Korean Air new chief Walter Cho in spotlight as Seoul hosts IATA AGM

Summary

• Korean Air plans to fight off intensifying LCC competition by using its budget subsidiary Jin Air and has no intentions of changing its economy class product or increasing the density of economy class cabins.
• Korean Air plans to renew its widebody fleet while reducing the number of widebody aircraft types in its fleet.
• Korean Air is pleased with the initial performance of its joint venture with Delta Air Lines and is keen to forge more JVs with other airlines.
• Korean Air is focusing on bolstering its international operation with more frequencies, particularly upgrading non-daily services to daily, rather than more new destinations.
• In the US, Korean Air is also keen to add a third daily flight to the three main markets of Los Angeles, New York and San Francisco.

How Korean Air is contending with rapid LCC expansion in South Korea

Walter Cho: "Low cost has become a very big competitor to us. However, we are in a different segment. We do not intend to directly compete with them in prices. We have much better services and a different point of view in customer service. We have six low cost carriers in Korea and it's growing at an extremely fast pace. And they are taking market share in Korea and in other countries in Asia as well."

"We formed our own low cost carrier about 10 years ago and they are doing extremely well, outperforming Korean Air dollar for dollar because it's a very lucrative market. It acts as a barrier between Korean Air and other low cost carriers."

CAPA: In 1H2019, LCCs accounted for 55% of domestic seat capacity in South Korea and 37% of international seat capacity. In 2009, LCCs accounted for only 1% of international seat capacity in South Korea and 23% of domestic seat capacity.

South Korea LCC and FSC seat capacity: 2009 to 1H2019

Source: CAPA - Centre for Aviation & OAG.

Korean's plans for long haul low cost, using Jin

Walter Cho: "Jin Air is looking into expanding the long hauls. They are already flying Hawaii and we could expand that to some European cities or the US where the traffic rights are not constrained."

"They have been asking for more [777-200s) and it is a possibility we will utilise Jin Air to compete in that market."

CAPA: Jin currently operates four 777-200s, along with 22 737-800s. Seoul-Honolulu is served seasonally and is Jin's only long haul route.

Korean's plans for acquiring new widebody aircraft

Walter Cho: "We have a lot of need for widebodies. We are looking at all the options. Since we already have a 787 fleet there is a very high possibility we would expand our fleet on the 787. The 777-X is coming up and would be a good replacement for our current 777."

"Our market has grown especially in trans pacific into the US and Canada. It is growing significantly and we are seeing needs for larger aircraft intra-Asia as well."

"We have too many fleet types. Consolidating to one large order would help us reduce maintenance type and training as well."

"I'm very pleased with our current (widebody} fleet - both Airbus and Boeing. But they are starting to show their age so we have to do replacement."

CAPA: Korean Air has a fleet very focused on widebodies but currently only has one more widebody aircraft on order - a 777-300ER slated to be delivered later this year. Korean currently operates 104 widebody passenger aircraft, compared to 31 narrowbody aircraft. The 103 aircraft are spread across five types - including 29 A330s, 42 777s, 12 747s, 10 787s and 10 A380s.

Korean Air widebody passenger fleet summary: as of 27-May-2019

Aircraft	In service	On order
Airbus A330-200	3	0
Airbus A330-200(HGW)	5	0
Airbus A330-300	5	0
Airbus A330-300E	6	0
Airbus A330-300X	10	0
Airbus A380-800	10	0
Boeing 747-400	2	0
Boeing 747-8	10	0
Boeing 777-200ER	13	0
Boeing 777-300	4	0
Boeing 777-300ER	25	1
Boeing 787-9	10	0
Total:	103	1

Source: CAPA Fleet Database.

Korean's new fleet of A220s (formerly known as Bombardier CSeries)

Walter Cho: "The aircraft has performed extremely well. We are very pleased with it. Passenger reaction has been very good. Service reliability is extremely well. We look forward to a very good operation."

