Korean Air Management Says It “Cannot Guarantee the Company’s Survival” In Employee Memo

In a memo published yesterday Korean Air senior management informed employees about the current situation of the airline and tried to display encouragement though this might have backfired a bit.

At a rather concerning note however, Korean Air’s President says that despite his optimism management can’t guarantee the company’s survival if this hardship continues for a long time.

While it’s obviously the case that South Korea and therefore the local airlines are hit extremely hard by the Coronavirus it should be emphasized that both national full service carriers Korean Air and Asiana have been in trouble over the last couple of years, especially 2019.

BBC News reported about the memo given by Korean Air last night (access here).

Korean Air has warned the coronavirus outbreak could threaten its survival in a memo sent to employees.

South Korea has been hit hard from travel restrictions aimed at curbing the spread of the virus.

Its national carrier has cut more than 80% of its international capacity while encouraging employees to take voluntary leave.

In the memo, Woo Kee-hong, Korean Air’s president said the airline couldn’t predict how long the crisis would last.

“But if the situation continues for a longer period, we may reach the threshold where we cannot guarantee the company’s survival,” he said in the memo, which was seen by Reuters.

A spokesman for Korean Air told the BBC the purpose of the internal memo was “to encourage employees and ask for understanding to overcome the crisis together”.

“We have gone through numerous difficulties for the past 51 years, and I’m confident that we will overcome this crisis together,” he said. …

South Korea’s economy has been flat for quite some time now and the two large carriers Korean Air and Asiana have been feeling it quite drastically.

According to a Nikkei Asian Review article from late last year, in 2019 Asiana already received a significant bailout from a consortium of Korean companies to guarantee it’s (temporary) survival.

Construction group HDC Hyundai Development has come to the rescue of troubled Asiana Airlines with a $2 billion offer, but a further realignment is deemed inevitable for the country’s beleaguered airline industry.

A consortium involving Hyundai Development and leading brokerage Mirae Asset Daewoo has been selected as the preferred bidder for the airline, parent company Kumho Industrial said on Nov. 12.

Hyundai Development will buy Kumho’s 31% stake as well as newly issued shares of Asiana under the plan, taking majority control of the debt-laden airline. …

Apart from the general economic outlook South Korea’s two main airline conglomerates have been facing public outrage, employee protests, plunging share prices and accusations of mismanagement and rather disruptive and harassing behavior by their owners’ families. South Korea’s ownership structure of many companies through these “Chaebol” families has been under scrutiny for a long time as many of the children of the company founders were embroiled in scandals of various proportions. We all remember the infamous “nut rage” incident involving the daughter of Korean Air’s founder.

The question has been brought to the table many times but is South Korea too small for two full service airlines (plus an array of budget carriers)? The country has a population of 51 Million people and the main airports are Seoul-Incheon, Seoul-Gimpo and Busan in the south.

In comparison, Japan has a population of 124 million with their two main carriers Japan Airlines and ANA All Nippon Airways. Taiwan with just 24 Million people also has two carriers, China Airlines and EVA Air which maintain a significantly smaller fleet though.

Korean Air has currently grounded 100 of their 146 planes including their 10 A380s, reducing their capacity which leads to a huge amount of idle staff.

Airline CEOs such Michael O’Leary of Ryanair and Alan Joyce of Qantas predict that some airlines will go out of business in the coming weeks. While that could ring true in the western world, Asian governments are unlikely to stand by idle while major airlines to go out of business.

Carriers such as Thai Airways and Malaysia Airlines are money burning machines for years yet the government continues to prop them up as going bust would have a severe impact on the infrastructure of the country and come with loss of reputation.

Conclusion

South Korea has enormous economic prowess, they definitely need capacity for both passengers and cargo and there is plenty of money around. This period will pass sooner or later and time will tell what the future holds for Korean Air.

Should they need capital to survive the choices are either to use the family fortune to stay afloat or to strike a corporate deal just like Asiana managed to do it. The third option of a government bailout is theoretically there but the question is how much political appetite there is amidst the public resentment against the corporate governance of the Cho family.

The company is also currently fending off a shareholder inquiry seeking to oust CEO Walter Cho (son of the recently deceased founder). Not much is expected to come of this though.