The region was ripe for airline consolidation even before COVID-19 but this crisis is not about to open the floodgates, says Brendan Sobie
SINGAPORE: Lengthy overdue consolidation is lastly coming to Asia’s battered airline sector with COVID-19 precipitating the merger of South Korea’s two important airways.
On Monday (Nov 16), Korean Air (KAL) and holding firm Hanjin KAL announced the acquisition of Asiana Airlines as a part of a settlement with Korea Growth Financial institution (KDB).
The merger will allow KAL to turn into one in every of Asia’s 5 largest airline teams.
The KAL and Asiana teams mixed carried 66 million passengers in 2020 and generated over US$10 billion in passenger revenues. When together with cargo and different companies revenues totaled over US$16 billion.
In the Asia Pacific, solely Japan’s ANA Holdings, Air China, China Jap, and China Southern generated extra revenues in 2019 – between US$17 billion and US$22 billion.
Compared, Singapore Airlines (SIA) Group generated virtually US$10 billion in revenues in 2019 and carried 38 million passengers whereas Cathay Pacific Group generated virtually US$14 billion and carried 39 million passengers.
ADDRESSING OVERCAPACITY IN KOREA
The Asiana-Korean Air merger is smart because the airline trade in South Korea – in addition to in Asia total – was ripe for consolidation.
Even earlier than COVID-19, the South Korean airline trade suffered from overcapacity and irrational competitors
South Korea does not likely have a necessity for 2 full-service community airways given the dimensions of its market – 123 million annual passengers in 2019 – the fast rise of low-cost carriers during the last decade and the intensifying competitors from international airways.
Asiana and KAL have important overlap, each working massive long-haul networks from hubs at Seoul Incheon Airport with planes as massive as A380s in addition to massive regional networks throughout the Asia-Pacific.
Overcapacity has to turn into a standard subject all through Asia lately, impacting airline profitability as community airways competed viciously for intercontinental visitors and confronted intensifying competitors on regional routes from price range airways.
South Korea now takes the lead in driving a possible new wave of consolidation in Asia’s airline sector.
AIRLINE GROUPS CONSOLIDATING
As KAL acknowledged in saying the acquisition of Asiana: “Given the disaster the airline trade is at the moment going through, it’s unavoidable to restructure your complete market, together with Korean Air, Asiana Airlines, the low-value carriers (LCCs) equivalent to Jin Air and related industries.”
KAL absolutely owns Jin Air whereas Asiana has two LCCs, absolutely owned Air Seoul and partially owned Air Busan. All three will likely be a part of the merger and are anticipated to turn into a single LCC.
Asiana will likely be saved as a separate full-service airline in the meanwhile however the merger plan contains the Asiana model ultimately disappearing.
The KAL Group will due to this fact consolidate beneath one main full-service community airline and one massive LCC subsidiary.
A number of different Asia Pacific airline teams have equally consolidated manufacturers lately, together with SIA – which dropped Tigerair n 2017 and is dropping SilkAir in 2021, leaving solely Singapore Airlines and Scoot.
Different current examples of airline model consolidation in Asia embody ANA merging LCCs Peach and Vanilla in 2019, ensuing within the Vanilla model disappearing, and Cathay Pacific dropping Dragonair final month.
THE COVID-19 EFFECT
Nonetheless, consolidation involving two airline rivals has been extraordinarily uncommon in Asia during the last couple of a long time whereas comparatively widespread in Europe, North America, and Latin America.
For instance, 5 main US mergers had been accomplished between 2008 and 2016: Delta Air Strains-Northwest Airlines, AirTran Airways-Southwest Airlines, Continental Airlines-United Airlines, America Airlines-US Airways, and Alaska Airlines-Virgin America.
Whereas commercially smart even earlier than COVID-19, KAL taking on Asiana would by no means have been politically possible if it weren’t for the pandemic.
The present disaster, which pushed an already weaker Asiana to the brink of collapse, created a lovely alternative for KAL that might be silly to not pursue.
Now the query turns into if different markets in Asia will comply with comparable consolidation strikes.
ASIAN MARKETS ARE RIPE FOR CONSOLIDATION
There isn’t a scarcity of markets ripe for airline consolidation in Asia.
Taiwan additionally has two full-service community airways – in addition to a bold full-service start-up that launched originally of this 12 months – regardless of being a lot smaller market than Korea, consisting 69 million annual passengers in 2019.
