Each day at noon, thousands of Korean Air (KAL) employees working at the carrier's Kimpo Airport headquarters building in Seoul make their way to the lunch room on the fifth floor. As they proceed down a long windowed hallway to the staff canteen, they cannot avoid seeing in an attached hangar the crippled wreckage of HL7496 - the Boeing 747-400 declared a write-off after a landing incident at the airport last summer.
The remains of the once graceful machine, with missing engines, wing and fuselage damage and conspicuously absent landing gear, serve as a stark reminder of the problems facing the airline. The aircraft was only two years old when it skidded off a wet runway into mud, sustaining damage in excess of $150 million. As a result, KAL was stung by the largest insurance pay-out in the history of aviation, beating Taiwan's China Airlines, which lost an even younger 747-400 at Hong Kong's former Kai Tak Airport in a similar landing incident late in 1993.
To its credit, KAL has many other records that it can be proud of, but its safety record is one that has been hanging negatively over it for two years. By any evaluation, its operational record is a disaster and its reputation so battered that South Korea's president Kim Dae-jung has branded the carrier an embarrassment to the country.
For years, KAL added to the country's pride. It expanded at a phenomenal rate and operates around 110 aircraft on 359 weekly international flights to 73 cities in 26 countries. But it has had four hull losses since August 1997, involving one 747-300, one 747-400, one Boeing MD-83 and one Boeing MD-11F freighter. Add these disasters to more than five domestic landing incidents over the last two years and you have an airline that is in need of change.
KAL insists this is taking place quickly. This is for one main reason, executives begrudgingly admit: the troubles are so serious they could mean the end for the airline.
Shim Yi-taek, named president and chief executive in April, is portrayed by KAL as the man who will save the carrier. He began his career with the airline 27 years ago, after spending several years with its main shareholder, the Hanjin transportation group. Groomed by Hanjin's chairman Cho Choong-hoon, Shim has been labelled by many outsiders as a Cho family sympathiser, a puppet installed to give the appearance of internal change.
Shim disputes this. "I'm not from the owner-founder's family," he insists. Many rank-and-file KAL employees agree, saying he is approachable and willing to listen, unlike the previous president and chief executive Cho Yang-ho. Shim says his personal and business styles are radically different from his predecessor, the elder Cho's son.
Shim was appointed to the top position after the elder Cho, then the carrier's chairman, resigned, and his son, Yang-ho, moved into his father's former role. The changes were all but forced by South Korea's president Kim, who after a Cabinet meeting in April issued an unprecedented public demand of a private company: that a "professional" management team be put in place.
Neither Cho has entered the airline's headquarters building since, primarily because Kim's call caused one of the biggest losses of "face" in the country's corporate history. While the Cho family holds a 27% stake in the carrier through the powerful Hanjin Group, the employees insist it now only has a "hands-off role". Although the younger Cho was moved up to chairman in the management shake-up, they say he has primarily been dealing with issues relating to IATA, the Association of Asia-Pacific Airlines (AAPA), and governmental affairs.
The Chos gave up their management positions two days after President Kim issued his demands. At the same time, KAL announced that all 29 of its executives above the level of managing vice- president had tendered their resignations. When the resignations were rejected by the airline and a rotation of 25 executives took place instead, critics branded the changes "cosmetic". These criticisms continue to this day, but Shim is unconcerned by the scepticism.
"I don't really care so much about it," says Shim. "I spend my time improving the safety level of Korean Air and encouraging people to work together."
By "working together", Shim means allowing managers below him to come up with their own ideas and to run their own departments, rather than be told what to do. The previous management was notorious for its authoritarian, autocratic style, and employees are fearful of the Cho family. This is not healthy in any organisation, and Shim knows it. As a result, he says he is far more visible than his predecessor, and regularly tours departments to speak to employees.
KAL's industrial relations are still carried out in Korean fashion, with employees paying their respects and only speaking when spoken to, while an entourage of enthusiastic underlings trails close behind. But still, it is better than before, according to airline staff.
"Let me put it this way," says one. "I don't feel so scared around Mr Shim. He is much easier to talk to."
