Posted : 2010-04-11 18:35
Updated : 2010-04-11 18:35

Fate of Asiana Up in the Air

Strong Performance May Save Debt-Ridden Flag Carrier

By Cho Jin-seo
Staff Reporter

Last week, early on Thursday morning, the employees of the Asiana Airline’s passenger sales team all rose from their seats upon the arrival of a man who came to visit their office. The man, Yoon Young-doo, their CEO, pleasantly waved his arms so the startled employees would sit down. He then toured the office and shook hands with everyone.

The CEO and his entourage were on a motivational tour of its central Seoul branch, a member of the sales team said. “We were caught by surprise, but we did feel good,” said the junior manager, who has been with the company since the mid-2000s. “Actually, the atmosphere in the office now is probably the best ever since I joined Asiana.”

The CEO making a victory lap may not register very well with most outsiders. Asiana and its parent organization, the Kumho Asiana Group, have been entangled in an ugly liquidity trap since late last year and many of its member companies are now facing creditor-led restructuring programs. And Asiana was one of the main culprits behind this crisis, which started back in 2008 when the firm had borrowed heavily to buy a land transportation company, Korea Express, at a ridiculously high price. The global economic crisis made it worse by bloodying its balance sheet red for the next two years.

Everything looked bad until a few weeks ago. Just recently, it became apparent that Korea’s second-largest airliner would be setting itself apart from the flock of sick companies within the Kumho Group. Profit is soaring for both its passenger and cargo sectors even though the January-March period is traditionally the off-season for the aviation industry. The surge was partly thanks to the increasing international transfer traffic at Incheon International Airport, its base port. Creditors, in turn, are mulling over giving more time to Asiana to see if it can take off by itself without any drastic measures on its organization and on its shareholding structure.

Stock market rally

The stock market finally absorbed this climate change. Asiana’s share price surged by 40.2 percent last week after reports indicated that first quarter results would be a record-high, with passenger and cargo traffic having increased by 31.2 percent and 27.6 percent, respectively, from a year ago. The shares are now trading at the highest level since June 2008, making the firm look like it is back on track.

“The shareholders and creditors of Kumho Asiana Group will announce their decision regarding Asiana at the end of this month,” said an industry source, who declined to be identified. “Until last month, there was a large possibility that they would decide to rescue the company by pouring in more money, diluting the value of existing shares. However, the surprisingly good first-quarter performance is likely to change their minds.”

There are even more upbeat forecasts. Samsung Securities analyst Park Eun-kyung says that even if Asiana decides to raise emergency funds by issuing new shares, investors will actually benefit rather than suffer a loss. “The problem with Asiana was not in its earnings, but in its financial structure. If the firm raised more capital, then the money could be used to pay off its debts and stabilize the financial structure. That would boost the share price even further.”She believes Asiana shares have the potential to rise another 20 percent from the current rate, especially considering that it is far undervalued compared to the share price of Korean Air, its archrival.

Debt conundrum

Yet, the stellar performance and rosy forecasts are not enough to free Asiana from its burden of debt ― currently at 3.7 trillion won and swelling by 200 billion won due to interest every year, according to Park. Paying that interest alone is a daunting task. The firm hasn’t earned more than 170 billion won in operating profit in the past five years. Without restructuring, the company is bound to crash someday no matter how well it provides service.

This means that the debt crisis has to be resolved at a larger scope than just within the firm. But how and who will share the legal and financial responsibility remains a puzzle to everyone involved in the Kumho Asiana Group.

The shareholders are first in line. Asiana’s major shareholders are Kumho Engineering & Construction and Kumho Petrochemical, both collectively owning 47.5 percent of the shares. Irrespectively, both firms have their own problems and are under supervision by its creditor banks and financial investors.

Next in line for the rescue operation are the creditors such as commercial banks, investment banks, bond holders and investment funds. The problem is that there are no less than 14 players in this complex game of finger-pointing, each having different interests in one or more of the companies belonging to the group.

Broadly speaking, its existing shareholders, as well as some of the creditors, want to save Kumho Group and Asiana without having to sell too much of their assets, believing that they could become profitable again if given enough time, support and trust. But other creditors are unwilling. They are eager to cash out fast from this ailing conglomerate, by splitting the assets into pieces and selling them off quickly.

Having so many players with conflicting and sometimes varying interests, reaching a consensus seems impossible. So the government takes part. The Financial Services Commission has been trying to play the role of moderator in this conundrum. Its chairman, Chin Dong-soo, has urged Kumho’s investors that they should take, not only financial, but also moral responsibility in their investments, thus they should be more patient (and give more capital if needed) to the Kumho firms so they can eventually reestablish themselves.

Relative happiness

The political landscape makes it simply impossible for Chin or the government to allow Kumho and Asiana to fail due to debt. Kumho is the only major conglomerate from the southwestern region of Korea, while most others originate from the rivaling southeast. Letting it fail will cause a massive political backlash to the current regime not only from the southwest but from other regions, where people often feel the national wealth has been distributed unevenly for decades.

Asiana employees are probably luckier than their colleagues at other Kumho member companies. They have better job security because of the firm’s strategic importance to South Korea - the government won’t allow shareholders and creditors to sell to foreigners. And it still enjoys a state-backed duopoly in most of the lucrative international routes to Japan, Europe and the United States, where high profit is more likely assured.

On top of that, the employees at Asiana realize that happiness is relative. “I haven’t received a bonus for years, but I won’t complain. I heard at other Kumho companies they don’t even get their salaries,” the sales team manager said.

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