"It hasn't been used to start new routes but has replaced 737-800s from smaller cities in South Korea which were too big. It has actually shown a lot of benefits."

CAPA: Korean Air operates 10 A220s, which were delivered from Dec-2017 to Feb-2019. It has no more A220s on order but has orders for 30 A321neos and 30 737 MAX 8s.

The 737 MAX 8s and A321neos are intended mainly as replacements for 737-800s but some aircraft are earmarked for new routes and some will replace widebody aircraft that are now used on regional routes due to a shortage of narrowbodies. Korean Air's first 737 MAX 8 had been slated to be delivered in 2Q2019 but has been delayed due to the global grounding of the 737 MAX.

Korean Air narrowbody passenger fleet summary: as of 27-May-2019

Aircraft	In service	On order
Airbus A220-300	10	0
Airbus A321-200neo	0	30
Boeing 737-8	0	30
Boeing 737-800	9	0
Boeing 737-900	16	0
Total:	35	60

Source: CAPA Fleet Database.

Korean Air's joint venture with Delta Air Lines and plans for other JVs

Walter Cho: "From the joint venture we have been seeing so many benefits. Their marketing power in US and our marketing power in the Korea and Asian market. Joining together creates so much force. Actually, it has been a lot greater than what I was expecting."

"We are looking possibly at other airlines to do other joint ventures and also stronger partnerships through SkyTeam."

"I would like to do a joint venture in China but right now joint ventures it is not possible because we don't have open skies with them so we are looking at other possibilities in Asia."

"I'm looking at everything in Europe and Asia. The only problem is open skies. We don't have open skies with Europe and we don't have open skies with lots of countries in Asia. But we see a lot of opportunities. It doesn't have to be as tight of a joint venture as we have with Delta. It could be a very loose relationship but still we can tie ourselves in very close. A loose joint venture but a close relationship."

CAPA: The JV with Delta was implemented in early 2018 and has already led to a large increase in transit passengers. The JV with Delta is Korean's first JV.

Korean's decision not to join other airlines in increasing economy class density

Walter Cho: "We believe customer service starts with a product and it always starts with economy. We always advertise our great products in first and business class but what really matters for the mass generally is the economy class service. It's not the taste of the food and it's not the smile of the flight attendants but it's the seat that is the most critical. We need to keep that bearable for 14 hours of flight. I'm a very tall guy and if I cannot fit in the seat we don't put it in. If I can fit and my knees don't pass the front seat then it passes."

CAPA: Korean Air has 34in pitch in economy across its long haul fleet, providing more legroom in economy than virtually any other airline.

Korean's decision not to join other airlines in introducing premium economy

Walter Cho: "Our economy class is very close to other airlines premium economy. To [add premium economy] we have to reduce our economy class pitch and I don't want to do that."

"We already have the lowest seat number on our A380. If we do put in premium economy it will go further down and that will impact our profitability even further. I'm not too optimistic how to do that."

CAPA: Korean does not want to reduce legroom in economy but believes the gap between its economy product and a new premium economy product would be too small to sell premium economy effectively.

Of the top eight airlines in the trans Pacific market, Korean is the only without a premium economy cabin.

Korean's plans for maintaining a first class product

Walter Cho: "We still believe we have a market for that. The business class of today is far better than first class 20 years ago but I still believe there is market for first class but we will try to keep it."

CAPA: Korean Air currently has a first class cabin in addition to business class on all of its widebody passenger aircraft. It is one of only a few airlines to configure 787s with first class.

Korean's plans for expanding its international network and operation

Walter Cho: "We have over 80 destinations internationally but we have many destinations we don't serve with daily flights. My first goal is to make all of them daily before we expand too much."

"We started Croatia (in 2017) and we started Barcelona (in 2018). They have been very successful. The Korea market is growing in terms of leisure travels to areas that were non-existent 20 years ago, 10 years ago even - like Central Europe, Eastern Europe and the Scandinavian countries. Koreans travel all over the world now and now they are looking at places we didn't really have any focus on before."

