Korean Air acquires Asiana, more consolidation expected

The global air market consolidation is underway as Korean Air announced its intentions to acquire Asiana Airlines this week. [caption id="attachment_69752" align="alignright" width="298"] Cathy Roberson, Cargo Facts Consulting senior consultant and Air Cargo World columnist[/caption] Combined, Korean Air will become the 10th-largest airline by fleet size. In terms of kilometers flown by paying passengers and based on 2019 data from the International Air Transport Association (IATA), the combined entity will create the world’s 15th-largest airline, a jump from No. 28 for Korean Air and No. 42 for Asiana. The main goal of the acquisition is to stabilize South Korea’s aviation industry amid the coronavirus pandemic and improve its competitiveness, according to Hanjin Group, Korean Air’s parent company. “In general, countries with a population less than 100 million have a single full-service carrier,” Hanjin said in a statement to Bloomberg. “However, Korea has two full-service carriers, which gives it a competitive disadvantage compared to countries like Germany, France and Singapore with a single major airline.” Based on IATA data Korean Air was ranked No. 6 globally for cargo operations in 2019 despite volumes declining 5.5% from 2018. Asiana was ranked No. 25, down from No. 19 in 2018. Asiana’s cargo volume declined 1.0% from 2018, so it is unlikely the combined entity will rise in cargo volume rankings for 2020. This year many airlines have seen passenger counts significantly decline due to COVID-19 lockdowns and restrictions although cargo volumes have increased. Korean Air and Asiana are no exceptions. In their latest earnings reports, both noted good year-over-year cargo volumes, particularly for semiconductors, auto parts, e-commerce and medical equipment and supplies. In addition, both are collaborating with supply chain partners and customers in preparation for the distribution of COVID-19 vaccines. Korean Air reported October international cargo up 17.6% year over year while Asiana reported October international cargo up 3.6% year over year. Both airlines' cargo gains were focused on U.S. routes. Air market struggles The Korean Air-Asiana merger will likely be just the beginning of what is expected to be a global airline consolidation. “Airline consolidation is inevitable,” said Peter Harbison, chairman emeritus of the Centre for Aviation (CAPA). Harbison expects a number of market exits as debts increase and revenues fail to rebound. The U.S. airline market already underwent a major consolidation in the early 2000s and may see another one because of COVID-19, but for now, the focus is on Europe and Asia. “Probably Europe is lagging behind the U.S. about 10 years, in terms of consolidation. Look at how the U.S. looks today and you’ll probably know how Europe will look 10 years from now,” Pieter Elbers, CEO at KLM Royal Dutch Airlines, said recently. “There’s probably going to be a few large, low-cost carriers and a few big systems — like we see actually today already emerging with the Air France KLM group, the Lufthansa group, the IAG group. And there’s going to be some new contenders or regional contenders in that system." Several Asian airlines, such as Cathay Pacific and the AirAsia group, are currently struggling, and Singapore Airlines lost $1.7 billion dollars in Q3 2020 — its worst-ever quarterly financial performance. Will we see consolidation in the Asian air market? Current operations send conflicting signals on that point, such as China's domestic flight numbers topping pre-COVID-19 levels in September. However, changes have been needed in the airline market since long before the pandemic. According to IATA’s latest survey of airline CFOs and heads of cargo, conducted in October, 83% of surveyed carriers reported a deterioration in their profitability, up from 78% in July. Only 14% of respondents noted slight profit improvements from repatriation flights and e-commerce demand combined with tight cargo capacity; this October number was lower than the 19% of July respondents who reported slight profit improvements. More than half of the surveyed carriers said they are considering long-term strategy changes, including reducing flight frequencies but keeping current networks, and some carriers are considering switching to smaller aircraft. Moreover, less than half of the respondents expected to extend their cargo networks, and 21% expect to significantly change their business models.

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