Asiana In Turmoil: Route Cuts Coming

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Asiana, Korea based Star Alliance member airline, has been in turmoil since late last month after its auditor refused to certify the company’s books and stock trading was halted for couple of days as a result.

The group CEO stepped down and the airline made an announcement today that they would suspend unprofitable routes and cancel airplane leases. Asiana currently operates 87 passenger routes using 83 planes.

Here’s an excerpt from Business Korea (access their piece here):

Creditors of cash-strapped Kumho Asiana Group are reportedly planning to demand that the group sell off prime assets and present a viable debt repayment plan.

In fact, the total amount of Asiana’s borrowings stood at 3.44 trillion won (US$3.03 billion) as of the end of last year. Out of these, the amount of short-term loans it needs to pay within a year is 1.32 trillion won (US$1.16 billion). Financing lease and asset-backed securitization account for most of its debts with 41 percent and 36 percent, respectively. The borrowings from financial institutions take up about 14 percent.

Here’s an excerpt from Korea Herald (access their piece here):

In a letter sent to employees, Asiana Airlines CEO Han Chang-soo said the company will “suspend non-profitable routes and reduce the number of planes to swiftly respond to changing market demands.”

The CEO’s message comes after the state-run Korea Development Bank, the main creditor of Asiana, asked the airline to come up with a stricter self-help plan to “resolve market concerns and regain the confidence of investors” last week.

Park asked the KDB to do all it could to help Kumho Asiana stay afloat.

Conclusion

Asiana is part of Kumho Asiana chaebol (conglomerate) that operates a number of unrelated businesses. This corporate structure is not (unfortunately) unusual in South Korea.

The airline had problem supplying its in-flight meals briefly last year (read more here) after the parent company had requested LSG Sky Chefs (in-flight caterer) to purchase $140 million worth of its bonds. LSG Sky Chefs rightfully refused and Asiana terminated its contract without having a replacement supplier in place.

Asiana’s books must have been in terrible condition considering what these auditors usually sign off on. In this case they refused and that lead to this inevitable crisis. The airline has $3B in financial borrowings of which $1B is due within a year. The airline lost close to $100M last year after its financial statements were updated.

It is interesting to see what routes the airline plans to “suspend” (read cut) and what planes it mat try to offload.

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