Korea-based Airlines need to soar beyond Incheon
In 1955, Germany's Lufthansa expanded into the American market by acquiring a 27 percent stake in Continental Airlines. Through mergers and acquisitions, Lufthansa integrated five national airlines from neighboring countries into its group, recording a net profit of approximately $960 million (approximately 1.3 trillion won) in the third quarter of 2023.
During the same period, Korean Air achieved a net profit of approximately 431.4 billion won. Similarly, Air France completed its merger with KLM in 2004, resulting in a 33 percent increase in pre-tax profits to 450.5 million euros the following year. In 2023, they secured 1.3 billion euros through a secondary stock offering, raising their operating profit margin to 15.5 percent.
However, in South Korea, three airlines have gone bankrupt since 2018, and one airline has suspended operations. Korean Air's takeover of Asiana Airlines faces structural and operational challenges, including government funding, a regional airport focus from both airlines' low-cost subsidiaries, job retention and the transfer of collective agreements. The main reason the domestic aviation industry faces these difficulties is its reliance on Incheon Airport for the domestic market share. To make a successful comeback, struggling airlines must address several key challenges.
First and foremost, active utilization of Fifth Freedom Traffic Rights is essential. The Fifth Freedom according to the International Civil Aviation Organizationis "The right to fly between two foreign countries on a flight originating or ending in one's own country." This, for example, allows Korean Air to open routes through Singapore, connecting to a third country. Korean Air can explore market expansion in Singapore, Guangzhou (China), and the UK, where Fifth Freedom is permitted, allowing them to venture beyond Incheon. Second, building hubs in Singapore or China, where Fifth Freedom is allowed, are necessary to compete effectively and enhance profitability from the global airlines' headquarters.
Establishing aviation hubs in Singapore and China with Fifth Freedom rights offers Korean airlines an advantageous position in competition with global airlines. Hubs allow them to offer more routes that do not overlap with Incheon, contributing to increased profitability and higher brand recognition.
Finally, pursuing the acquisition or merger of foreign airlines' shares is crucial for global network expansion and market share growth. This strategy provides airlines with new regional routes and customer bases, strengthening their ability to provide services over an expanded geographical range. Additionally, it is effective in sharing technology and operational know-how, cost reduction and, most importantly, reducing market entry barriers.
When all these elements come together, Korea based airlines' competitiveness and profitability will be enhanced, laying the foundation for a successful position in the international aviation market. As mentioned earlier, global airlines have established themselves as leaders in the global aviation industry through decades-long global expansion plans. Likewise, we hope that Korea based airlines can quickly grow beyond the domestic market and become companies that symbolize the nation's image.
Lim Jounghee is head of cargo in Korea with airBaltic and former adjunct professor of College of Humanities and Industries at Chungbu University.