December 12, 2024

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Korean Air and Asiana Airlines planes are parked side by side at Incheon Airport on Nov. 29. (Newsis)

Korean Air is set to finalize its long-awaited 1.8 trillion won ($1.4 billion) merger with Asiana Airlines Thursday, marking a pivotal moment in the country's aviation industry landscape.

On Wednesday, Korean Air completed payments for Asiana shares to secure a 63.9 percent stake in the smaller rival, putting an end to the four-year-long journey.

Over the next two years, the two airlines will operate independently, with Asiana functioning as a subsidiary of Korean Air as they prepare for full integration.

The high-profile merger comes at a crucial time when uncertainties grow within the tourism and aviation industries about the business impact of the ongoing political unrest triggered by President Yoon Suk Yeol's short-lived martial law imposition.

The shocking martial law declaration sent the won-dollar rate soar to a two-year high while prompting major economies to issue travel alerts for their citizens staying in Korea.

Daishin Securities Analyst Yang Ji-hwan downplayed a serious long-term impact, saying "Worries about the airline industry and travel demand would likely subside quickly, with stabilization expected within one or two quarters."

Korean Air also expressed confidence in overcoming these obstacles, highlighting its resilience and commitment to the successful integration of Asiana Airlines.

"It is true that we received some cancellations in pre-reservations during the initial days following the martial law order, but this has not resulted in a significant decrease in overall passenger demand," said a Korean Air official.

"Global fuel costs are typically recalculated on a monthly basis, and regarding aircraft, our fleet operates on a 9:1 ratio, with nine owned and one leased. Therefore, the impact of exchange rate fluctuations will be minimal overall," the official explained.

Meanwhile, the merger inevitably places financial pressure on Korean Air, especially as it assumes Asiana's heavy debt burden. By the third quarter of last year, Asiana’s debt-to-equity ratio had surged to over 2,000 percent. Korean Air plans to allocate profits toward improving Asiana’s financial health, but this could strain its capital resources, according to industry sources.

"While the merger presents significant long-term benefits, Korean Air must prioritize managing Asiana's substantial debt burden as a critical first step in its planning process," an investment bank analyst based in Seoul said on condition of anonymity.

The analyst highlighted the importance of meticulous financial strategy, particularly in light of the ongoing market volatility driven by political tension.

"Without a robust and well-structured financial plan, the profitability and sustainability of the newly combined entity could be at risk," the analyst warned, stressing the need for proactive measures to mitigate financial and operational challenges during the airline's two-year transition.

By Kim Hae-yeon (hykim@heraldcorp.com)