is an offer to Korean Air. This is because it was a sale that others refused to do, but it was inevitable that Korean Air’s top management would be appealing. Regarding this, a person who is bright in the situation of Korean Air analyzed that “if Korean Air had been in a normal situation, it would never have been received,” and “However, in the special circumstances of Chairman Cho Won-tae, he could not have resisted it.”

The story goes back to the so-called’peanut turnaround’ by Cho Hyun-ah, former vice president of Korean Air, which broke out in December 2014. National resentment arose over the chaebol owner’s’gap-jil’, and in the aftermath, a time of trial came to Hanjin Street. Hanjin Group was seized and searched by each government department 18 times. The investigation took place at the home of former chairman Cho Yang-ho. Former Chairman Cho’s health deteriorated due to repeated bad news. The final blow was the failure to reappoint Korean Air’s CEO post in March 2019. 64,1% agree and 35.9% disagree. It was just 2.5% less than the approval rate for success in the second term (66.66%). Cho, who could not overcome the sense of loss in the end, passed away on April 8, 2019 in Los Angeles, USA.

Former Chairman Cho, who passed away at the age of 70, left a will, saying, “Let’s cooperate well with each other and lead a good relationship”. As a result, the bereaved families were unable to keep this movement. Former Vice President Jo Hyun-ah has left the ranks. Hanjin Kal’s stake in the holding company is essential to maintain the group’s dominance. At the time when Cho passed away, the proportion of Hanjin Kal’s shares held was 6.52% of Chairman Won-tae Cho, 6.49% of former vice president Hyun-ah Cho (47), his younger sister Hyun-min Cho (38), 6.47% of managing director Han Jin-kal, and Myung-hee Lee (72), an advisor to Jeong Suk Enterprise 5.31 %. When these shares are combined (24.79%), a 4.15% stake in related parties such as Hanjin Group affiliated foundations and a 10% stake in the US Delta Air Line, which is a friendly force, are added to reach 38.94%. It is more than 10% higher than the combined stakes of KCGI (17.29%) and Bando E&C (8.20%), also known as’strong wealth fund’. It would have been able to defend management rights relatively smoothly.

However, on December 23, 2019, former vice president Cho Hyun-ah announced a point of view through the law firm that’Chairman Cho Won-tae cannot be recognized as the head of the group’. Later, she joined the KCGI and Bando Construction Association. In an instant, the proportion of Hanjin Kal’s shares narrowed to 33.45% for the pro-Jo Won-tae camp and 31.98 percent for the anti-Jo Won-tae camp, which is referred to as the’three-party alliance’. At the general shareholders’ meeting of Hanjin Kal on March 27, 2020, in such a composition, Chairman Won-tae Cho won a complete victory. Chairman Cho’s reappointment plan was passed (56.67% in favor, 43.27% in opposition, 0.06% withdrawal). In addition, the proposal for the appointment of internal and external directors was carried out according to the intention of Chairman Cho. Two backgrounds worked for the results that were more unilateral than expected. One was the expression of support by Chairman Cho Won-tae of the National Pension Plan, which came out the day before the general shareholders’ meeting. Although Hanjin Kal’s stake in the National Pension Service was only 2.9% (estimated), it was symbolic in terms of representing the’government position’. Another reason was the court ruling that limited the voting rights held by Bando E&C. The court said, “Only on January 10, 2020, after the closing of the stockholders list, Bando E&C changed the purpose of holding shares from’simple investment’ to’participating in management’.” It was interpreted that the voting rights could be exercised at the shareholders’ meeting on February 27th.

After that, the dispute over management rights entered an incubation period. In the phase of overcoming the Corona 19 crisis, the burden that would occur when raising’noise’ also worked. However, the two sides constantly competed under the water for stakes. The three-party alliance has raised the stake to 45.24%. It has approached the majority of Hanjin Kal’s stake. Hanjin Kal’s stock, which was less than 30,000 won before the dispute over management rights intensified, once showed an overheating, soaring to 111,000 won. In this phase, Korea Development Bank emerged as a’game changer’. The Korea Development Bank suggested to Chairman Cho, who had difficulty maintaining management rights under the same circumstances,’how Hanjin Kal bought Asiana Airlines through a paid-in capital increase method allocated to a third party’.

