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Korean Air restructuring at risk after Delta takes stake: analysts

US carrier's investment bolsters Cho family against activist fund

Delta Air Lines' investment in Hanjin-KAL could help the Korean Air parent fend off calls for reform by an activist fund. (Photo by Takaki Kashiwabara)

SEOUL -- Delta Air Lines' 100 billion won ($86.4 million) investment in Korean Air Lines parent Hanjin-KAL last week threatens to slow the restructuring of South Korea's largest carrier by bolstering the conglomerate's family owners against calls for change from a local activist fund, analysts are warning.

Delta announced last week that it had acquired a 4.3% stake valued at 103.2 billion won in Hanjin-KAL, the largest shareholder of loss-making Korean Air. The U.S. carrier, which a year ago announced a broad partnership with the South Korean airline, has promised to increase the stake to 10% over time, after receiving regulatory approval.

The move has been seen by the market as giving greater power to the scandal-ridden Cho family, which has come under fire from the Korean Corporate Governance Fund, Hanjin-KAL's second-largest shareholder with a 15.98% stake.

Last week, the U.S. airline refused a request from KCGI to speak with Delta CEO Ed Bastian about the family's "backward and illegal practices." Delta also said that it had no intention of controlling Korean Air.

"KCGI has suggested options to make [Hanjin-KAL's] corporate governance transparent, but Delta has blocked this ... even if it did not intend to do so," said Park Ju-geun, president at CEO Score, a corporate analysis company.

Delta has made clear that it does not support KCGI's calls for spinning off the carrier as part of the activist's demand for a wider restructuring and improved transparency. KCGI has also called on the conglomerate to sell its loss-making hotel business to reduce its 700% debt-to-equity ratio. Delta said it backed the company's Vision 2023 plan unveiled in February, which targets 16 trillion won of sales and 1.7 trillion won of operating profit by that year. However, Hanjin-KAL has given little concrete detail on how this would be achieved.

"The company's Vision 2023 plan will remain, but its corporate value will improve slower than the market's expectation," said Choi Nam-kon, an analyst at Yuanta Securities.

The Cho family owns 28.93% of Hanjin-KAL. It would need 33.3% to fend off proposals from KCGI, said Park, which could be achieved if Delta voted with the family.

"We value our partnership with Korean Air and are confident they have taken the right steps," said Hiroko Okada, a regional manager at Delta. "We remain focused on delivering on the benefits of our JV for our customers. We will not have a control in the Korean Air management."

KCGI, which had proposed that Delta help boost the group's transparency to global standards, raised questions about the carrier's motives for making the investment.

"If Delta Air Lines bought Hanjin-KAL's stake due to a secret deal with Hanjin group, it would violate the Republic of Korea's fair trade act and Capital Market Act," said KCGI in a statement. "We hope Delta Air Lines abides by the Republic of Korea's regulations."

The logic behind Delta's move was not obvious, said Park. "It does not make sense that Delta helps Hanjin with no reason," he said.

But Delta could be trying to protect its joint venture, suggested one analyst. "Delta apparently intends to help Hanjin group when it is in need," said Shin Ji-yoon, head of the research center at KTB Investment and Securities. "Delta has strengthened its alliance with Korean Air recently through their joint venture."

Hanjin-KAL has lost a quarter of its market value since Friday when Delta announced its investment in the company. Before the fall, Hanjin-KAL shares had doubled since KCGI took its stake in November, aiming to improve corporate governance and transparency.

Hanjin-KAL's management of its businesses has come in for strong criticism. Korean Air has struggled over the past five years, posting only one annual net profit, in 2017. Financial support for Hanjin Shipping, which entered bankruptcy protection under the brother of former Korean Air Lines Chairman Cho Yang-ho, and real estate and other poor investments have weighed on earnings.

Moreover, the family has been in the headlines after a series of scandals.

Cho Yang-ho was ousted from the boardroom of the country's largest airline in March and forced to resign as Korean Air's chief executive as more than a third of shareholders opposed his reelection due to an embezzlement allegation against him.

Cho died suddenly in April, and his son, Cho Won-tae, took over as chairman. But a family battle over control delayed the announcement of a permanent successor.

The elder Cho's two daughters, who worked for the airline, have also sparked controversies. Cho Hyun-ah, a former vice president of the airline, was forced to resign after she assaulted Korean Air cabin crew on a flight in 2014 because she was unhappy with how nuts were served to her in first class.

The other daughter, Cho Hyun-min, resigned from her position as vice president of the airline last year after she was accused of physically abusing an employee of an advertising agency.

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