Korean Air takes control of KAI in rationalisation drive

NICHOLAS IONIDES / SINGAPORE

Years of talks and political pressure pay off as memorandum of understanding is signed

Korean Air (KAL) has agreed to take over Korea Aerospace Industries (KAI) after years of talks and pressure from the South Korean government for a deal to consolidate the country's aerospace sector.

A memorandum of understanding has been signed with Daewoo Heavy Industries & Machinery, one of KAI's three main shareholders, covering the purchase by KALof its entire stake in the country's dominant aerospace manufacturing company for between 102 billion won ($86 million) and 130 billion won, depending on the outcome of due diligence.

Daewoo owns just over 28% of the company, as do Hyundai and Samsung, while creditors own 15%.

KAL says it also expects to be issued with new KAI shares, lifting its stake to more than 50% and giving it management control. The airline has its own aerospace manufacturing division, KAL Aerospace, and says one option under consideration is the transfer of the assets of that division into KAI. It expects the transactions with Daewoo and KAI itself to take between two and three months to complete.

The carrier plans to turn KAI around, and establish it as "one of the key players in the aerospace industry". It says: "For KAI to operate with more efficiency, it needed a responsible dominant stockholding figure and the rationalisation of business structure."

A management team has not been agreed, although there is speculation that KAL's president and chief operating officer, Shim Yi-Taek, will be appointed head of the company. Shim was executive vice-president of KAL Aerospace between 1991 and 1999.

KAI was formed in 1999 through the merger of the aerospace operations of local conglomerates Daewoo, Hyundai and Samsung in a government-backed move aimed at consolidating South Korea's struggling manufacturing sector. KAL previously declined to fold its financially stronger manufacturing unit into the new company.

KAI's financial position is still relatively weak, however, with a high debt to equity ratio.

Industry sources say the South Korean government put pressure on the parties to involve KAL, and the airline only agreed to assume a role if it could have majority ownership.

KAI is primarily involved in military manufacturing, with the T-50 advanced trainer in partnership with Lockheed Martin and the KT-1 primary trainer its main fixed-wing programmes. It also licence-builds Bell helicopters.

KAL makes parts for Airbus and Boeing aircraft, as well as licence-building Sikorsky helicopters.

Source: Flight International