Though facing challenges of the economic slowdown and a weak local currency, Korean Air chief executive Cho Yang-ho continues to set his sights on the long-term
Given that it is a network carrier and the largest freight airline outside the major dedicated cargo operators, you could be forgiven for thinking Korean Air management would be worried right now. Reeling from volatile fuel prices, where few could win whether they hedged or not, all carriers have been hit by demand going into freefall by the economic crisis. Premium and cargo traffic have been particularly hard hit.
But Korean's chief executive Cho Yang-ho is not in panic mode. Instead he exudes the calm of a man who expects the SkyTeam carrier to ride out the storm as it has others before."Some people say we are very bold and very aggressive," he says, from his office at the carrier's headquarters, located at Seoul's now predominantly domestic and regional airport, Gimpo. "But for us it's a long-haul process because we know our visions and how to improve, and even though we have a downturn, we know how to get out. So without hesitation we invest for the longterm, so we don't lose out on an opportunity when times are good."
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The long-term picture punctuates Cho's comments throughout. This is perhaps not surprising for a man who has Korean Air in his blood. Forty years ago his father Cho Choong-hoonfoundedthe airline, which is majority-owned by Korean transport logistics group Hanjin.
Cho himself has been with the airline since 1973. He became chairman in 1999amid a major reshuffleas the carrier worked to improve a safety record blighted by a spate of accidents in the late 1990s. Later he becamechief executive and also leadsparent group Hanjin. During this period the carrier rebuilt its reputation, tooka founding role in SkyTeam and expandedat great pace to carrynearly 22 million passengers and almost 2.2 million tons of freight last year.
"In the last 10years or so in airline leadership, like other industries, there's more finance people filling the top management positions, especially chief executives, without long histories in the airline industry," says Cho. "Some time ago the top leaders started as baggage handlers and so knew every detail of the airline,so they can have a big picture. Many people come from financial institutions and are looking at short-term interests and profits, rather than the long-term development of the airline industry.
"We are improving our service and expanding our network more aggressively for the longterm, and we can expand it at the right time and at the right price," he explains. "We have established management controls, long-term investment and also I delegate my staff to make their own decisions so they can act faster without bureaucracy. It took some time to do it. In Oriental cultures it is very difficult, so it took some time to customise and make their own decisions and take responsibility. But it means I have more time for longterm planning rather than short-term day-to-day operations."
Challenging Conditions
But while there is a long-term vision, and a pretty ambitious one at that, there is a current economic crisis to deal with.
"It is difficult for all industries, including airlines, and we are no exception," acknowledges Cho. "We have suffered because a lot of Koreans stopped travelling overseas because of the weak Korean won and the business slowdown. But we did two things. We foresaw the slowdown so we preserved a lot of cash to maintain our cashflow, and we looked at further markets, such as fifth freedoms.
"In the good times, we were highly dependent on Korean customers because Koreans travel a lot," explains Cho. "[But since] last year we concentrated on fifth freedom markets like US passengers travelling to Asia; Japanese coming through Korea to Asia, China and the US. While we have a softening Korean won, we bring a lot of overseas travellers with foreign currency so they fill the gaps."
The result of this has been for the carrier to shift the balance of its business over the last two years from 60% Korean and 40% overseas business to 40% generated from Korea and a majority from overseas.
It is a similar story in cargo, where the carrier has developed its presence in China through its Tianjin-based joint venture with Chinese logistics firm Sinotrans, Grandstar Cargo. In Uzbekistan it has sealed a partnership with Navoi Airport with a view to developing it as a logistics hub for central Asia.
"For cargo, like other airlines in these difficult times, our volume is reduced," says Cho. "But we found an opportunity of investing and managing Navoi airport in Uzbekistan. Uzbekistan wanted to have a hub for central Asia and we are managing the airport, and with co-operation with Uzbekistan Airways, we find some good opportunity to expandwith new markets. Hopefully this will fill the gap of what we are losing in our own market. Overall volumes and revenue may be the same or even better."
