During what should have been a quiet week, Korean’s competition authority last week said it was going to approve the proposed acquisition of a majority stake in Asiana by Korean Air, effectively creating a single dominant player in the South Korean market. This is a major step in the process, so I thought it was worth diving in a little deeper.
Asiana has been in financial trouble for some time, even pre-dating the pandemic. The pandemic only made things worse, and the easy solution was to simply merge the two airlines. Korean is the de facto flag carrier even though it is technically privately-owned by the Hanjin chaebol. Asiana was part of the Kumho Asiana Group, but the controlling stake was sold off and Asiana has remained in limbo as a new owner is sought. It was in late 2020 that the bright idea of making Korean take over Asiana came to be.
The two airlines have broad service to every region of the world outside of Africa and the Middle East. Here’s a map looking at current plans for July 2022, though these are obviously highly subject to change.
July 2022 International Route Map for Asiana and Korean Air
If we look at 2019 seats, you can see why there might be some concern from competition authorities here. Korean, its subsidiary Jin Air, and its joint venture partner Delta had 34 percent of seats departing South Korea while Asiana and its subsidiaries Air Busan and Air Seoul had 22.5 percent. That leaves only 43.5 percent of seats in the hands of others.
But that fails to really tell the whole story here. The domination by geography is very different. Here’s a look at 2019 seat shares broken down by region.
Seat Share by Geography for Asiana, Korean Air, and Joint Venture Partners/Subsidiaries
Obviously Australia/New Zealand and South Asia (which is almost entirely India) are the biggest points of concern. But even in the Americas, the two airlines along with Delta control three-quarters of the market. In the domestic market, it’s a hefty 69.3 percent. These are all problematic in one way or another.
For that reason, the regulator has warned that it is not going to just give carte blanche to the combined airlines. Instead, they’ll likely face slot/gate divestitures. There are 10 routes of primary concern since they will become monopolies:
- Busan – Nagoya (flown by Korean and Air Busan)
- Busan – Qingdao (flown by Korean and Air Busan, China Eastern flew last in 2015)
- Seoul – Barcelona (flown by Korean and Asiana)
- Seoul – Los Angeles (flown by Korean and Asiana, Singapore flew last in 2018)
- Seoul – New York (flown by Korean and Asiana)
- Seoul – Palau (flown by Korean and Asiana, not in future schedules)
- Seoul – Phnom Penh (flown by Korean and Asiana, Cambodia Airways briefly flew in 2020)
- Seoul – Seattle (flown by Korean, Delta, and Asiana)
- Seoul – Sydney (flown by Korean and Asiana)
- Seoul – Zhangjiajie (flown by Korean and Air Seoul through 2020, not in future schedules)
The idea here would be to free up slots and gates to allow new entrants, but who is really going to do that? On the short-haul routes, I can absolutely see success in either attracting new Korean low-cost operators or Chinese and Japanese carriers. I’m assuming South Korea would rather see the former. For Phnom Penh, maybe Cambodia Airways will come back or maybe some adventurous Korean carrier will give it a shot. And I suppose Qantas has been getting ready to grow significantly again, so maybe it can be coerced into starting Sydney. But for the Americas and Europe, it’s going to be a tougher sell.
Barcelona’s best shot would be LEVEL, but LEVEL likely has no interest in that… it barely exists as it is. And then there’s the US market which has LA, New York, and Seattle on the list. I could see United possibly considering Newark someday… maybe. And could American do Seattle? For LA, that would have been obvious for American before, but now I guess United would be the only hope. I wouldn’t put much stock in any of these unless corporate clients will show enough interest to make it work. Maybe the most likely possibility is some wide-eyed new entrant from South Korea, but that’s not bound to end well.
Of course, for the regulator, that’s not necessarily the issue. If it can free up more gates and slots at Incheon, then it can divvy them up and let others use them in different ways even if some of these monopoly markets don’t get new service themselves. That’s still a victory.
The reality is that Asiana was in trouble, and the two combined will have more seats than they should be offering. While nobody likes giving up slots and gates, Korean was bound to slash Asiana’s service level down to something more rational anyway. That alone will lower the combined market share, and it will not be a huge hardship for Korean to let some slots go. We do need to know what the ask is, naturally. But as long as it isn’t egregious, I expect this wouldn’t be an issue.
