Special price tickets disappear? Necessity of a 'price monitoring system' after the merger of Korean Air

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: December 2, 2024 (Monday)
■ Talk: Professor Yoon Moon-gil of the Department of Business Administration at Korea Aerospace University

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.

◆ Reporter Cho Tae-hyun (hereinafter referred to as Cho Tae-hyun): We briefly told you last Friday that the merger process between Korean Air and Asiana Airlines has been virtually completed. It's the two largest airlines in Korea. It's not just about what makes them better and better. I have a lot of questions about what I'm concerned about. In particular, if you generally use airlines, I think you will be interested in what happens to airline mileage. I'll connect with an expert in this part to find out more. I'll connect you to Yoon Moon-gil, a professor of business administration at Korea Aviation University. Is the professor out?

◇ Professor of Business Administration, Korea Aerospace University (hereinafter referred to as Yun Moon-gil): Yes, hello.

◆ Cho Tae-hyun: I told you that the merger process has actually been completed, so you mean that this process is not complete, right?

◇ Yoon Moon-gil: Yes, that's right. The final approval is still available in the United States, and then the domestic Fair Trade Commission approves it before the merger is finally completed.

◆ Cho Tae-hyun: But since the EU has been approved now, I think it's almost finished. But why do so many countries need to get approval when domestic companies are joining together?

◇ Yun Moon-gil: It's because of the characteristics of the aviation industry. The aviation industry should not only operate domestic flights, but also international flights. Then, the monopoly problem will be reviewed in the aviation market of the other country. As a result, there are nine countries, including Korea, that are mandatory reporting countries. In the case of Korean Air, it was reported to five countries where the other market is more important as a voluntary country.

◆ Cho Tae-hyun: So you can see that now the approval process is almost in the final stage. Let's look at the history first. These are the two airlines that were rivals in Korean Air and Asiana Korea, and why did you go through the merger process like this?

◇ Yoon Moon-gil: I think the biggest problem was probably Asiana Airlines' financial position. At that time, the high debt ratio and especially the Korea Development Bank's borrowing problem seemed to be the key. Asiana Airlines also generated some operating profit, but its financial structure was a little weak due to excessive financial costs, so creditors tried to sell Asiana Airlines. There was a time when HDC signed a contract and gave up in the middle, and it was canceled. Then, Korean Air took over in a surprise move.

◆ Cho Tae-hyun: The deterioration of Kumho Asiana Group's financial position is leading to this result, and these two national airlines are the largest airlines in Korea. How big are these two airlines combined?

◇ Yun Moon-gil: If you look at the simple sum, it's over 21 trillion in terms of sales. It becomes a super-large airline with assets of more than 40 trillion won.

◆ Cho Tae-hyun: So what level is this in terms of the world?

◇ Yoon Moon-gil: I think it's almost in the top 10.

◆ Cho Tae-hyun: Okay. Aren't there cases where other foreign airlines have grown their size through mergers and acquisitions like this?

◇ Yun Moon-gil: Quite a lot. When we went to Europe after Delta Air Lines and Northwest Airlines, which we know a lot, Air France and KLM grew a lot through mergers and acquisitions. However, the difference between these airlines and the Korean market is that even after the mergers and acquisitions of these mega airlines, there were strong competitors in the market. But in our case, we are a little concerned about whether there can be such a competitive airline that can match such an integrated airline.

◆ Cho Tae-hyun: First of all, you've mentioned your concerns, but before we go into detail about your concerns, let's look at what we're looking forward to. As you said in Korea, the world's top 10 super-large airlines will be born. What are some good things that we can experience here?

◇ Yun Moon-gil: First of all, from the airline's point of view, we can reduce costs and secure various competitive advantages because of economies of scale. But now, this competitive advantage will help airlines improve their profitability, and I think it can help them explore new business opportunities through profitability improvement. I think this can have a positive effect. So the concerns are that the birth of such a super-large airline is constantly being raised as competition declines. So, I think the integrated airline will have to think a lot about these parts.

◆ Cho Tae-hyun: Again, you mentioned your concerns. I think this is the core of the concern that the problem of monopoly occurs. If a monopoly occurs, the market price will inevitably rise. These are one of the concerns, but what do you think about the possibility of a fare increase?

◇ Yoon Moon-gil: Isn't it natural for business operators to be tempted to raise fares when competition decreases?

◆ Cho Tae-hyun: Of course.

◇ Yoon Moon-gil: But from the standpoint of the integrated airline, especially Korean Air, we have promised several times that there will be no increase in fares or decrease in services, but now international fares are approved by the Ministry of Land, Infrastructure and Transport. But this authorized fare is authorized for the highest price you can sell, not for the individual prices you sell on the actual market.

◆ Cho Tae-hyun: So you have to get permission for the most expensive price, and the market price is not controlled?

◇ Yun Mun-gil: It's not really in control. In the case of Korea, it is usually sold at 4 to 7 freight rates. But from the consumer's point of view, they are actually interested in how much the lowest price is more expensive than last year or more expensive than before, but there is no practical means to engage or control the fare.

◆ Cho Tae-hyun: So if it doesn't exceed the highest price, you can freely set the target value. Do I just look at it like this?

◇ Yoon Moon-gil: First of all, the airline operates in that form.

◆ Cho Tae-hyun: There are a lot of people looking for special flight tickets and things like that these days. But isn't it possible to affect things like special flight tickets?