Malaysia, a market of 82 million annual passengers in 2019, has two full-service airways and is the principal base for Asia’s largest LCC – AirAsia.
Philippines, Thailand, and Vietnam are different medium-sized markets that might profit from consolidation.
Smaller markets equivalent to Cambodia and Myanmar have a number of native airways, additionally making them apparent candidates for consolidation, however on a special scale given they don’t have any massive carriers.
Nonetheless, mergers or acquisitions just like the Asiana-KAL deal can’t be assumed.
CROSS-BORDER CONSOLIDATION NEEDED
In different Asian markets, together with Malaysia, the place mergers had been mooted in 2019, the main target in the course of the pandemic has been on every airline getting its personal home so as slightly than mergers or acquisitions.
Consolidation could possibly be achieved via airline collapses slightly than mergers or acquisitions however this can be restricted to a couple of smaller opponents as governments and trade companions have an excessive amount of at stake to let bigger airways fail.
What Asia actually wants is cross-border mergers and acquisitions – which is how the European market has efficiently consolidated during the last number of years with one other wave may be forthcoming.
Germany’s Lufthansa Group now contains airways in 4 international locations – Austria, Belgium, Germany, and Switzerland – whereas British Airways mum or dad IAG contains airways in three international locations –Eire and Spain and the UK.
SIA AND CATHAY COULD BENEFIT
Cross-border mergers would give Asian airways – significantly these outdoors the principal markets of China, India, Indonesia, and Japan – efficiencies to higher compete within the post-COVID atmosphere.
They might be the one automobile enabling Cathay Pacific and SIA to match the brand new KAL in measurement.
Cathay, SIA, and different main Asian airways ought to profit from the Asiana-KAL merger because it opens up alternatives for enlargement in South Korea.
SIA might doubtlessly resume Korea-US companies, which it ceased in late 2018, significantly as it would lose Asiana as a companion.
Nonetheless, SIA won’t be able to overhaul KAL and transfer into Asia’s prime 5 without a cross-border merger or acquisition.
ARCHAIC OWNERSHIP RESTRICTIONS
Not less than for now, airline possession restrictions make cross-border mergers unimaginable to pursue anyplace within the Asia-Pacific.
Whereas COVID-19 could possibly be seen as a possible set off to lastly take away archaic airline possession laws, that is unlikely to occur. If something, the trade has to turn into extra nationalistic throughout this disaster resulting from authorities’ bailouts.
As an illustration, the Asiana-KAL merger wouldn’t be potential without state-owned Korea Growth Financial institution (KDB), which saved Asiana alive after the deliberate sale of a majority stake to Hyundai Growth that was initially agreed in late 2019 fell via resulting from COVID-19 and is now backing KAL’s transfer to amass the identical stake.
Even with assistance from KDB and South Korea’s transport ministry, the deal is controversial as some take into account it anti-competitive and could also be derailed by antitrust authorities.
Hopefully, authorities will recognize that enough competitors could be maintained and that is the form of deal Asia’s airline trade wants extra of to show the nook following the pandemic.
THERE IS SUFFICIENT COMPETITION
At the beginning of 2020, South Korea had a staggering 9 native airways for a market of 123 million annual passengers – together with 90 million worldwide and 33 million home passengers – and inhabitants of around 52 million.
Two extra airways are planning to launch companies throughout the subsequent few months, having already secured preliminary approvals previous to COVID-19.
The Asiana-Korean merger will ultimately get rid of three airways, leading to an extra affordable eight – or doubtlessly fewer if both of the 2 new airways fail to launch or if a present airline that suspended companies in March doesn’t reach efforts to save new capital and resume operations.
Nonetheless, even when there are solely 4 or 5 impartial airways this could present ample competitors to justify the Asiana-KAL merger.
Furthermore, there could possibly be yet one more wave of recent start-ups because the market recovers in 2022 and 2023 on the condition that there has all the time been a robust curiosity in Korea for beginning and investing in new airways.
Due to this fact, any monopolistic considerations for South Korea in addition to different Asian markets that might doubtlessly expertise consolidation are unfounded given the large variety of opponents remaining after the pandemic.
Asia has manner too many airways and without important consolidation, the area’s aviation trade might by no means have the ability to recuperate from COVID-19.
Brendan Sobie is the founding father of Singapore-based impartial aviation consulting and evaluation agency Sobie Aviation. He was beforehand chief analyst for CAPA – Centre for Aviation.