With this hurdle seemingly clearly, Korean can go back to focusing on what the other outstanding jurisdictions will do. Australia, China, the EU, Japan, Singapore, and the UK have all yet to weigh in, so we will have to wait and see what they say before knowing if this will really happen or not.
I don’t see why Barcelona is a particular concern. Granted it has no long haul hub carrier, but the passenger traffic in Barcelona is very heavily skewed towards inbound tourism. Vueling as part of IAG is not going to be co-operating in any meaningful way with Korean. There are a large number of 1-stop airlines able to offer SEL-BCN. Is a connection to Barcelona really strategically important to South Korea ?
I would be much more concerned about routes to Paris CDG and Rome FCO where the long haul hubbed carriers are in Skyteam along with Korean
David – It may not end up being a big concern, but it is a market that would go down to monopoly. In reality, they may not care as much. I’m not really sure.
Same for Zhangjiaje, pretty much all tourism.
Plus, Busan-Nagoya can fairly easily be replaced by flights to Haneda or Kansai, each less than 2 hours away by train.
Not sure how to pose this question, but is the South Korean air market really robust enough to allow for a flood of new service from outside the country to replace one of their own carriers?
Not huge but not tiny; 10th overall in terms of scheduled capacity according to OAG (ahead of Turkey and Australia but behind Russia and Vietnam).
SEAN – It is a big market in general, but Korean has generally been the 800 lb gorilla and Asiana has just flooded in more capacity making it untenable for others. Just look at LA where both airlines were operating competing A380s. There’s just no room for anyone else. So maybe a rationalized capacity would help others to justify coming in. I think that it would be hard for a startup to come in and make it work for long hauls, but if an existing airline found it worth connecting in, that might make sense.
that is a brilliantly accurate assessment, CF.
Two unhealthy competitors duking it out removes the incentive for any rational competitors to enter a market.
ICN was at or near slot limits at certain times of day so a merger will free up some capacity for new carriers while removing duplicate capacity that wasn’t sustainable for Asiana and Korean combined. KE will not fly all of the capacity the two carriers operated in every market; they will clearly gain some additional slots via the merger but, if regulators do it right, there should be slots made available for new entrants and some of those slots need to be kept available for at least a couple years as competitors figure the market out. It is possible that some of those routes might not see a second carrier beyond KE or DL but the biggest such as LAX, SFO and maybe NYC could see other carriers, even on a 5th freedom basis.
Also, the strength of the DL/KE alliance is in opening up further US gateways just as DL has done to both AMS and CDG. Tokyo and Beijing have economic or legal limitations (the number of flights to HND and all of China is limited by treaty). S. Korea and the US as well as DL and KE all benefit if totally new routes are added such as SLC which DL has said it would be interested in flying; there are certain to be other cities on their radar. KE has a decent number of B787s and DL’s A330-900s are all well-suited for opening up new routes and cities that will likely never see another transpacific flight.
Simple-minded question, but what’s the role for all those foreign regulatory bodies that you list? Do they have any authority to block the merger? Or is Singapore’s (for example) leverage limited to “We don’t like this merger. If you merge, we’ll limit your ability to fly to Singapore”?
grichard – Good question. Presumably those foreign bodies wouldn’t outright reject the merger but would rather ask for concessions. If the airlines weren’t willing to do that, it could sink the merger, I suppose.
But can they stop it from happening beyond their borders? No. It just might make life difficult if it’s a market that matters enough to the airline.
The first thought I had is that the Delta/Korean JV is likely toast. I don’t see how the regulators can let it continue.
I agree. How exactly will UA or AA be encouraged to launch LAX/NYC/SEA-ICN with bulk of the point of sale tending to be S. Korean, and all the FFs, especially the business customers at KE/DL’s hands? US to ICN will become a huge monopoly.
The Asiana/Korean merger is difficult for a number of reasons but also probably not as problematic as it could be.
Asiana was failing because S. Korea, like a lot of countries, cannot support two global carriers. Both Asiana and Korean carried a large amount of traffic to/from China that connected to its global network and that traffic has largely disappeared and won’t come back even when other parts of East Asia return. After over two years of pandemic-induced interruptions to their business model, many East Asian airlines simply do not have the resources to return to their pre-covid place in global aviation.