Currency Factor
Even with this diversification Korean Air still ended 2008 in the red. The carrier made an operating loss of nearly 100 billion won ($80 million) - only the third loss in its 40-year history - and recorded a heavy net loss of 1.95 trillion won ($1.54 billion), when the sharp depreciation of the Korean won is taken into account. "Market shrinkage is one thing, but the major reasons for the loss are the high oil price and weak Korean currency," he says. He believes operating figures more accurately represent its position.
"You have to understand that on Korean balance sheets all the assets are converted to Korean won at the time of the purchase, but liabilities are in US dollars. At the end of the year, they calculate the exchange rate. In 2007 the exchange rate was 980 [Korean won against the US dollar] and in 2008 it was 1,250 - and all the loss is against the exchange rate. Cashflow-wise we did not lose that much;a lot better than other airlines," he says.
"This year is more bright because the exchange rate is 1,250 and stabilised and the oil price is around [half of 2008] at $60, so our fuel expense will be down, and exchange rate loss will not be much. We may even have an exchange gain."
For the first quarter of this year net losses widened and operating profits were down as the carrier works to meet what Cho describes in Korean Air's annual report as "ambitious yet attainable" plans for the year. It hopes to consolidate revenues - which passed the 10 trillion won mark for the first time in 2008 - at around 10.3 trillion for 2009 and to make an operating profit of 600 billion won.
If Korean's growth has been strong over the last decade, it has no intentions of sitting back for the next 10years either. In marking its 40th anniversary Korean set out its long-term vision. Come its 50th anniversary in 2019, it hopes to more than double operating revenues to 25 trillion won; boostinternational traffic numbers from 13 million today to 20 million; and serve 140 destinations.
Cargo remains key. Its importance for the carrier is clear; at over three billion Koreanwon in revenues, it accounts for around 30% of its turnover. Its Grandstar and Navoi ventures are examples of how it is looking to expand this strategy. While acknowledging the likely challenging market for cargo this year, Cho believes Koreancan take advantage of capacity cuts by rivals during the downturn to expand its market share.
"We are not just going after existing markets, we are going to create the market," he says. "In the cargo market there is still a lot of room for growth and we can create new markets like Uzbekistan. Even though we are number one, our market share is less than 5% worldwide. So I told my people, we are only 5% of market share, so go out and find some more cargo from the other 95% of market."
Fleet Renewal Strategy
A further key part of its plan is the renewal and expansion of its 125-strong fleet. It has ordered a string of new aircraft. "We are ordering more than 50 aircraft, but it's only a 25-aircraft increase as we are replacing older aircraft," he explains. Under this plan the carrier's fleet should reach 150 by 2019.
The current fleet includes 47 passenger and cargo Boeing 747s. "The 747 is a good workhorse and was a cash-cow aircraft up to a few years ago," says Cho. "Now, because of the oil price, and compared withnew aircraft, it's ageneration behind, that's why we've ordered A380s, 787s and new generation 777s."
It has 10 A380s, 10 Boeing 787s and 12 Boeing 777-300ERs on order, as well as six A330-200s, on the passenger side. Its freighter fleet will be bolstered with seven 747-8Fs and six 777-200LRFs.
The carrier is taking three 777-300s this year and is now scheduled to receive its first A380s late next year. "We were supposed to receive them before the Beijing Olympics, but we lost a good opportunity," says Cho. "We want to receive them at a time when the market is round the corner, so we can take advantage of the aircraft. Everybody is still curious about the A380. After next year hopefully the economy will returnback to normal and we'll see what we'll do with it."
The first of the 787s will follow in 2011, andKorean istakingits new high-weight A330-200s between 2010-13 - a variant it pressed Airbus to develop. "We wanted a long-range aircraft for thinner markets to compete with the 767s. Since we did not buy 767s, we do not want to have to get 767 long-range just for certain markets," he says.
Choadds: "We are still looking at whether the A380/777s can replace the 747 or whether we need other aircraft, so we look at all the possibilities."
On the cargo side he believes the combination of 747-8 and 777 freighters meets it requirements. "The cargo market is always imbalanced," he says. "A big aircraft may be good for one leg, but on the way back its load is bad. The 777 is a good aircraft for the imbalanced market. The 747 has advantages. The 777 cannot take the place of the 747 advantages on some markets."
