Korean Air-Asiana deal leads Asia-Pacific consolidation moves
While only a handful of Asia-Pacific airlines have gone out of business due to COVID-19, there have been some significant consolidation moves via mergers - with more potentially on the horizon.
As the COVID-19 crisis bloomed, many airlines in this region came under severe financial strain. But few actually collapsed, as governments and investors proved willing to prop up struggling airlines that might have otherwise disappeared.
Mergers are likely to be more effective in reducing the number of players in some markets. However, capacity reduction is often minimised when an airline's operations are absorbed by another airline. And in some cases, consolidation has presented opportunities for new start-ups to emerge.
Consolidation can take a number of forms. It can involve two unrelated or rival airlines, such as Korean Air and Asiana Airlines. It can also occur within airline groups, such as the Cathay Pacific and Singapore Airlines groups. The latter example allows the parent companies to streamline their operations, which will help set them up for the post-pandemic recovery phase.
Summary:
- Korean Air has gained local approval for Asiana merger, with conditions attached.
- The Korean-Asiana deal must still be signed off by some major overseas regulators.
- India's Tata Group is likely to consolidate its diverse airline holdings.
- Cathay Pacific and Singapore Airlines have both merged airlines within their groups.
Korean Air is working through the regulatory steps required for Asiana deal
The most significant move towards consolidation has been Korean Air's proposed takeover of Asiana. There are still a number of regulatory steps required, but when completed this is expected to make Korean Air one of the top-10 largest airlines in the world.
Asiana was struggling financially, even before COVID-19 emerged. Hyundai Development Corp had agreed to buy Asiana, but the deal collapsed after the pandemic devastated the airline industry.
The Korean Air-Asiana merger was proposed in Nov-2020, with the support of the state-owned Korea Development Bank. The deal was viewed as being the best way to preserve Asiana jobs and operations - albeit under a different brand.
Korean Air is still in the process of gaining the necessary clearances for the merger.
A major step was achieved in Feb-2022, when the Korean Fair Trade Commission granted conditional approval with measures designed to promote competition in specific markets. However, the deal still needs to be signed off by authorities in many of the countries served by both Asiana and Korean Air. In Jan-2021 Korean Air submitted business combination reports to eight other governments where such reporting is required.
So far Taiwan, Turkey and Vietnam have approved the proposal, and Thailand determined that a report submission was not necessary. The airline is still waiting for decisions from the remaining four authorities - the US, the EU, Japan and China.
Korean Air has also sought clearance from several countries where reporting is not mandatory. It has received sign-off from some of these, with clearances still pending from Australia and the UK.
Korean Air estimates that it will take about two years to fully integrate Asiana after gaining the necessary competition approvals. Asiana will operate as a subsidiary until it is absorbed by Korean.
The two airlines will also be merging their subsidiary low cost airline brands. Korean subsidiary Jin Air will likely be combined with Asiana's Air Busan and Air Seoul to make a larger low cost airline.
Tata Group is likely to try to rationalise its growing stable of airlines
Further consolidation could occur as a consequence of the privatisation of Air India.
The Tata Group completed its acquisition of Air India and its LCC subsidiary Air India Express in Jan-2022. Tata also controls the LCC AirAsia India and is part-owner of Air Vistara.
The Tata Group is expected to merge some of these brands, with the most likely candidates being Air India Express and AirAsia India. Air India may also increase its links with Vistara, although it would need the approval of its fellow part-owner Singapore Airlines for any formal merger.
India has an increasingly crowded domestic airline market, with more players such as the relaunched Jet Airways and Akasa Air expected to enter this year. This means that more consolidation could be on the cards, in addition to any Tata Group moves.
Cathay and SIA groups have each integrated their full service brands
There have already been a number of consolidation moves caused by restructuring within airline groups in the Asia-Pacific region. Some of these had been planned before the pandemic, while most were prompted by the COVID-19 crisis.
The Singapore Airlines Group announced in May 2018 that it intended to merge its SilkAir subsidiary into the parent airline. The integration began in Jan-2021, with many of SilkAir's aircraft and routes transferred to Singapore Airlines.
In a similar step, Cathay Pacific shut down its Cathay Dragon short haul subsidiary in Oct-2020 as it restructured during the pandemic. Some of the Dragon aircraft and orders were reallocated to Cathay Pacific and Cathay applied to regulators for the right to pick up most of the former Dragon routes.
Consolidation also achieved through airline closures
Virgin Australia axed its LCC subsidiary Tigerair Australia in Sept-2020, as part of its pandemic response measures. Tigerair had already been under pressure, and COVID-19 was the final straw that caused its parent company to scrap it.
Some joint venture LCCs in the Asia-Pacific region have been terminated by their owners during the pandemic.
AirAsia Japan ceased operation in Oct-2020, and NokScoot was closed in Jun-2020. Moves such as these are examples of the parent groups wanting to focus their resources on their core operations rather than joint ventures in different markets.
Mergers will certainly benefit airlines - but not necessarily by reducing capacity
The major factors that have reshaped the Asia-Pacific airline industry during the pandemic have been airlines slashing capacity, schedules and networks. In comparison, airline collapses and mergers - completed and planned - will have far less effect on the size of the industry.
In many cases the consolidation moves from Asia-Pacific airlines will not cause big swings in capacity, as operations are integrated into the purchaser or the parent airline. And often the demise of one brand has helped spur the creation of another, as new start-ups have stepped into market gaps.
This will be the case with Hong Kong's Greater Bay Airlines, which has seen an opportunity after the disappearance of Cathay Dragon. In Australia, the start-up airline Bonza believes there is a gap in the Australian market for another low cost airline after Tigerair Australia was discontinued.
But even when it does not cut capacity dramatically, consolidation still offers significant benefits for airline groups.
For takeovers, it allows a airline to expand its network reach and gain greater scale efficiencies. When consolidation involves existing group members, it simplifies the group structure and reduces costs.