The key point is that the acquisition of Asiana Airlines is not Korean Air, but Hanjin Kal. Korea Development Bank decided to invest a total of 800 billion won in Hanjin Kal, of which 500 billion won was put into participation in a paid-in capital increase allocated to a third party. As a result, Hanjin Kal’s stock of 6.62,146 shares. The stake is 10.66%. Until the end of the year, Chairman Cho Won-tae’s friendly power (22.44%) was estimated at 37.3%, even with Delta Airlines (14.9%). On the other hand, the three-party alliance reached 45.24% (Cho Hyun-ah 6.49% + Strong wealth fund 19.55% + Peninsula E&C 19.2%). However, with the introduction of the Korea Development Bank, the stake in the trilateral alliance was reduced to 40.4% (Hyunah Cho 5.79% + Strong wealth fund 17.46% + Peninsula E&C 17.15%). On the other hand, Chairman Cho Won-tae’s friendship stake surged to 44.02% (20.5% for Cho Won-tae’s camp + 13.31% for Delta Airlines + 10.66% for Korea Development Bank). If you add the implied premium of’government support’ to this, it can be seen that Chairman Cho’s dominance is in fact in the right of stability.

On December 1, the Seoul Central District Court rejected an application for a provisional injunction against the issuance of new shares issued by the Kangsung Fund against Hanjin Kal. In short, the Korea Development Bank approved the sale of Asiana Airlines to Hanjin Kal. Since then, Hanjin Kal’s stock price has plummeted. The stock price, which was close to 90,000 won, was threatened by even 60,000 won. The market actually decided that the dispute over management rights was over.

There were also criticisms that the government was trying to deal with the Asiana problem, which is a fire of instep, that’Chairman Cho Won-tae gave preferential treatment to defend management rights without spending even a single won’. Kim Jong-in, chairman of the People’s Power Emergency Response Committee, said, “There is a lot of talk because the government helps a specific key owner.” “The Korea Development Bank is a place where the government automatically compensates for any losses, so there is a tendency not to think that it is a big problem. There is” he pointed out. The ruling Democratic Party wasn’t just as friendly. Rep. Min Byeong-deok, Min Hyung-bae, Park Yong-jin, Song Jae-ho, Ogi-hyung, Lee Yong-woo, and Lee Jung-moon held a press conference at the National Assembly on November 17, saying, “The understanding of the heads of families to take the lead in the dispute over management rights with the Industrial Bank, which had a burden on Asiana Airlines. It is possible to have a reasonable doubt that the relationship is right,” he said. “Hanjin Kal and Korean Air’s shareholders’ stakes will dilute, and Asiana’s major shareholder’s profits will double.” They also added, “There are concerns that the national blood tax will be used to monopolize the aviation industry.”

Lee Han-sang, a professor at the Korea University Business School, also pointed out on Facebook, “Why should Hanjin Kal shareholders and Korean Air shareholders be responsible for the KDB’s lending money to Asiana?” It is a view that existing shareholders cannot neglect the diluting stakes due to a paid-in capital increase allocated to a third party. In this regard, an aviation industry expert who responded to the interview on the premise of anonymity said, “If Asiana Airlines was not a Honam company, it wouldn’t have been so long.” It is a view that politically considering the Honam sentiment, he tried to force a company that is difficult to revitalize, and the tax was spent on the tax basis and came to this point. Prof. Lee also said, “The Korea Development Bank did a deal with Hyundai Industrial Development without having to properly deal with Honam companies because of the politics. The face of the restructuring failure was the hidden purpose of this deal (Hanjin Kal and Asiana Airlines).”

Apart from this view, the affirmation that Korean Air and Asiana can create synergy when they come together under one umbrella is also gaining strength. The biggest expectation is that’Korea will be able to have a world-class airline’ through this big deal. The world’s 7th largest carrier in terms of transport volume will be born. As of 2019, Korean Air (22.9%), Asiana Airlines (19.3%) and its affiliated LCC Jin Air, Air Seoul, and Air Busan’s share of domestic carriers totaled 62.5%. The share of international passengers was 19.3% for Korean Air and 14.1% for Asiana Airlines. Korean Air accounted for 30.2% of international cargo transportation and 17.5% of Asiana Airlines. Aaron Schult, general manager of Asia-Pacific aviation, logistics, and transportation at Bain & Company, a consulting firm, said in an interview with JoongAng Ilbo on November 29, “The main trend in the global aviation industry for the past 20 years has been integration.” “Air France and KLM In the case of the merger of (Netherlands), it was possible to reduce flights on low-demand routes and enter new cities in cities where calls were difficult. “As the size of airlines grows, they can exert greater power in negotiations with aircraft and engine manufacturers. In the past 15 years, all airline consolidation has been successful.”

Within Korean Air, the favorable atmosphere for the merger is strong. A frontline employee who met during the interview testified that “If you look closely, the international routes between Korean Air and Asiana do not overlap more than you think.” He said, “For example, Korean Air is the only one flying to Ulaanbaatar, Mongolia. That’s why the price is relatively expensive,” he said. “So, if it becomes a monopoly, the price increase is inevitable. Instead, Korean Air should appeal in the direction of strengthening premium services.” Both companies have a total of 115 international passenger routes. Of these, 53 Korean Air routes and 14 Asiana routes. The 48 routes are redundant. However, many of these overlapping routes are short-distance routes and can be adjusted.

