Asiana Tries to Shrink Its Way Out of Trouble

It has been — to be understated — a very bad year for Asiana, the second largest airline in South Korea. Years of increasing debt loads have finally caught up with the airline, and it is now trying to shrink its way back to a comfortable place. This is very much a work in progress, but you can expect a fair amount of upheaval as things move forward.

Asiana started flying only in 1988, breaking up Korean Air’s monopoly as the hometown airline. By 1991 it was flying to the US (Los Angeles), and it grew quickly from there. Today it is a member of Star Alliance with 80+ airplanes flying around the globe. That may sound like a success story, but that would gloss over how the airline actually got to this point.

Like most large South Korean businesses, Asiana is part of a chaebol, a local word for a mega-conglomerate. What today is known as Kumho Asiana Group owns stakes in companies in all kinds of industries. Kumho Asiana spent a lot of money and raised a lot of debt to grow into a variety of industries.

That legacy of Kumho Asiana is visible everywhere with the company’s signature logo. If you ever wondered why Asiana’s logo looks a lot like Kumho tires, it’s by design.

But in the last decade, Kumho Asiana has had to shed some of its investments to try to pay down those crushing debts. Kumho Tire was sold off in 2017, and now Asiana itself may face the same fate. This isn’t a story about the parent company, however. Asiana Airlines has its own problems.

Earlier this year, word came out that the airline’s auditors refused to certify Asiana’s financial statements. Why? As Reuters explained:

Asiana’s auditor Samil PwC had previously said it could not complete its audit because it had not been provided with enough information to evaluate the airline’s provisional debt related to maintenance of leased aircraft, as well as the fair value of stakes in affiliates bought in 2018.

To get that audit completed, Asiana had to restate earnings, and it was a substantial hit. Operating profit plunged from 88.7 billion won to a mere 28.2 billion won (about US$24 million). And that led to a net loss nearly doubling from 105 billion to 196 billion won (about US$170 million).

That massive change sent shockwaves through the airline. With the restated financials, South Korean credit agencies warned they might downgrade the airline’s debt to junk status. If that were to happen, it would trigger provisions that would require Asiana to repay more than the 1 trillion won in debt it already has to repay this year. And that could be catastrophic for the financial future of the company.

As you can imagine, shares of the company plunged on this news and management sprung into action. It was like the airline had been completely asleep at the wheel, but all of a sudden, plans were quickly compiled to right the ship.

First, co-CEO Park Sam-koo stepped aside leaving Han Chang-soo as the sole CEO. Han sent a letter in early April telling employees that the airline would cut airplanes and routes but gave no details.

By the end of April, a bailout had been secured. Creditors would provide a staggering 1.6 trillion won (more than US$1 billion). Meanwhile, Kumho Industrial, which owns about a third of the airline, said it would sell its stake. This would result in improved liquidity and yes, financial stability. But still, Asiana wasn’t going to be able to just keep operating as it was. Cuts were coming.

First, the route cuts began. The airline will drop narrowbody service to Sakhalin and Khabarovsk along with A330 flights to Delhi this July. In perhaps a bigger surprise, Chicago service will end in October.

That last change may show the weakness of Asiana’s strategic position in the US market. While Korean Air has become Delta’s joint venture partner, and Incheon has become their primary connecting point between the US and Asia, Asiana has a much weaker position with fellow Star carrier United. United and ANA have the joint venture that sends traffic through Tokyo. Asiana is just a minor partner for United, at best. Apparently it’s so minor that United’s hometown Chicago hub can’t help sustain Asiana’s service there.

I imagine we may see more route cuts coming. Meanwhile, there’s the airline’s fleet problem. At last check, Asiana was flying 83 airplanes as follows:

Aircraft# Passenger# Cargo
A320/A321250
767-30061
A330-300150
777-200ER90
A350-90080
747-400211
A380-80060

In addition, it had 25 A321neos, 13 A350-900s, and 9 A350-1000s on order. That’s a lot of metal coming in to an airline that’s already bloated with debt. But instead of shedding orders, it looks like Asiana will be ditching older aircraft. In particular, it is eyeing the 767 and 747 fleet for cuts.

Many had speculated the small A380 fleet would also disappear. Those six airplanes currently fly one daily flight from Incheon to Bangkok, Frankfurt, Hong Kong, Los Angeles, New York/JFK, and Tokyo/Narita. After modifying other aircraft, the A380 remains the only airplane with First Class onboard… until September.

Beginning September 1, the First Class suites will remain, but they will no longer be sold as First Class. Instead, they will be sold as Business Suites with the same service as in Business Class, helping the airline to cut costs.

Except for what would ultimately be the elimination of the airline’s dedicated freighters, these changes all seem relatively minor so far. Even if the 747s and 767s go away, the orders will still give Asiana net growth. It may have new capital and owners by the end of the year, but that alone won’t turn the airline’s fortunes around. Bigger changes are needed.

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17 Responses to Asiana Tries to Shrink Its Way Out of Trouble

  1. Concerned says:

    Thanks Cranky.

  2. Tim Dunn says:

    The bigger issue here is that there are a number of Asian airlines that have rapidly grown or still are not near as financially stable as their US or even European counterparts. Asiana’s primary competitor and its parent company, Korean, is not exactly a shining example of financial success either. While the US3 (AAL DAL and UAL) have charged that the Middle East 3 airlines are subsidized, many Asian airlines are private companies and so the day of reckoning that Asiana is facing does eventually come; the China big 3’s state ownership skews the market there.
    Many customers are happy to point out the great service levels of Asian airlines but fail to consider or acknowledge that they are much less viable businesses.

  3. Bill says:

    Cranky: “If you ever wondered why Asiana’s logo looks a lot like Kumho tires, it’s by design.”

