In November 2020, Korean Air struck an agreement to purchase 63.81 percent of its long-time competitor Asiana Airlines for 1.8 trillion Korean Won (KRW). After mulling over this mega-merger between two of Korea’s full-time service carriers, the Foreign Trade Commission (FTC) finally grants approval in February. According to The Korea Herald, the merger would allow the two air carriers to operate around 48 percent of international flights departing South Korea and 62 percent of the domestic flights. This has led to concerns over monopolization, which could hinder competition on a significant number of routes.

According to the United States (U.S.) Small Business Administration (SBA), mergers and acquisitions (M&A) are similar but have a few major differences. Mergers combine two separate businesses into a single, new legal entity. True mergers are uncommon because it is rare for two equal companies to mutually benefit from combining sources and staff, including their Chief Executive Officers (CEOs). On the other hand, acquisitions do not result in the formation of a new company. Instead, the purchased company is fully absorbed by the acquiring company. Sometimes, the acquired company gets liquidated, meaning the assets or properties of the acquired company are converted into cash by selling them on the open market. In the agreement between Korean Air and Asiana Airlines, the assets of Asiana Airlines are planned to be sold. With this, they plan to become a combined entity in 2024, thus making it a merger. As rival airlines, their merger would make them the world’s seventh-largest airline.

Fastening the Seatbelt

On January 14, 2021, Korean Air announced its planned merger to 14 governments, with the expectation that approval would be granted by nine of the 14 countries. Approval for the merger was unconditionally granted by Singapore on February 5, along with Taiwan, the Philippines, Turkey, Malaysia, and Vietnam. However, foreign countries preparing to review the decision over the merger are Japan, Australia, the U.S., the United Kingdom (UK), China and the European Union (EU).

Korean Air will closely work with these countries as it plans to complete the merger. However, there is a likelihood of a decrease in competition on specific routes; some of the slots for airports may even have to be given up when Korean Air eventually obtains its rival. Even worse, the EU may potentially block the merger or impose more severe conditions for its approval. This is because the EU’s regulatory body has become stricter regarding mergers between companies because of the possibility of monopoly. It is also due in part to the merger of South Korea’s two shipbuilders Hyundai Heavy Industries and Daewoo Shipbuilding & Marine Engineering, over which the EU expressed monopoly concerns.

The Bumpy Road to the M&A

Korean Air’s merger of Asiana Airlines dragged on for two major reasons. The first was the debt owned by Asiana Airlines to Korea Development Bank (KDB), which is due soon. This poses a problem because it could weaken the financial strength of Korean Air and reduce its 5-star airline rating. According to Professor Hwang Yong-Sik (Business Administration, Sejong University), the most fundamental principle to consider during M&A is to take a more conservative approach to due diligence. For the acquiring company, it is not easy to obtain complete information about the acquired company. In other words, a conservative approach to acquisition prices is required to solve this information asymmetry problem.

Investment expert Warren Buffett also explained in Safal Niveshak, an online news article, that to avoid the winner's curse, or the situation in which the acquiring company's performance deteriorates after an acquisition, it is crucial to set the highest valuation, subtract 20 percent from it, and not add a cent after that. In addition, conservative bid settings should include costs that may be incurred during the post-acquisition consolidation process. By taking the acquisition price into account, the probability of falling into the winner's curse after the acquisition can be reduced.

Unpredictable Aftermath

This merger may have been given the go-ahead by the FTC, but there are conditions that have to be met. The airline has to give up airspace for 26 international and 14 domestic routes in which the market share of Korean Air and Asiana Airlines combined is more than 50 percent. These include Los Angeles, Sydney, New York, Phuket, and Beijing. Additional conditions have been laid out by the FTC to ensure that customers are not affected by the merger. For instance, both airlines are prohibited from increasing their fares at a rate that is greater than the rate of increase in consumer prices until their market share for all flights is 50 percent or lower. They are also not permitted to reduce the benefits for frequent flyers compared to what was offered in 2019.

This merger potentially impacts consumers and the airline industry because there is a possibility of a monopoly after Korean Air and Asian Airlines combine. The consumers may face increased ticket prices after the FTC’s conditions have been met with greater benefits for them, such as a greater range of destinations and flight schedules. For smaller airlines, the merger could mean job losses for some as the competition for flights and routes increases. In some instances, mergers destroy small businesses, as was the case with the Disney and Pixar/Marvel mergers, which stunted the growth and potential of independent film companies.

Moreover, Professor Hwang added that downsizing is inevitable due to the overlapping manpower that will occur after the merger between the two companies. Currently, Korean Air has 18,000 employees, whereas Asiana Airlines has 8,700. Given the conditional approval by the FTC, it is expected that more than 1,000 workers may be deemed as idle manpower. Although Cho Won-tae, Chairman of Korean Air, promised to not carry out artificial restructuring, maintaining such employment could put a greater burden on the business in the long run according to World Today News. Without downsizing, existing employees’ contracts may not be extended, and recruitment may be stalled.

When misunderstood, mergers can be viewed as damaging; however, for a struggling company that still has something to offer, it can be an opportunity. M&A is beneficial for an underperforming company - in this case, Asiana Airlines - because it can access funds or valuable assets that can help it become profitable again. In the meantime, the FTC and the countries that gave their approval for this merger will have to continue monitoring the situation.