Asiana backs sale of cargo unit, removing one hurdle to Korean Air merger

By Heekyong Yang and Hyunsu Yim

SEOUL (Reuters) – South Korea’s Asiana Airlines said on Thursday its board had approved the sale of the company’s cargo business – an important step towards allaying EU competition concerns about a proposed takeover by Korean Air Lines.

Korean Air, the country’s biggest carrier, said in a statement following the decision that it had submitted a package of remedies to the European Commission – remedies that also include it divesting routes to some European Union cities.

Analysts said, however, that Asiana’s greenlighting of the cargo unit sale did not necessarily ensure smooth sailing ahead for the deal.

They noted the desired valuation for the air cargo unit of some 700 billion won ($520 million) including debt, as reported by local media, was probably too high. That could become a new stumbling block for the sale and hence regulatory approval.

“The price seems to be way too expensive, and there aren’t that many players at home with the means to spend that much money on Asiana’s debt-ridden cargo unit … there are lingering uncertainties,” said Bae Se-ho, an analyst at Hi Investment & Securities.

And even if the deal gets the nod from the European Union, it still needs approval from the United States and Japan, analysts also noted.

Korean Air said in a statement that while it was continuing with “its efforts to secure the approval from the European Commission, the airline will also communicate closely with the remaining regulatory bodies to finalize the approval process as quickly as possible.”

Approving the sale was a contentious issue at Asiana amid concerns that a takeover by Korean Air would lead to the loss of many Asiana jobs. Just this week, one board member resigned ahead of the vote, although the reasons for the departure were not disclosed.

In the end, three board directors voted in favour, while one opposed the plan and one abstained, a source familiar with the matter said, declining to be identified.

Korean Air also said it will buy 300 billion won of convertible bonds issued by Asiana, part of fresh financial support to the smaller airline.

Any takeover of Asiana by Korean Air would come amid a wave of consolidation in the industry, with Lufthansa acquiring a 41% stake in Italy’s ITA Airways and British Airways and Iberia owner IAG buying the remaining 80% of Spanish carrier Air Europa it does not already own.

Asiana creditors, including state-run lender Korea Development Bank, have been looking for a new owner for the debt-laden carrier for several years. Korean Air agreed to acquire Asiana in 2020.

As of end-June, Asiana had debt of more than 13 trillion won.

The company accounts for about a fifth of South Korea’s market for overseas air cargo. With 11 cargo planes, its service encompasses 21 routes to 25 cities in 12 countries, including the United States, Germany and Russia.

Shares in Asiana closed down 8.7%, a decline analysts attributed to a lack of potential positive news for the airline now that the sale has been approved.

($1 = 1,342.9900 won)