Asiana Airlines, Inc.

views updated

Asiana Airlines, Inc.

Asiana Town
Kangseo P.O. Box 98
47 Osae-Dong
Kangseo-ku
Seoul
Korea
Telephone: +82 (2) 669-3183
Toll Free: (800) 227-4262
Fax: +82 (2) 669-3170
Web site: http://us.flyasiana.com

Public Company
Incorporated: February 17, 1988
Employees: 6000
Sales: W 1.78 trillion ($1.41 billion) (1999)
Stock Exchanges: KOSDAQ
Ticker Symbol: 20560
NAIC: 481111 Scheduled Passenger Air Transportation; 481112 Scheduled Freight Air Transportation; 481211 Nonscheduled Chartered Passenger Air Transportation; 481212 Nonscheduled Chartered Freight Air Transportation; 48819 Other Support Activities for Air Transportation

Asiana Airlines, Inc., Korea’s second national airline, has carved out an impressive place for itself during its relatively brief time in the skies. Founded by the Kumho Group as a chiefly domestic carrier. Asiana has invested in new planes from the start and has sought to compete on quality rather than price. Asiana flies a fleet of more than 50 planes to 50 destinations in 13 countries and has extensive cargo and catering operations in addition to its passenger business.

Origins

Asiana Airlines was formed in February 1988. Korea’s newfound prosperity was creating rising consumer demand for airline tickets, notes aviation historian R.E.G. Davies, and the transitioning of the country from Third World to industrial made having a single national airline (Korean Airlines Co. Ltd., or KAL) seem an obsolescent idea. With KAL unable to maintain market share in the face of unprecedented demand, Korean president Chun Doo Hwan granted a license for a second national airline to the Kumho Group. This was to be headquartered in the southern city of Kwangju in the Chollanam-do Province, an area somewhat removed economically and politically from the Korean mainstream.

The Kumho Group worked its way into aviation literally from the ground up, starting in taxis in 1946 before moving on to buses and, finally, planes. It was also the country’s largest tire producer. Kumho founder In Chon Park, a former police officer, dreamed of founding an air empire. However he died in 1984 before this could be realized.

His son, Dr. Park Seong-Hwang, Kumho Group chairman and former transport minister, saw the dream through as Asiana’s first chairman. A former economics professor trained at Yale, he helped secure $36.5 million in start-up capital for the new venture, 35 percent of it came from the Korean Development Bank.

Asiana began scheduled services the week before the government lifted restrictions on foreign travel on January 1, 1989. The pent-up demand was immense. Asiana began with domestic routes based on hubs in Seoul and Cheju. Within a year and a half, it was also flying to four Japanese destinations. In fact, Asiana was able to provide passengers from provincial cities in Japan better international connections in Seoul than they could obtain using Japan’s own international airports, noted Business Week.

With domestic fares already low in Korea, Asiana competed on service quality. It operated relatively new planes from the beginning, starting with Boeing 737s leased from Ireland’s GPA Group. Asiana ordered still more planes in April 1989. This show of confidence continued in September 1990, when the very young airline ordered or optioned $6 billion worth of planes from Boeing.

Asiana’s revenues were less than $100 million in 1989, and the carrier lost $46 million. Losses of about $90 million were posted the next two years, though revenues reached $150 million in 1990 and doubled in 1991. The company had about 3,000 employees at the time.

Spreading Its Wings in 1991

In early 1991, Asiana’s international network spread to Taipei, Hong Kong, Bangkok, and Singapore—all important commercial centers. That November, the carrier launched an ambitious passenger/freight service to Los Angeles via Boeing 747. By the end of 1992, Asiana had also added separate routes to San Francisco and New York. The carrier would have preferred Chicago over San Francisco, but it was already served by KAL and the U.S. government would not allow Asiana to fly there as well. International flights accounted for 65 percent of Asiana’s revenues of $404 million in 1992.

Asiana’s international expansion outpaced the Korean government’s ability to hammer out air traffic agreements with other countries. Korea and China were working on a bilateral agreement covering the Beijing-Seoul route in early 1993; China only wanted to allow one of Korea’s airlines to operate between the two cities. Guidelines established in 1990 had only permitted Asiana to fly to Japan, Southeast Asia, and the U.S., but these rules were soon bent.

Routes to two very different destinations were launched in July 1993: Ho Chi Minh City and Honolulu. Unfortunately, Asiana also experienced its first crash that month when one of its Boeing 737s hit a mountain on the Korean coast. By this time, Asiana had a fleet of 29 new Boeing aircraft flying 6 million passengers a year to 16 domestic and 19 international destinations. It had 6,000 employees. The company planned to double in size within seven years.

Profitable in 1994

Asiana’s president since 1991, Park Sam-Koo, was the younger brother of company founder Park Seong-Hwang. Park Sam-Koo banned smoking from all planes upon learning the majority of passengers preferred nonsmoking seats. Such decisiveness, noted Business Week, helped the carrier carve out its place in a competitive market and post its first profit in 1994—W 14.2 billion ($18 million) on sales of W 792.5 billion ($993 million). The airline had lost $200 million during the previous five years. Kumho periodically infused capital into the airline to keep it running. The group did dilute its holdings; it owned 75 percent of Asiana in 1993.