"There is a lot of opportunities for us to expand. But as a business traveler myself I'd like to have all my destinations be daily flights first because it's critical for business travel to have at least one flight per day direct back to home."

CAPA: Korean Air currently has 99 international passenger destinations. East Asia accounts for 58 of the destinations and 68% of its international seat capacity.

Korean Air international passenger network: week commencing 27-May-2019

Source: CAPA - Centre for Aviation & OAG.

Korean's plans for further US expansion

Walter Cho: "I want to make daily flights two daily, five times a week to a daily flight. I want to expand our frequency rather than go to new markets."

"I would like to put more flights into San Francisco, more flights into Los Angeles and more into New York as well in the very near future. Hopefully with a 787-size aircraft."

CAPA: Boston was launched in Apr-2019, becoming Korean's 11th passenger destination in the US and 13th in North America (excludes the US territories in the Pacific such as Guam).

A 12th US destination seems unlikely as the focus shifts to building up frequencies. Boston, Dallas and Las Vegas are currently served less than daily (based on OAG schedules for week commencing 27-May-2019). Atlanta, Chicago, Honolulu, Seattle and Washington Dulles are currently served once daily. New York, Los Angeles and San Francisco are currently served twice daily.

Korean is already the largest Asian airline in the US market.

Top 10 airlines in US-Asia Pacific market ranked by seat capacity: week commencing 27-May-2019

Rank	Airline	IATA	Weekly seats	Capacity Share
1	United Airlines	UA	136,340	14.7%
2	Delta Air Lines	DL	80,280	8.7%
3	Korean Air	KE	65,840	7.1%
4	Cathay Pacific	CX	55,344	6.0%
5	Japan Airlines	JL	53,844	5.8%
6	All Nippon Airways	NH	52,162	5.6%
7	American Airlines	AA	48,494	5.2%
8	EVA Air	BR	46,718	5.0%
9	Air China	CA	45,343	4.9%
10	Qantas Airways	QF	34,535	3.7%

Source: CAPA - Centre for Aviation & OAG.

Korean's plans for its aerospace and maintenance division

Walter Cho: "We will maintain our own MRO facility for our own fleet. We will try to expand on the building of parts for Boeing and Airbus. The MRO is a very good part of the industry and I believe it's critical for us to maintain that skill to be able to maintain our own aircraft even if it's heavy maintenance."

"We are very space constrained (and therefore are unable to pursue third party work). We do not have enough space and time to do our own."

CAPA: KAL performs heavy maintenance on several aircraft types and KAL Aerospace also produces aircraft parts for major manufacturers - commercial as well as military and general aviation (helicopters). While most airlines have aircraft maintenance divisions, Korean Air is the only airline with an aircraft-component manufacturing business.

Korean Air contends with airspace and infrastructure constraints

Walter Cho: "The airspace over China causes us many, many delays for our flights to Europe. This is a very serious concern to us and all the airlines coming into Asia."

"Incheon is starting to see a lot of constraints as well. It's not like we can build another runway and we can solve it. It is airspace that is very limited over Korea which is constraining our usage of the airport."

CAPA: Incheon opened Terminal 2, the new home for Korean Air and SkyTeam partners in 2018. Incheon is planning to extend Terminal 2 and complete a fourth runway by 2023.

Although these projects will increase the airport's capacity airspace, it is clearly an issue that will need to be resolved. Incheon's current capacity is 72 million passengers per year, which the airport is expected to reach in 2019.

Seoul Incheon Airport passenger traffic and year-over-year growth: 2009 to 4M2019

Source: CAPA - Centre for Aviation and Incheon Airport reports.

Korean is the largest airline at Incheon by a wide margin. Korean and Jin combined currently account for a 31% share of seat capacity at Incheon. Rival airline group Asiana, which includes the LCC subsidiary Air Seoul, accounts for only a 20% share.

Seoul Incheon Airport capacity share (% of seats): week commencing 27-May-2019

Source: CAPA - Centre for Aviation and Incheon Airport reports.