November 25, 2024

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Korean Air and Asiana Airlines aircraft are parked at Incheon Airport. (Newsis)

Flag carrier Korean Air, having recently secured conditional approval from the European Union's antitrust regulator for its merger with Asiana Airlines, is mandated to initiate the sale of Asiana Airlines' cargo division as part of the conditions for approval.

According to sources in the investment banking and aviation sectors, Switzerland-based financial services firm UBS, tasked with selling Asiana Airlines' cargo division, has recently disseminated prospectuses and nondisclosure agreements to potential acquisition candidates.

UBS intends to circulate the bid proposal shortly after securing nondisclosure agreements with companies potentially seeking the acquisition. Interested firms must submit bid proposals by the end of this month, outlining details such as financing and business plans.

The candidates are expected to strategize on the acquisition, considering options like leveraging the financial strengths of their largest shareholders or forming separate consortia with strategic investors.

So far, four Korean low-cost carriers -- Jeju Air, Eastar Jet, Air Premia and Air Incheon -- have been cited as possible candidates to acquire the cargo business.

Jeju Air is part of Aekyung Group, while the other LCCs each have other major shareholders: VIG Partners for Eastar Jet, JC Partners for Air Premia and Socius for Air Incheon.

"The cargo business offers LCCs a strong strategic avenue for business expansion since it does not need in-flight passenger services that LCCs comparatively lack," Kim Sang-hyun, a professor at Korea Aerospace University, told The Korea Herald. "They also have fewer constraints regarding slot allocation, since unlike passenger routes, freight routes operate during off-peak hours."

However, Kim stressed that the venture involves a considerable amount of initial investment costs, as establishing a local freight sales network and grounding facility for cargo handling is essential. "Ultimately, freight customers and passengers occupy two distinct markets. Making the final selection of a qualified candidate should be a meticulous process as not all may be equipped to fulfill the necessary obligations."

Korean Air is expected to complete preparations for the sellout of Asiana Airlines' cargo division, including bidding and selecting buyers, by October at the latest. Subsequently, Korean Air will also need to receive final approval based on judgments on the eligibility of buyers from the EU.

Asiana Airlines' cargo division currently operates a total of 11 cargo planes, including eight of its own cargo planes and three leased cargo planes.

The cargo division's sales recorded 1.67 trillion won ($1.2 billion) last year, accounting for 24.6 percent of Asiana's total sales. The division handles a considerable volume of cargo transportation, amounting to 750,000 tons per year, making it the second-largest in Korea.

Although the exact price is expected to be determined during the bidding process, industry estimates value the acquisition of Asiana Airlines' cargo business between 500 billion won and 700 billion won.

Meanwhile, in light of the impending merger with Korean Air, Asiana Airlines' management organized a town hall meeting on Friday to tackle employee apprehensions.

Led by Asiana Airlines' CEO Won Yoo-seok, the 3 1/2-hour session witnessed staff reportedly raising concerns regarding post-merger employment succession and wage adjustments.

As for inquiries concerning employment changes following the sale of the cargo division specifically, management assured that they would strive to safeguard jobs and mitigate disadvantages through negotiation efforts, according to reports.

"Despite concerns surrounding employment implications of the merger, both Korean Air and Asiana Airlines are reportedly on the same track to retain current employees at Asiana within each division to maintain their current positions, including the cargo division," an industry insider said on condition of anonymity.

By Kim Hae-yeon (hykim@heraldcorp.com)