[Ram Garikipati] Korean Air, Asiana face turbulent tailwinds

South Korea’s main flagship air carriers appear to be facing strong headwinds at the same time and it is worrisome.

Korean Air and Asiana Airlines are embroiled in their own difficulties, and it is all connected to the typical family-owned conglomerate management system that is so prevalent here.

While there have been calls for chaebol reform over the past years I have been here -- starting with Roh Moo-hyun administration -- there have been no drastic changes so far.

I have always admired Roh, and think he genuinely tried to reform chaebol governance and the prevalent system -- but even he was not successful and got bogged down by the entrenched system.

That aside, I am referring to the problems faced by Hanjin Group and Kumho Asiana. Their problems are different, but not completely. It all boils down to how the chaebol -- family-owned “kingdoms” operate here.

The unexpected passing away of Hanjin Group Chairman Cho Yang-ho, came as a real shock here. It came weeks after he was ousted from the board of directors of the group that controls Korea’s flagship air carrier Korean Air.

Cho, 70, who had served as the airline’s CEO since 1999, died in the United States on April 7, where he had been receiving medical treatment for a chronic lung disease -- all hush-hush till he died.

If you talk of transparent corporate governance, it should have been made public that he was sick -- after all it is a listed firm. But don’t expect such corporate transparency here, not yet.

His only son and Korean Air President Cho Won-tae is now set to take control.

Hanjin, Korea’s 14th-biggest conglomerate by assets, including its affiliates Korean Air, as budget carrier Jin Air, Hanjin KAL and several other logistics companies face an uncertain future now.

The Cho family has been struggling with a string of controversies, especially regarding the high-handed behavior of the patriarch’s two daughters and his wife.

His removal from the board was the first time a founding family member of any chaebol had been forced out of a key post by shareholders. It is a good start.

He was on trial after he was indicted last year on multiple charges that include embezzlement and tax evasion. But that is nothing, chaebol owners here have been let off on far more serious charges after presidential pardons.

His death is expected to speed up changes to the ownership structure of Hanjin Group as a whole, with his son likely to take the reins of the group’s management. Of course given the inheritance taxes the family has to pay it could delay the process … till they figure out the “legal” loopholes.

According to news reports the group has adopted an emergency management arrangement that will leave the chairmanship vacant for now and entrust decisions to a collective leadership made up of several top executives.

As regards Kumho Asiana, which owns Asiana Airlines, it is also complicated.

Reeling under humongous debt and pressure from creditors, the group’s board decided this month to sell the air carrier, a day after main creditors rejected its latest self-rescue proposal.

“For normalization of Asiana, we considered the best option and decided that its sell-off will recover trust in the group and the airline,” it said in a statement.

“The sale of Asiana -- with a 31-year history -- is also for the sake of the future development of the company, as well as for some 10,000 employees,” it said, adding that the group would proceed with the sale process.

This follows a “qualified opinion” issued by Asiana’s auditor Samil PwC.

Samil suggested that “the company might have provided limited financial information.”

It disagreed with Asiana on how much the airline allowed liabilities for operating-leased aircraft repair and earnings from mileage.

While airlines across the world have faced similar situations for decades, it is really sad that the top air carriers in Korea are in trouble.

For example, 24 airlines in the US have filed for bankruptcy under Chapter 7 since the early 1980s, while 60 have filed for bankruptcy under Chapter 11.

Chapter 7 bankruptcy is a legal process that can help individuals get relief from debts by discharging -- or clearing -- some or all of what’s owed. Chapter 11 is a form of bankruptcy that involves a reorganization of a debtor’s business affairs, debts and assets.

Meanwhile, SK and Hanwha groups have been mentioned as potential buyers of Asiana, but they are also family-controlled, so I don’t see how the ground situation will change.

With low jet fuel prices now, one would have expected Korea’s top air carriers to rake in profits, so it certainly means there was something wrong with their management.

It all boils down to the chaebol culture. The “family” reigns supreme and they do whatever they want without bothering about other stakeholders.

That is why it is good that the National Pension Service which has substantial stakes in chaebol firms is now strengthening its stewardship code. Hopefully, politicians with a vested interest won’t put pressure to derail it.

Of course some blue chip firms will continue to thrive with their skullduggery. There are many which I won’t name.

It is also good that activist shareholders -- not just overseas investors, but even Korean firms -- are not keeping quiet and demanding changes to the way the chaebol operate.

There is still a long way to go, but finally things are moving -- 15 years after I first landed in Korea.


Ram Garikipati
Ram Garikipati is a business writer at The Korea Herald. He can be reached at ram@heraldcorp.com -- Ed.