Korean was not exactly a financially strong company pre-covid either but it was stronger and it has been boosted by Delta’s investment and sole transpacific joint venture while American and United used Japan as their primary JV base.
ICN had, pre-covid, one of the most extensive route networks in Asia and was geographically as well suited to serve as a major global hub; S. Korea consolidated nearly all longhaul international traffic at ICN while Tokyo and even Beijing divided that traffic over two airports. ICN is more concentrated but it is also more efficient as a hub. The S. Korea market supports multiple carriers, both allied such as DL/Skyteam and KE are, but also other global carriers as well as a strong group of low cost carrier, many of which use Gimpo airport.
S. Korean and foreign regulators need to ensure there is adequate access for access by competitors – but that doesn’t mean that competitors will succeed in Seoul. The US and Mexico required divestitures at MEX as part of the AM-DL JV and most of the low cost carriers have withdrawn; MEX is much more limited in its abililty to accommodate additional traffic. The merger of Asiana and Korean will remove a significant amount of connecting capacity is removed which is ultimately good for all carriers that compete for traffic from Asia to the world. As long as there is legitimately open access for competitors and for parallel alliances to compete in the flow traffic that flows over S. Korea as part of the Skyteam alliance and its JVs, there is probably not a legitimate ground for blocking the merger or KE’sJVs.
I wonder if Starlux would be allowed to operate any fifth freedom flights between Seoul and LA/SF/Seattle? I know they’re based in Taiwan, but they’re new and have ambitions to grow. Perhaps there are some routes here that they could make bank on.
It has always fascinated me that South Korea could support so many airlines. There are (currently) two major full service carriers, plus their subsidiaries, three low cost carriers, and a few minor startups and commuter airlines. Yes, geographically Korea is a peninsula, but the only way off is by air or sea. – so some of the extra capacity is explained.
There was a time I had to fly (pre-COVID) from ICN to HKG, I chose KE for the miles benefit, but its subsidiary Jin Air was selling the exact same route on a similar aircraft (a 777) for nearly the same price. It was even cheaper on the low cost carriers and there were also foreign carriers on the route. Now I realize this is/was a busy route between to business hubs, but the amount of capacity seemed incredible and the fares seemed super low. It seemed like something eventually had to give in terms of capacity and low fares.
Since South Korea is so small, this merger makes sense on many levels, but it’ll be interesting to see what kinds of divestitures are required, if any. This next item is totally unrelated to the topic, but I thought of you when I saw it.
The Korean startup Air Premia is coming to LAX. Was targeting June 2022 per its DOT filing.
I’m surprised Continental hadn’t tried EWR-ICN before the UA merger. It seemed like a huge hole in UA’s network that they only flew SFO-ICN once daily for years but I’m sure their network planners have better knowledge than me. With KE/OZ merging and right-sizing in JFK, I would think UA has a good opportunity to do reasonably well with at least a 787 out of EWR – all that NYC traffic is consolidated at JFK and none of the east coast gateways that currently offer ICN service can support the combination of connections and O&D demand that Newark can. I heard that US carriers have been relatively small in ICN since KE/OZ have a huge point-of-sale advantage in the US-Korea market due to most O&D passengers being from the ICN side (we also see this in KE’s US destinations, with places like LAS coming to mind and all other non-DL hub destinations having a reasonably large Korean diaspora).
Another tangent: it’s really surprising how small Qantas is in Asia given their geographic location.
Qantas has always disappointed in North Asia (except Japan) and South Asia (it’s been acceptable in SE Asia). Basically relied on codeshare with China Eastern, Asiana and others.
For the next year or two refocussing on VFR traffic. They’re starting Delhi, trying Rome, I could see them trying Seoul from Sydney, especially as the JAL JV got nixed which would have been their alternative. There’s a lot of Koreans living here and it is (was) popular tourist destination for Koreans, in fact it’s one of only two countries you can be a tourist from in Australia right now. Jetstar was doing Seoul – Gold Coast 3 times a week pre-pandemic, with connections through on Jeju Air, I could see that coming back.
Longer Term, Qantas just ordered a bunch of A321XLRs and wether they end up being painted red or orange they could do a lot for them in terms of expanding their Asian reach, especially with western Sydney airport opening around the time they get delivered. SYD-ICN is a bit far but south east asia isn’t and neither is CNS-ICN.