He sees plenty of opportunities to place these new aircraft. "China is a big market, one place we do not really cover yet is Africa and we have more room in South America and Central Asia. We are in cargo there, but there is a decent passenger market there as well."
Low-cost Response
Closer to home the carrier has acted to protect its market share from low-cost carriers, last year launching low-cost unit Jin Air.
"Low-cost airlines are coming one way or the other. Korean Air is in the high end market. But low-cost is a different market, that is why we launched Jin Air," he says.
The 737-800 operator began in a small way on two domestic routes; Seoul to Busan and Jeju. It later dropped Seoul-Jeju but added a Busan-Jeju connection. Korean regulations require new operators to begin on domestic routes only and Jin Air will be clear to operate international flights from this summer. The first of these will be Seoul to Bangkok and Macau this October.
"We are ready to launch internationally and probably by next year we are going to make a profit," Cho says. The unit is targeting 90 billion Korean won in sales this year.
"Korea is one of the biggest Asian low-cost markets and I want to protect our market from other low-cost airlines coming in and taking [market share]."
But thus far overseas carriers have struggled to get a foothold in the market, frustrated in part by the introduction in late 2007 of the regulations requiring start-ups to fly domestically first before being allowed to operate on more attractive international routes. IndeedSingapore-based low-cost airline group Tiger late last year dropped plans for an associate carrier in South Korea, citing "regulatory uncertainty" among the factors.
Cho though says low-cost rivals, be theydomestic or overseas,havestruggled to make an impact "because they do not understand the Korean market". He says: "The Korean customer is very sensitive and their demands are high. Without knowing the Korean marketyou cannot just come in with price. Price is one thing, but not everything."
And so Cho's attention returns to the longterm. Even his view of how to tackle the short-term crisis is informed by the longer-term vision. "My challenge for the next year is how to make sure we come out of the crisis ready for new opportunities. Timing is very important. So when the right timing comes, we are ready for it," says Cho.
picture this
Photography is one of the passions of Cho's life and an interest he has made time to pursue. "I travel a lot. But I used to travel, finish the work, catch the next plane back," he explains. "Now I find some time to relax, take my camera with me, take one day off and enjoy the sights and take nice photographs."
This has developed into a tradition of producing a calendar showcasing some of Cho's photography and striking destinations. His 2009 calendar captures dramatic scenes, ranging from the Han River in Seoul to the Avachinsky Volcano in Kamchatka.
But the line between hobby and work is sometimes blurred. "I usually go to destinations that are potential markets for our passengers. So I take a nice picture, and make up a calendar of the nice sceneries. Then when people see the pictures, they say 'this is a nice place, I want to go next time on vacation,' and that helps Korean Air."
sum of its parts
Alongside its cargo and passenger businesses, Korean Air has been developing its catering, maintenance and, unusually for an airline,an aerospace manufacturing business.
The carrier's technical centre in Busan specialises in a widerange of repair and manufacturing capabilities, both for commercial and military aircraft.
Its manufacturing business includes increasing work on Airbus and Boeing aircraft, including the 787-for whichit manufactures six parts including the raked wing tip -and the A380 and A350. On the latter it is working on the cargo door programme.
"We have technologicalknow-how," says Cho. "We specialise in composite materials. Those arethe materials for the future. So we concentrate on that technology."
Other capabilities include avionics and parts maintenance, as well as 747-400 cargo conversions and cabin modifications.
The company is also expanding its maintenance capabilities. In the commercial sector it supports current Korean Air aircraft types, with services on Airbus A300/A330s and Boeing 737s,777s and 747s, and is keen to develop this business further.
"We have increased productivity, we are starting to getcontracts from other airlines," says Cho, citing work for United Airlines and engine overhaul contracts. "Our aero market is expanding. We concentrate on our own aircraft first and, if there is room, we expand with [third party work]."
Korean's aerospace division generated revenues of $470 million in 2008 and employs a little over 2,500 staff.
Source: Airline Business