◇ Yoon Moon-gil: I think that can happen, of course. Even if it's not necessarily a special ticket, the airline can sell it in 26 products at Iata. However, in Korea, it is usually sold at four to seven fares, and it seems that the government does not actually control or monitor these market prices. I think there is a need for a system that can monitor this socially or systematically fair prices to monitor price fluctuations.

◆ Cho Tae-hyun: Okay. Korean Air will not raise fares above inflation for now. I made a promise like this, but as the professor said, there seems to be a need for a system to monitor such things. I think this is the part of mileage that the general public will be interested in. In your view, what do you think is the most difficult point in this process to add up the mileage of the two companies?

◇ Yoon Moon-gil: I actually have mileage on both sides, but I think it's probably something that many people are interested in. This mileage is actually divided into two personalities. One has miles earned depending on boarding. There are miles earned using credit cards. Since these two have slightly different characteristics, it seems that the most difficult problem is how to integrate these two different mileage characteristics, and one of the other things that I overlook is that Asiana Airlines mileage belongs to Star Alliance.

◆ Cho Tae-hyun: Yes. The alliance is different. Both

◇ Yun Moon-gil: We have different alliances and Star Alliance is the largest aviation ally in the world, and I think we also have to talk about whether the opportunity to use the mileage to use the Star Alliance airline can be maintained or if it's gone and only the Sky team should use it.

◆ Cho Tae-hyun: I think the alliance issue will have no choice but to affect this, but I heard that there is a lot of unused mileage. In your view, are there any examples that we can refer to when overseas airlines merge?

◇ Yoon Moon-gil: I don't know. There were a lot of mergers and acquisitions by overseas airlines, but there's not much publicly available data about mileage integration, so in a way, it seems that it was carried out in a way that the operators decided to do this internally and the consumers recognized them.

◆ Cho Tae-hyun: In this merger, I think we should come up with a smart plan that consumers can acknowledge internally. But when the two companies merge, won't there be many overlapping areas? Then, there is no choice but to talk about restructuring. What do you think of this part?

◇ Yoon Moon-gil: Restructuring is one of the most important issues. In particular, Asiana Airlines, which is taking over, will have no choice but to worry about job insecurity or personnel disadvantages. So of course, we have no choice but to believe it because Korean Air has promised several times that it will never happen, but I think there must be such concerns from the perspective of Asiana Airlines executives and employees. So, in terms of taking over such things as objective devices and rational measures to dispel such concerns, I think it is necessary to present them first, communicate with members, and obtain consent.

◆ Cho Tae-hyun: You said that it's an objective device. What is there for example?

◇ Yoon Moon-gil: Now, for example, there are unions in Asiana, and the government also promised that there would be no artificial restructuring in the process of announcing the integration, so we need systems to guarantee those things. For example, I think it will take a lot of consideration for such things as ways to express a certain intention to the board of directors.

◆ Cho Tae-hyun: Okay. I hope you find a good way to avoid noise in this area. But the same goes for Korean Air. Asiana Airlines also has LCC, that is, low-cost airlines as subsidiaries. Will these subsidiaries and low-cost airlines be integrated?

◇ Yun Moon-gil: First of all, it was announced that it would be integrated. If this is integrated, there are three integrated LCCs as well as Asiana and Korean Air. When those three LCCs are combined, the number one airline in Korea is Korean Air, Asiana, and the second place in the integrated aviation accident is the integrated LCC that integrates these three LCCs.

◆ Cho Tae-hyun: So, Jeju Air has been the No. 1 player in the industry among LCCs so far. By the way, Jin Air, Air Seoul, and Air Busan, if these three are combined, they will go beyond this, right?

◇ Yoon Moon-gil: Of course you jump.

◆ Cho Tae-hyun: So what happens to this process? Will Korean Air and Asiana go through the same process?

◇ Yun Moon-gil: I don't know. I think there will be some position of the government and some of the business operators. Ironically, if you look at the merger and acquisition process of Korean Air's Asiana. For large airlines that spent a lot of national bank money, the government supported mergers and acquisitions through financial support. I applied to airlines with a lot of debt, but I don't think I've ever heard of any financial support for mergers and acquisitions by low-cost airlines or such. However, in fact, in order to firmly maintain the ecosystem of the domestic aviation industry, we believe that independent LCC mergers and acquisitions will be necessary in addition to Korean Air's Asiana Integrated LCC.

◆ Cho Tae-hyun: Are you saying that the market needs to be reorganized?

◇ Yun Moon-gil: That's how you look at it.

◆ Cho Tae-hyun: You're going to need some sort of joint venture and stuff. Should we understand that the government needs some financial support here?

◇ Yoon Moon-gil: I think it's more important for the government to maintain some policy stance than for the government to provide direct financial support. Rather than directly intervening in the market, some financial support is needed when airlines voluntarily do mergers and acquisitions, or if necessary, some financial support is needed, as Korean Air did at the time of Asiana's merger and acquisition, and more importantly, the government has implemented various policies to maintain the multiple aviation system in Korea. I think it would be a good idea to use those policies again.

◆ Cho Tae-hyun: Okay. The merger of Korean Air and Asiana Airlines So far, we have pointed out various aspects of expectations and concerns about this. I was with Yoon Moon-gil, a professor of business administration at Korea Aviation University. Thank you for talking today.

◇ Yoon Moon-gil: Yes, thank you.