Delta has acquired a 4.3 percent equity stake in Hanjin-KAL, the largest shareholder of Korean Air. The investment demonstrates Delta’s commitment to the success of its joint venture with Korean Air and the customer benefits, market positioning and growth opportunities the partnership enables. Delta intends to increase its equity stake to 10 percent over time, after receiving regulatory approval.
Together with the team at Korean Air, we have a vision to deliver the world’s leading trans-Pacific joint venture for our shared customers, offering the strongest network, the best service and the finest experience connecting the U.S. with Asia
This is already one of our fastest-integrating and most successful partnerships, and experience tells us this investment will further strengthen our relationship as we continue to build on the value of the joint venture
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Delta and Korean Air operate the industry’s most robust trans-Pacific joint venture, providing customers with seamless access to more than 290 destinations in the U.S. and over 80 destinations in Asia, including the partnership’s award-winning hub at Seoul-Incheon (ICN).
Since launching in May 2018, Delta and Korean Air have strengthened cooperation by expanding joint operations in the trans-Pacific to include more than 1, 400 codeshare flights, including connections throughout Asia and the U.S. Teams at both airlines have also worked closely together to provide the best travel experience for customers between the U.S. and Asia, integrate sales and marketing activities, and enhance loyalty program benefits, such as the ability to earn more miles on both loyalty programs and redeem them on a wider range of flights. Additionally, Korean Air and Delta have launched cargo cooperation across one of the most comprehensive route networks in the trans-Pacific market.
The partnership is contributing to Delta’s first year-over-year growth in the Asia Pacific region since 2012, with new service launched earlier this year between Minneapolis/St. Paul and Seoul, as well as Seattle and Osaka, operated in partnership with Korean Air. Additionally, Korean Air has launched new service linking Boston with Seoul.
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The joint venture builds on nearly two decades of close partnership between Korean Air and Delta, both founding members of the SkyTeam airline alliance.
Delta is growing its international footprint and leveraging partnerships with key airlines in regions around the world, including through joint ventures and equity investments. These investments improve alignment between Delta and its partners, creating a more stable environment for growth amid an increasingly dynamic global landscape.
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But Delta is not merely replicating this pattern with a deal announced Thursday to indirectly invest in Korean Air, which it already has a JV with. Instead, the investment is a vote of confidence in Korean Air’s new leader, Cho Won-tae (Walter), and the wider embattled Cho dynasty as they come under growing threat from an activist shareholder.
That also makes Delta’s investment defensive. The activist is gaining ground in its shareholdings but without a concrete alternative vision for Korean Air. Delta’s investmentgives more breathing room to the Cho familyas they adjust to the April death ofpatriarchCho Yang-ho, sort out resulting succession planningand addresslegal cases. The family has control of Korean Air through various ownership stakes, but the activist shareholder can still press for change.
Delta announced on Thursday it bought 4.3% of Hanjin-KAL, a major shareholder of Korean Air. Delta intends to raise this amount to 10% subject to regulatory approvals. The value of the transaction for existing shares was undisclosed, but Delta is highly profitable and its investments have generally been accepted by analysts.
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Korean Air chairman Walter Cho received a credibility boost and breathing room from Delta Air Lines'... [+] June 20 investment into Korean Air shareholder Hanjin-KAL. Delta, which already has a joint-venture with Korean Air, invested 4.3% and intends to grow this to 10%. The activist shareholder has said it does not want control of Korean Air but does want to effect change. Delta has invested in other partners in anticipation of a major partnership. Cho succeeded his father, who died in April. Photographer: SeongJoon Cho/Bloomberg
The investment is relatively costly considering Hanjin-KAL shares are at a record peakin recent history. Shares in June have been hovering around 40, 000 won (US$35), more than double the 16, 000 won ($14) pricein July 2018.Just inApril, shares were below 30, 000 won ($26).
