KCGI slams KAL owner family for losses, rules out heiress' return to management

Holding the ownership family of the nation’s flag carrier Korean Air responsible for its indebtedness, the head of a Korean private equity fund on Thursday reiterated calls to oust the incumbent chairman and bring in professional managers to run the struggling transport empire.

Kang Sung-boo, chief executive of Korea Corporate Governance Improvement, also ruled out the possibility of Cho Hyun-ah -- the heiress to Korean Air, with whom he had forged an alliance to dethrone her brother -- returning to management.

“The dogmatic financial decisions made by owner families have taken a toll on the group,” Kang said, at a press conference held in Seoul, citing Hanjin’s acquisition of Hanjin Shipping despite bleak prospects according to market watchers. The poor governance also exhibited a lack of risk management, as it has failed to recognize its perpetual bonds as liabilities and to adopt fuel cost hedging strategies, Kang claimed.

According to Kang’s argument, Hanjin KAL under the Cho family has left its air carriers including Korean Air and Jin Air increasingly vulnerable to external uncertainties such as geopolitical risks across the world and fluctuations in foreign currency exchange rates and crude prices.

Korean Air’s average debt-to-equity ratio came to 861.9 percent as of end-September 2019, the highest among Kospi 200 constituents. The accumulated losses of Korean Air came to 1.7 trillion won ($1.41 billion) from 2014 to 2019. Kang was speaking at a press conference held in an apparent bid to turn the tide in the unfolding proxy battle. The KCGI-heiress alliance faced an unexpected setback earlier this week over former Korean Air executive Kim Chi-hoon, a boardroom member candidate, and the Korean Air labor union siding with the incumbent chairman.

The rare open briefing by a private equity firm was held three weeks after it forged a coalition with the heiress and Bando Construction. The shareholders meeting to decide the fate of Chairman Cho will be held in March.

Hanjin KAL countered KCGI’s claim later in the afternoon that its statement was misleading and groundless. Liabilities are indispensable in the aviation business by nature to carry out large-scale investments and secure planes, while it employed a global accounting standard to regard perpetual bonds as capital.

The group also lashed out at the alliance that its pledge of excluding the heiress’s involvement in management is a lie and that she may step into management once the boardroom is taken by candidates recommended by her side.

On KCGI plans to convert Korean Air into a “platform business,” Hanjin KAL said the plan is unrealistic and elusive. According to Kang, the plan is aimed at making a foray into digital convergence, duty-free shop operations, tourism and aerospace in the long run, beyond its air carrier business.

Meanwhile, the activist fund manager denied accusations that the alliance is seeking short-term capital gains, saying it is different from US hedge fund Elliott Management, which has locked horns with Samsung and Hyundai in recent years.

“Unlike activist funds, we do not intend to carry out shareholder activism like excessive dividends (or) share buybacks for the sake of a short-term profitable change,” Kang told the press conference Thursday in Seoul. “Instead of short-term gains, we focus on improving the portfolio firm’s long-term fundamentals and transparency in the decision-making process.”

Kang added that KCGI’s vehicle that invested in Hanjin KAL is under a 10-year lockup period with a maturity of 14 years, and mostly comprises Korean limited partners.

The KCGI-led coalition had a 32.06 percent stake in Hanjin KAL as of end-January, while Chairman Cho’s coalition, including other family members, owned 22.45 percent as of Thursday.

Other notable shareholders of Hanjin KAL include Delta Air Lines, Kakao, the National Pension Service and some 10,000 small shareholders.

Cho’s tenure as a Hanjin KAL executive expires in March, when he will move to extend his term via a shareholder vote. KCGI looks to add seven directors to the board. Hanjin KAL’s six-member board will be reduced to four, if the two directors, including Cho, fail to extend their terms.

By Son Ji-hyoung (consnow@heraldcorp.com)