    Thanks for clearing that up. I have been losing sleep over this.

  4. WindyCityWill says:

    Hey Cranky, how much of a negative effect did Asiana’s crash at SFO cause on their overall well-being? It would seem to me that kept many Americans from purchasing travel on them.

    • CF says:

      WindyCity – Hard to know for sure. I think by now it’s been long forgotten, but I imagine there was a short term hit to bookings.

    • Nathaniel says:

      I agree with cranky, it’s forgotten. The bigger problem is a lack of identity here in the US, at least for it’s US Services. Korean, ANA, JPL all have brands that fit their hubs. What do you think of for Asiana?? It could be anywhere from Hong Kong to Korea and anywhere in between. That doesn’t send a coherent message to consumers.

      • PushKatel says:

        Very interesting point. It’s hard for us airline geeks to see it from that perspective! ;)

  5. A says:

    Last year when in Korea we flew Air Busan in lieu of Asiana and Korean Air due to cost – it was about half price as I recall. In doing some research on who I was trusting to fly me around the Korean peninsula I learned that Air Busan is just a subsidiary of Asiana. Seems to me that they’re cannibalizing their own customers with a LCC. I hear UniTED calling….

    • Alan says:

      Lots of international airlines have LCC subsidiaries. Look at Air Canada Rouge, Lufthansa’s Germanwings, Aeroflot’s Pobeda, Copa’s Wingo, SAA’s Mango, Qantas’ Jetstar, IAG’s Vueling…there are a ton of them. That strategy was not successful in the US, however, which is why Ted and Song are no more.

  6. Pilotaaron1 says:

    “Asiana has a much weaker position with fellow Star carrier United. United and ANA have the joint venture that sends traffic through Tokyo.”

    I wonder if going to Oneworld would be any better for them. I know that there of course is Cathay and JAL. But I don’t know how strong those partnerships are. Not to mention Asiana does get United traffic through SFO.

  7. DesertGhost says:

    I thought American was the only airline that couldn’t fly Asian routes profitably from Chicago (being a bit facetious).

  8. Specter Koen says:

    This reminds me of an analogy a business writer used when talking about Sears’s bankruptcy: “It’s like a game of monopoly. When you have to start selling your properties to stay afloat, the game is pretty much over.” While Asiana’s moves make sense individually (its pretty trendy right now to get rid of first class and focus on fuel efficiency), them speeding up the process with everything else going on seems a bit desperate, like they are trying to get as far ahead as they can before the debt catches up to them and cripples their ability to adapt.

  9. Jason H says:

    I’d imagine that the reason for keeping the A380 (for now) is because they are leased and returning them would be too expensive if they broke the lease, and there’s no secondary market for them. If it is a 10-year lease, then they would probably be returned around 2024-5.

    No idea if this is actually true, but the exact same thing happened with Malaysia, and Singapore also got rid of its oldest A380s after 10 years, as soon as they could.

  10. jonathan reed says:

    Interesting to me in this context: A a holder of a lot of United miles I have been disappointed in how hard it has been for me to use those miles in the last few years for premium transatlantic and transpacific flights out of my home base of Las Vegas. Although I haven’t taken a trip to Japan recently I have been thinking about it and i see that United premium award flights to Japan use to be on Asiana thru Seoul. Now they are United or ANA direct to Japan.

  11. GS in Portland says:

    Buying / leasing the A380 would seem to be an expensive undertaking for any airline, and a small, relatively new (just over age 30), not-as-established airline would likely have trouble making enough money to justify the expense. For a well established airline like BA or Lufthansa, it should be easier to fill that size of plane – loyal, dedicated clientele, particularly with the business crowd, established home market & primary base(s), frequent flier plan, good partner network, etc. Would not be surprised if this was not a primary cause of the financial problems.

    Another one that I can see from your metal chart is just the # of types in the fleet. Why on earth would an airline of this size and scope need 6 different wide body types?? If there is anything that the low-cost model should be teaching legacy and larger airlines, it is that you can derive significant efficiencies, i.e. cost savings, by simplifying your organization, and in this case, your fleet. “Optimize” as Dr. Deming would say. (the developer of the Toyota production system, which has application across pretty much every industry in our global economy)

    • CF says:

      GS – I think the number of widebodies is really indicative of an airline in transition here. Just look at the delivery dates:

      747 – 1991 to 2004 767 – 1994 to 1999 777 – 2002 to 2013 A330 – 2004 to 2013 A380 – 2014 to 2016 A350 – 2017 to present

      There is a story to tell here. The airline started with 747s for long-haul but eventually it moved most of those to cargo. The later deliveries were cargo airplanes, and others were converted. Sure, they keep two around for passenger flying now, but that’s not hard to do when you already have the pilots and maintenance to support cargo. Without cargo, I imagine these airplanes would be gone now. At the same time, it then needed a smaller widebody for more regional routes, and that’s where the 767 came in. That airplane has served well but the time to retire has come. When these flights are gone, you already have a third fewer fleets.

      The next wave of fleet renewal was with the 777 for lower capacity long-haul and the A330 for higher capacity medium-haul. The 777 makes sense, but the A330 makes less sense unless you were also going to retire the 767s. Maybe they just had more growth opportunity and decided it wasn’t worth doing at the time.

      Then the A380 came in and that I assume was purely political. If Korean had them, Asiana wanted them too. I don’t know all the details, but that is an ugly duckling of an order there.

      Then there’s the A350 which is the current strategy. Get rid of the 747/767 fleets and ride out the 777s until those hit the end of their leases/useful lives. Kill the A380s when you can. Then you have A330s for regional and A350s for long haul. It just has taken the airline a long time to get there.

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