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Asiana bailout: Price war, weak economy blight South Korea airlines

HDC Hyundai Development to take control of No. 2 carrier in $2bn deal

Excessive competition, along with a weak South Korean economy, has contributed to Asiana's financial woes.

SEOUL -- Construction group HDC Hyundai Development has come to the rescue of troubled Asiana Airlines with a $2 billion offer, but a further realignment is deemed inevitable for the country's beleaguered airline industry.

A consortium involving Hyundai Development and leading brokerage Mirae Asset Daewoo has been selected as the preferred bidder for the airline, parent company Kumho Industrial said on Nov. 12.

Hyundai Development will buy Kumho's 31% stake as well as newly issued shares of Asiana under the plan, taking majority control of the debt-laden airline. A formal agreement is expected to be inked by year-end.

Asiana Airlines's trouble stems from intensifying competition in the local market amid declining traffic. Carriers are fighting price wars for short-haul international destinations such as Japan and China as the slowing South Korean economy discourages locals from flying.

Airlines also are hampered by rising fuel costs and aircraft leasing fees due to the South Korean currency's roughly 10% depreciation against the dollar over the past year. All eight players -- market leader Korean Air Lines, Asiana and six budget carriers -- incurred an operating loss for the April-June quarter, local media report.

Flaring political and trade tensions between Seoul and Tokyo dashed hopes for the peak travel season during the following quarter. The number of South Korean visitors to Japan tumbled 48% on the year in August and 58% in September, the Japan Tourism Agency said. Japan routes account for about 10% of revenue at Korean Air and Asiana -- and 30% to 40% at budget carriers.

Domestic air travel is a small market in South Korea, a country roughly the size of the U.S. state of Indiana. Low-cost carriers have focused on short-haul foreign destinations, including mainland China and Taiwan. Travel to Japan was particularly strong in recent years.

But as the travel industry fell victim to the deepening political rift, airlines slashed fares on round-trip flights between South Korea and cities such as Tokyo, Osaka and Fukuoka to around 10,000 yen ($92), eating into their bottom line. Budget players Jeju Air and Jin Air appear likely to post a loss for the July-September term, while Korean Air is expected to report a profit drop of more than 20%.

The low-cost segment looks to grow even more crowded. Three new companies -- Air Premia, Aero K and Fly Gangwon, which counts a regional government and local businesses among its owners -- have announced plans to enter the business. Momentum is building for realignment, and a leading newspaper reported last month that budget carrier Eastar Jet is up for sale.

In bidding for Asiana, the HDC-Mirae camp overwhelmed two other bidders including Aekyung Group, the operator of budget carrier Jeju Air, by offering about 2.4 trillion won ($2.06 billion) for Asiana and the airline's low-cost units Air Busan and Air Seoul.

The buyer intends to "keep investing in deployment of the latest aircraft and improving service," Hyundai Development Chairman Chung Mong-gyu told reporters in Seoul, as it looks to do everything to "help Asiana become competitive."

The real estate developer and construction group also operates luxury hotels and duty-free shops. Hyundai Development hopes to create synergies from the acquisition, such as air-and-hotel bundles. Chung cited "in-flight duty-free sales" and said the group will consider collaboration in other areas after the purchase.

The sale essentially dissolves Kumho Asiana Group, which loses the breadwinner generating 60% of its revenue. Putting the airline up for sale became the group's only option after an accounting scandal came to light earlier this year.

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