Korean Air faces mounting mileage-related liability

Korean Air is facing a growing mileage-related liability as it moves to integrate its mileage program with that of Asiana Airlines, with higher redemption requirements adding pressure on the combined carrier’s ticket sales and profitability.

Last week, the Fair Trade Commission (FTC) approved the airlines’ mileage integration plan, requiring Korean Air to provide more opportunities for customers to use their accumulated miles. Under the plan, Asiana miles will remain separately available for 10 years after the merger.

As of the end of June, Korean Air’s consolidated mileage-related deferred revenue stood at 4.07 trillion won ($2.94 billion), including 3.12 trillion won for Korean Air and 946.3 billion won for Asiana, according to the companies’ interim reports. The amount represents the value allocated to unused miles that have yet to be redeemed and is recorded as a liability until the related services are provided.

The figure does not represent conventional debt that Korean Air must repay in cash. Rather, it reflects future service obligations. When customers redeem their miles, the deferred revenue is recognized as sales. But the redemption can still carry costs for the airline, particularly when miles are used for seats that could otherwise have been sold to paying passengers at higher fares.

The regulatory requirements could add to that pressure.

Korean Air must increase the combined annual mileage usage of its customers to 106 percent of the 2025 level in 2027 and 2028, 112 percent in 2029 and 121 percent from 2030 through 2036. The carrier must also expand mileage award-seat availability, particularly on long-haul and popular routes, with the goal of giving customers greater opportunities to redeem their miles.

That requirement could create a trade-off for Korean Air. More mileage redemptions would help reduce its accumulated mileage-related liability, but it could also limit the number of seats available for full-fare passengers, especially during peak travel periods.

The impact will depend heavily on where and when customers use their miles. Redeeming miles for otherwise empty seats may impose relatively limited additional costs.

“However, using miles for high-demand international flights could carry a greater opportunity cost because those seats could have generated significant ticket revenue,” an official from the industry said.

“The challenge for Korean Air is not simply to integrate two mileage programs. It is to unwind a growing future service obligation amid lingering external geopolitical uncertainties represented by volatile exchange rates and unstable oil prices.”