In addition, he said, “Korean Air has a high percentage of airplanes. On the other hand, Asiana planes are mostly leases. Because of this, Asiana’s insolvency has deepened. But if you think about it in reverse, the lease is due. After the merger, the lease deadline ends, and the burden is less and less as long as we hold on to it somehow,” he predicted. As of April 2019, 51 out of 84 Asiana Airlines and 21 Air Busan and Air Seoul were leased. On the other hand, Korean Air has only 16% of its 165 units.

There is also optimism within Korean Air about the restructuring, which is considered the biggest variable in the airline big deal. Leaders such as Cho Won-tae and Woo Ki-hong, president of Korean Air, have repeatedly emphasized that “there is no artificial restructuring.” However, few in the market believe this declaration. One accountant in charge of M&A due diligence dismisses, “M&A without restructuring is a word that the world has never heard of.” In fact, the position of the two companies’ unions on the aviation big deal is sharp. In particular, Asiana employees, who are facing the merger, have considerable anxiety. Asiana Airlines’ pilot union, open pilot union (Asiana), and Asiana union expressed their opposition, saying, “The opinions of workers from both companies were excluded.” In Korean Air, the Korean Air union, the largest union (11,679 subscribers), expressed its consent to the merger on the premise of “employment stability promise”, but the Korean Air Pilots’ Union and Korean Air’s Employee Solidarity Branch expressed opposition.

In response, significant predictions are being made within Korean Air. “I think the management will keep the promise of not restructuring Asiana Airlines. Due to the nature of the aviation industry, more manpower is needed than expected. You can imagine a structure in which Korean Air is in charge of long-distance high-end services and Asiana is in charge of LCCs such as Jin Air, Air Seoul, and Air Busan.” In this case, redundant manpower will occur in the LCC or partner companies. The restructuring that takes place here could replace Asiana’s manpower cuts. Amid this trend, the number of new hires in the aviation industry is likely to decrease in the future.

Some are warned that Asiana’s debt ratio may not be met and even Korean Air may become insolvent. However, after the announcement of the merger, Korean Air, Asiana and affiliated LCC-related stocks have been strong in the stock market. In the short term, even if there is pain, there is an expectation that it will eventually make a soft landing, and that the government will not let the aviation industry collapse.

Chairman Cho Won-tae came to the forefront of the group’s management since April 2019, when his father, former chairman Cho Yang-ho passed away. Korean Air recorded an operating profit of 290.9 billion won in 2019 despite bad news such as the reduction of routes to Japan due to deteriorating relations between Korea and Japan in China, and the democratization of Hong Kong. However, it was a decrease of 56.4% from the previous year. 2020 was the worst ordeal of Corona 19. In the second quarter, when the goal was the deepest, Korean Air posted an operating profit of 148.5 billion won. Compared with Delta Airlines (-5,710 trillion won), Lufthansa (-238 trillion won), and Singapore Airlines (-700 billion won), it was a huge savings. The transformation of the idea that more than 140 passenger planes were converted and put into cargo transportation was crucial. Chairman Cho came up with an idea and showed his determination. On January 30, 2020, Chairman Cho was accompanied by a flight to Wuhan, China to save Korean citizens from the coronavirus. The unexpected power of execution he showed changed public opinion to be friendly.

Chairman Cho joined hands with Korea Development Bank and hit Bae-Jin on his own. Already, his mother, adviser Lee Myung-hee and his younger sister Cho Hyun-min, are taking steps to withdraw from the management of aviation affiliates. An aviation industry official said, “If it goes well, Korean Air will be able to make a leap forward as a global super-large airline that neither founder Jo Joong-hoon and father Cho Yang-ho have achieved. On the other hand, if not, management will be lost to the government and remain only as shareholders.”

Chairman Cho said in an interview with the Monthly JoongAng in March 2020, “In the aviation industry, timing is more important than any other business. If the growth engine is lost at the point of growth, it is difficult to recover. “The ultimate goal is to create a structure that can generate profits even in difficult external environments.” Chairman Cho, the chairman of the global aviation alliance’Sky Team’, sought the timing and momentum of growth in the merger between Korean Air and Asiana Airlines. And it must solve the difficult task of generating profits without artificial restructuring. The time has come to prove this to Chairman Cho, who emphasizes that “there are both problems and answers in the field.”

Reporter Kim Young-joon, Monthly Central Reporter [email protected]