The Cho family owns approximately 29% of Hanjin-KAL.Their lack of majority ownership has been picked at by the Korea Corporate Governance Improvement Fund (KCGI), which last November disclosed it amassed a 9% stake in Hanjin-KAL, causing shares to rise in anticipation of airline reform. KCGI has gradually grown its stake, reaching 15.98% in May, according to regulatory filings. Despite KCGI's success in acquiring more shares, it failed to bring major change at a Hanjin-KAL shareholder meeting. It succeeded in rejecting Cho Yang-ho's re-appointment as Korean Air chairman, but this was symbolic.
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New chairmanWalter Chosaid in June, “If needed, amid the rapidly changing industry trend, I will seek business change through discussion with board members.” He was not specifically referencing KCGI, but their growing presence is unmistakable. The Korea Herald speculatedKorean Air is “in all-out efforts to defend its management rights” from KCGI. Korean Air was accused earlier this year of pressuring employee shareholders tohave a proxyvote for them atthe shareholder meeting.
Cho said KCGI are “one of the shareholders” and that so far this year “we have not met them privately, nor did they ask us to meet. The last time we met was last year.”
As KCGI makes ground, the Cho family’s stake is not guaranteed under the status quo. The family’s 29% stake includes 17.8%held by the late Cho, whodied in April. Korea’s high inheritance tax could amount to upwards of 170 billion won ($147 million) for the late Cho’s estate, according to some analyst estimates.
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KCGI has gained support from other shareholders by leveraging a string of Cho family scandals that have dominated headlines in Korea – and sometimes abroad, such as the infamous 2014 “nut rage” incident onboard a Korean Air A380 at New York JFK. Other scandals range from illegally importing luxury goods, circumventing the employment visa process for Filipino workers, throwing a cup of water, and claims of embezzlement.
KCGI’s underlying issue is the less sensationalist claim Korean Air has been under-performing due to Cho family management, theheart of a chaebol. The activists want more independent management and for associated companies to be sold off.
There are questions what Delta gains from the investment – after all, Delta already has a joint venture with Korean Air. In contrast, Delta bought Singapore Airlines’ 49% stake in Virgin Atlantic in order to partner with Virgin, and Delta bought into China Eastern to deepen their partnership and hopefully later form a JV.
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Delta spent a few years courting Korean Air for the JV, sometimes deploying heavy-handed tactics by restricting codeshares and frequent flyer benefits. At one point, it was thought Delta may be unwilling to partner with Korean Air unless equity was involved.
CEO Ed Bastian said in March about investments more broadly, as quoted by Reuters: “What we have found is that by making an investment into these businesses we can get actually inside the board room and help to start shape the strategy.”
Korean Air is finding the JV has done better than expected. Korean Air's 2018 Americas performance showed a 6.5% yield improvement and 3.7ppt load factor increase on a 2.5% ASK reduction, despite the JV onlylaunching in May 2018.
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Bastian said in a statement announcing the Hanjin-KAL equity: “This is already one of our fastest-integrating and most successful partnerships, and experience tells us this investment will further strengthen our relationship as we continue to build on the value of the joint venture.” The JV’s fast integration may be due to Delta and Korean aligning systems prior to final approval and kick-off.
There is seemingly little risk for Delta’s investment. The wider Hanjin-KAL portfolio shows more benefit, such as the company’s majority stake in Jin Air, the low-cost carrier that is effectively the budget sister of Korean Air but not owned by Korean Air.
Jin Air had been performing well until growth was suspended because the airline was found to have as a director Cho Hyun-min (Emily), who was born in the United States. An unusual but forgotten quirk of Korean law prohibits foreign-born directors, a requirement not often found in other jurisdictions. Korean authorities considered the drastic punishment ofcancellingJin Air's license, but they ultimately let Jin Air continue business, and permitted Hanjin to retain ownership.
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Walter Cho has had an unusually early high-profile start for an aviation executive. He hosted this month's IATA annual general meeting in
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