Asiana signed a code-share agreement with Northwest Airlines Corp. in August 1994, operating trans-Pacific routes in tandem with Northwest and giving it access to passengers transferring from the U.S. carrier’s extensive network. In 1995, Asiana began operating a Shanghai-Seoul service in collaboration with China Eastern Airlines, which had previously partnered with KAL on that route. However, in November 1996, the South Korean government halted a space-sharing arrangement with Virginia-based Gemini Air Cargo on the New York-Seoul route, contending that this represented a wet lease, which was illegal in South Korea. In a wet lease, one company provides planes, fuel, and crew for another.

By the end of 1996, Asiana was flying cargo flights to three countries, including service to Delhi and Macao, where Asiana shipped cargo on barges from nearby Hong Kong. Cargo accounted for a quarter of Asiana’s revenues in 1996.

In the fall of 1997, Asiana became one of several Pacific Rim airlines to sign a code-share agreement with American Airlines, which was attempting to expand its presence in the East. Sabena, Austria Airlines, and Air China were other code-share partners.

Crisis in the Late 1990s

Asiana and Korean Air both suffered during the Asian financial crisis as both the Korean won and passenger counts fell. Asiana logged a loss of W 53.6 billion on revenues of 684 billion for 1997. Both airlines began selling off planes to reduce their debt; Asiana had borrowed $3 billion to expand its fleet. One analyst quoted in Business Week gave the company a 50–50 chance of going bankrupt.

Both Asiana and Korean Air also petitioned the government to allow a greater percentage of ownership from foreign investors. Since Korean Air was publicly traded, the government allowed it to be half-owned by foreigners, though it was only 21 percent foreign-owned at the time. Asiana was limited to 20 percent foreign ownership and was in fact 19 percent owned by foreign interests since Swiss-based Pacific Investment Capital had invested in parent company Korean Air Transportation Co. in 1996.

A new bilateral agreement between the U.S. and Korea in 1998 opened the US market to Korean carriers. Asiana soon was posting profits again, thanks in part to a focus on high-yield routes to China and Japan and the recovery of the national economy. A string of accidents at rival Korean Air boosted Asiana’s passenger loads. In 1999, Asiana recorded a net profit of W 109.6 billion on sales of W 1.78 trillion, after losing W 141.5 billion on sales of W 1.54 trillion the year before.

Company Perspectives:

The company’s mission is to become recognized worldwide by our customers, shareholders, and employees as the best airline in the world. We will focus our energy on performing services that are consistent with our mission by de-centralizing authority, empowering employees, exceeding customers’ expectations, and continually improving by providing on-going education. To assist with our mission, we will focus on the following guiding principles: safety will not be compromised; be customer driven, both externally and internally; develop the attitude that conformance to customer expectations has top priority; understand that improvement includes everyone in all parts of the organization; bring all employees into the decision making process; trust people and their ability to contribute to the mission; place emphasis on prevention and problem solving work; treat each other with dignity and respect.

Asiana launched an initial public offering on the local KOSDAQ exchange on December 24,1999. The carrier earmarked the capital to restructuring its debt. The airline, along with the rest of the Kumho Group, was helping to pay for the development of Inchon International Airport. After the IPO, Kumho Group’s ownership in Asiana fell from 66.7 percent to 47 percent.

Challenges Beyond 2000

Unfortunately, the carrier could not maintain its good results. It posted a net loss of W 156 billion for 2000, thanks largely to higher fuel prices and a weaker currency. Another cause for concern was the re-entry of more foreign carriers, such as All Nippon Airways, into the Korean market.

Asiana started a high-speed delivery service in the spring of 2000 that paired its planes with motorcycles. In June of that year, Asiana was tasked with carrying a South Korean delegation to Pyung Yang in a historic first flight to North Korea since the country was divided in 1945.

As part of its effort to attract lucrative business travelers, Asiana installed sleeper beds in its first class cabins, which were limited to only a dozen seats. In-flight entertainments systems were also top rate, and Asiana compared its business class cabin to other airlines’ first class. A generous mileage program and excellent on-time performance were two other key selling points for the business client.

Flight attendants and ground staff staged a strike at Asiana in June 2001. That summer, Asiana was protesting a ruling by the U.S. Federal Aviation Administration that lowered Korea’s air safety rating, preventing any of its carriers from expanding or changing operations to the U.S. Asiana felt it was being unfairly penalized, as its own safety record was above average.

Asiana continued to vie aggressively for trans-Pacific cargo business. In June 2001, it launched a service to carry fresh fruit and seafood from Seattle to Asia. In late September, the carrier announced cutbacks to its Los Angeles service at the same time as it was trimming 360 jobs from its 8,600-strong workforce. Asiana also cut routes in Asia and Europe.

The Korean government announced a W 250 billion ($192 million) bailout package for both Asiana and Korean Air in November 2001. Asiana was to receive a low-interest loan for W 110 billion ($85 million).

Principal Operating Units

Air Transportation; Catering; Communication; Construction; e-business; Electricity; Engineering; Facilities; Ground Handling; Logo Products.

Principal Competitors

All Nippon Airways; British Airways; Cathay Pacific Airways; Fed Ex; Japan Airlines; Korean Airlines Co. Ltd.; Singapore Airlines; United Airlines.

Key Dates:

1988:: Korea’s Kumho Group forms Asiana Airlines.
1989:: Korean government lifts foreign travel restrictions.
1990:: Asiana orders $6 billion worth of new Boeing aircraft.
1991:: U.S. operations commence.
1997:: Asian financial crisis hits Korean business traffic hard.
1998:: New bilateral agreement further opens U.S. market to Korean carriers.
1999:: Asiana lists on the KOSDAQ exchange.
2000:: Asiana participates in historic flight to North Korea.
2001:: Asiana trims routes and staff and receives government assistance.