So what has Shim accomplished in terms of changes at KAL? Much, he claims proudly, adding that the improvements he has helped put in place date back to well before his appointment to the top job.
In August 1997, after a 747-300 was lost in a crash on Guam that killed 229, says Shim, he immediately began working to improve flight safety. Although he was at the time executive vice-president of the carrier's aerospace division, he says he wore "many hats". Improving flight operations was top of his agenda.
KAL called in the US-based Flight Safety Foundation to carry out a full inspection of flight operations after the Guam crash. Its audit identified problems with the airline's operational system, especially pilot training.
In May last year, alliance partner Delta Air Lines was hired to assist with necessary advancements. It worked until July identifying further areas for improvement and advising on how the carrier could upgrade its operational systems. In September, a formal contract was drawn up under which Delta would help KAL in three main areas: improving flight operations, developing an operational control centre and improving cabin crew safety training.
But domestic landing incidents in September and October led the South Korean Government to impose operational penalties on the airline that lasted six months and cost it more than $30 million in lost revenue. Adding insult to injury, South Korea's president Kim contracted rival Asiana Airlines for the first time to carry him and a delegation on an official visit overseas.
KAL remained problem-free for the following five months, but a scathing internal report then made its way onto pilots' sites on the Internet, blasting the carrier for the handling of its 747-200 fleet. The 23-page review detailed serious crew errors and strongly criticised KAL's operational management culture. Its alleged practice of promoting ex-military crew members above others was slammed, as was a lack of English language use by management and poor English among pilots.
In a lengthy public defence early in March, KAL called the leaked assessment, which was carried out between May and July last year, "overly critical, non-constructive and consisting of personal observations accumulated before implementation of the actual audit".
Justified or not, the defence was made worthless days later, when on 15 March KAL lost an MD-83 in a Pohang landing incident. One month later came the crash of an MD-11F at Shanghai in China which killed all three on board as well as at least five on the ground.
New government-imposed sanctions were slapped on the airline soon after - this time for a year. Delta, Air Canada and Air France suspended codeshare arrangements. The US Government at the same time advised the thousands of US military personnel stationed in South Korea not to fly on the airline.
Shim says he is confident the code-share arrangements will be restored. He is upbeat about the internal changes. Since the Shanghai crash, he and his flight operations department have been working to build on the Delta work.
In June, the carrier confirmed a major contract with FlightSafety Boeing, which from August was to have taken over the responsibility for all initial and recurrent simulator training, as well as "pilot tracking", for at least two years. Almost 100 FlightSafety Boeing instructors and managers are being assigned to KAL.
"It's a $30 million contract on top of the $15 or $16 million consultation with Delta Air Lines," says Shim. "We are pouring dollars to train Korean Air's pilots to be sure we can clean up every possible single cause of future accidents."
The airline is at the same time working to improve cockpit management with other parties, including the University of Texas's Aircrew Research Center to create a customised cockpit resource management programme. Other plans include the hiring of more foreign captains. KAL employs more than 1,500 cockpit crew, including over 120 foreign captains. It plans to hire around 50 more foreign captains this year and up to 100 next year.
The airline is working on other changes for implementation this year, that will see training at its recently expanded new-pilot training centre at Cheju island in the south stepped up. In addition, managers are pleading with pilots to carry out "go-arounds" when landing in poor weather - some of the former air force captains in particular are said to "lose face" when they cannot land aircraft on their first attempt.
Limits for landings in poor weather have been toughened. From October, a new system of working hours will be put in place. US aviation regulations will be applied, limiting the number of hours a pilot can fly to 1,000 a year, or an average 83 each month. Pilots will specifically be prevented from flying more than 100h each month. KAL has also extended the number of flying hours first officers must accumulate before becoming captain, raising them to 4,000 from 3,000.
Flight operations improvements are not the only changes being implemented at KAL. Shim says employee salaries, reduced after the effects of the regional economic downturn began to bite late in 1997, have been restored to "normal levels", while other benefits have been increased.
