Tom Ballantyne

South Korea's airlines are scrambling to downsize and slash costs as the region staggers from the blow of Asia's worsening economic crisis.

Flag carrier Korean Airlines faces more than US$900 million in foreign exchange losses after the local currency, the won, dived 40 per cent against the dollar. The carrier was faced with debts of 5.7 trillion won ($4.3 billion) at the end of last year, six times more than its equity, with up to 90 per cent of it in US currency.

According to South Korean airline sources, both Korean Airlines and Asiana are operating in a sea of red ink. KAL lost some $120 million in its first six months to June 30, before the currency plunge, and its full year deficit is set to exceed $250 million. Korea's second airline, Asiana, lost $50 million in its first half and faces a blowout in its bottom line.

In an effort to stem the tide, both airlines have sold aircraft and dropped or trimmed international services. KAL, with a fleet of 113 aircraft, has already sold four Airbus A300s and a Boeing 747-400 to its creditors, which include Crédit Lyonnais and Indosuez, under a nine year leaseback arrangement estimated to save it $185 million.

The carrier also sold a 747-200 freighter to an unnamed Japanese trading firm for $43 million and is expected to arrange similar deals on at least three more jets.

Asiana, meanwhile, has sold five jets, including four Boeing 767s, and leased them back. The airline plans to sell two more aircraft this year, also under leaseback arrangements, in a bid to reduce debts by $300 million. The carrier has also deferred plans to buy five new aircraft in 1998.

South Korea's two troubled airlines have also announced plans to cut flights on unprofitable routes. KAL has trimmed 48 services on 21 international routes and Asiana cut 15 services on six international routes. Domestic routes are also being targeted.

The disastrous financial position is, however, causing mounting concern among KAL's staff. Employees worry that losses and rising debt could make the carrier a target for hostile takeover or a share buy by foreign interests.

In December, employees held an emergency meeting and voted to use all their bonuses to buy stock to protect current management. Their concern has been heightened by a government decision to raise the foreign stock ownership ceiling from 7 per cent per individual and 26 per cent for groups to 50 per cent for both.

No legal shield now exists against offshore interests attempting to grab management rights, although aviation is a core industry directly linked to the national interest, says a union executive.

The airlines' financial trauma is being exacerbated by an upsurge in discounting as the two carriers attempt to lure back lost customers and increase dwindling traffic.

With Korean passenger numbers expected to decline as a result of tough economic conditions, the two airlines are launching campaigns to attract increasing numbers of foreign passengers.

One of the few bright areas for KAL and Asiana is the promise of increased capacity on China routes, which they believe will be extremely profitable.

After talks last November, South Korea and China agreed to lift service between the two countries from 42 flights on 11 routes to 111 flights a week on 27 routes. The allocation of route rights is expected to be finalised by the ministry of transport during the first half of this year.

Source: Airline Business