As far as the fleet is concerned, KAL is planning to concentrate on 747-400 freighters, which are likely in the coming years to replace its 747-200Fs and possibly MD-11Fs. On the passenger side, KAL hopes to sell its remaining 747-200/300s this year and to trade in its MD-82/83s and Fokker 100s for the 737s due next year. Three Airbus A330s and two Boeing 777s are scheduled for delivery this year, while more 777s and A330s will be delivered in 2000.
Shim says KAL will be conservative about aircraft acquisitions, in part because of the carrier's safety woes, but also because the South Korean economy is only just recovering from the major downturn which began late in 1997.
"For the next few years the increased rate [for aircraft] will be quite moderate," he says, adding that capacity will be increased by between 3% and 5% annually in the coming years. He plans for a fleet of between 110 and 120 aircraft. This is far below what the carrier said it would do in 1996 - then it said it planned to operate 200 aircraft by 2005.
KAL's overall business has been strong this year despite its safety troubles. The airline posted a net profit of 296.6 billion won ($246 million) in 1998 - a turnaround from the year earlier, when it posted its worst-ever net loss. But this was achieved largely on the back of aircraft sales. At an operating level, last year's figures were among the worst in KAL's history. It forecasts a healthy operating and net profit for the current calendar year, however.
The business impact from the Shanghai accident "is not that big", Shim says, adding that KAL has "recovered" from a resultant decline in business.
Shim expects the market to remain strong for at least the next three years, at which time it will be operating from the new Inchon International Airport. Based 50km (30 miles) west of Seoul, Inchon will replace Kimpo as South Korea's main international gateway when it opens in January 2001, although, while Kimpo will only serve the domestic market, KAL will remain based there. The new airport, with an initial capacity for 27 million passengers and 1.7 million tonnes of cargo, will boost profits, says KAL.
Cargo depressed
The cargo business has suffered particularly. Conditions remain depressed this year, according to vice-president for cargo sales and marketing, Lee Ji-young. While KAL's huge cargo division is profitable, yields and load factors are much lower than last year's, which in turn were significantly down on 1997. The strong US dollar against the South Korean won has led to a widening gap between exports and imports, and frequencies have been reduced on some routes while several other services have been cut outright. While South-East Asia and Japan routes are healthy, "we are now under a so-called directional imbalance on European and US routes", Lee says. He adds that it is unlikely that new cargo services will be added this year, although if the market shows signs of recovery in the second half, new services could be added in 2000 to Miami and to northern European destinations.
Despite these difficult conditions, KAL is optimistic about cargo in the medium to long term. KAL is a major player in air freight, in part because of its owner Hanjin's dominance in sea freight. The airline claims its cargo division is today the world's second largest behind Lufthansa's. KAL has joint service partnerships with 19 carriers and Lee says it is hoped that these can be expanded. Hopes by KAL's cargo division to enter into a multilateral freight alliance have been held back by regulatory issues at home, however. Lee says talks were held last year with Lufthansa - the German carrier is exploring a global cargo alliance with freight partners Singapore Airlines, SAS and others - on a global freight tie-up, but KAL is not able to join such a grouping at this time. A cargo tie-up "would be to save costs of course, but also to expand our network," says Lee. "It is necessary, but there are difficulties for Korean Air."
KAL's troubles are affecting it in a year which was supposed to have been one of celebration. On 1 March, it silently marked the 30th anniversary of the Hanjin group's takeover of the South Korean Government's airline division.
Minds are focused on bringing the airline a new lease of life, possibly through a corporate identity revamp. The last time KAL made such a move was on its 15th anniversary in 1984 - one year after the infamous shoot-down of its Flight 007 in Soviet airspace, which killed all 269 on board. At that time KAL changed its livery and its name, from Korean Air Lines to Korean Air.
Shim says that "some people advised me to change even the colour of the aeroplanes or the company name". He has not ruled out such changes, but believes them unnecessary because the "current colour and the logo is very much identified in the industry".
While that logo is unfortunately also associated with accidents, Shim adds that a corporate identity facelift would be superficial. Substantive change is what will truly show in the end.
Source: Airline Business
