Korean Air Lines Co., Ltd.

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Korean Air Lines Co., Ltd.

7F, Korean Air Operations Center
1370 Gonghang-Dong, Kangso-Ku
Seoul
Korea
(82-2) 656-7114
Web site: http://www.koreanair.com

Public Subsidiary of The Hanjin Group
Incorporated: 1962 as Korean Air Lines
Employees: 14,100
Sales: W 4.29 trillion (US $3.03 billion) (1997)
Stock Exchanges: Korea
SICs: 4512 Air Transportation, Scheduled; 4522 Air Transportation, Nonscheduled; 3721 Aircraft; 3728 Aircraft Part & Auxiliary Equipment, Not Elsewhere Classified

Korean Air Lines Co., Ltd. (KAL) is South Korea’s leading airline and part of the giant Hanjin Group, which deals in land, sea, and air transport, construction, heavy industry, finance, and information services. KAL has embarked upon a huge fleet expansion to handle the increase in overseas travel in and out of Korea; the average age of its airliners is less than eight years. In 1997, 25.5 million passengers flew KAL, which boasts the largest cargo operations of any passenger airline.

Origins

The Hanjin Group has its origins in the Hanjin Transportation Co., founded by Choong-Hoon Cho, who is still the chairman of the group today. Cho started the company in 1945, at a time when the Korean economy was in a state of chaos following World War II. Korea was occupied by the Imperial Japanese Army and was effectively under Japanese control. Upon liberation by U.S. forces in 1945, the country was poverty stricken. Cho saw a market for trucking services, and his first major customer was the United States Armed Forces, who were busy establishing bases in Seoul, Pusan, and other Korean cities.

The hostilities between North and South Korea from 1951 to 1954, which involved combined United Nations Forces against North Korean and Chinese forces, proved beneficial to business in South Korea. The huge U.S. military investment in South Korea required various local services, transport being one of the most important. Hanjin expanded rapidly and in 1956 was the prime transporter of U.S. military cargo in Korea. In 1960 the company was granted an air transportation license, which proved important in its later expansion in this sector. The company founded Air Korea, which initially dealt with cargo. In 1961 and 1964, respectively, Hanjin Sightseeing Bus Company and Korea Vehicle Transportation were established, with the Daejin Shipping Company joining the group in 1967. Cho’s company had become a leading private transportation firm in South Korea. In 1969 the South Korean government recognized Hanjin for its performance as an earner of foreign exchange and presented it with the Presidential Flag Citation. This same year the Korean government would transfer operations and ownership of the bankrupt national airline KAL to the Hanjin Group, under Cho’s control.

In 1962 Korean National Air Lines, the forerunner of KAL, folded because of a combination of low demand, inability to compete with foreign carriers, and inexperienced management dealing with poor technology. The state-owned enterprise had been started by the government shortly after World War II and consisted of nine small aircraft; the Korean government could not afford to keep the airline afloat, however, and began the search for suitable private-sector investors. The task of rehabilitating the airline was at first taken on by Choong Hoon Cho’s Hanjin Group, in part out of a sense of patriotic duty and in part as a business challenge. At the time the prospect of a mismanaged, ill-equipped airline competing with the world’s largest carriers seemed daunting. Cho realized that the domestic market for air travel within South Korea was limited by the country’s small size, and international travel originating out of country was severely restricted by a government ban on its citizens traveling abroad. Despite these limitations Cho set about putting his acute business sense to work on the airline, which he officially named KAL when he acquired it in March 1969.

Building the National Carrier in the 1970s

The first step Cho took was to build up an Asian network based on cargo rather than passenger business. The freight business remained a mainstay of KAL, accounting for 40 percent of revenues. But although a freight network could be built up to service the explosion of manufacturing that was taking place at the time, finding a passenger market proved to be a different matter. The growing volume of business travel and visits to South Korea by tourists was not enough to maintain a civil carrier, and Cho’s strategy, therefore, was to use Seoul as a transit route in the busy Asian region. Japan proved to be the strongest market in this category, with cost-conscious tour groups prepared to travel an indirect route to the United States or Europe via Seoul.

The first activities of the new airline consisted of the opening of branches in Taipei, Hong Kong, Saigon, and Bangkok, plus the commencement of service to Osaka in Japan from Pusan, followed by flights to Taipei, Hong Kong, and Bangkok from Seoul. In 1970 KAL moved into a new 26-story building built by the Hanil Development Company, a member of the Hanjin Group. New hangars also were constructed in 1970 to accommodate KAL’s new fleet of planes. The operation of a Seoul-to-Los Angeles cargo route was followed closely by the 1973 acquisition of KAL’s first Boeing 747, which was put into immediate service on the route. Although KAL began its first regular flight to Europe with a cargo service to Paris in 1973, the airline remained at a severe disadvantage in flying to Europe. Whereas other Asian airlines took advantage of the direct route to Europe over the USSR, South Korean aircraft were not granted such privileges by a Soviet government that still refused to recognize South Korea as an independent state. KAL, therefore, concentrated on trans-Pacific service to the United States and became the first airline to offer an all-cargo 747 service across the Pacific. Cho saw the need to keep pace with his international competitors’ technological advances. KAL opened a modern engine shop at Seoul’s Kimpo International Airport and introduced an IBM mainframe computer in its push toward full computerization. In 1975 KAL became one of Airbus’s first customers with the purchase of three A300s, which were put into immediate service in the Asian routes.

In 1976 KAL established an aerospace division to contribute to South Korea’s aviation and defense industry. Borrowing engineers from its maintenance department and using the resources of the Hanjin Group, KAL formed the Korean Institute of Aeronautical Technology as a subsidiary in 1978. The company was involved initially in the assembly of helicopters for McDonnell Douglas of the United States; in 1981, with the help of Northrop, it built South Korea’s first domestically produced fighter aircraft, the F-5EF. The aerospace division planned to develop a short-range commuter aircraft eventually. On the civil passenger side of operations KAL continued its expansion with services to Paris, Manila, Bahrain, Zurich, Nagoya, Kuwait, Colombo, and Abu Dhabi by 1979. To accommodate these routes KAL placed an order with Boeing that represented the second largest single order in commercial aviation history—18 Boeing 747 jets. Nonstop KAL service to New York and Los Angeles began shortly thereafter. The lack of access to trans-Siberia passage to Europe continued to be problematic for KAL, which was forced to fly to destinations in Europe via Anchorage.

Weathering the Challenges of the 1980s

In 1983 disaster struck on a flight that strayed off course into Soviet airspace. The KAL jet was intercepted and destroyed by a squadron of Soviet fighter aircraft; 269 passengers and crew members were killed. The incident resulted in international condemnation of the USSR and counter accusations by the Soviet government that the KAL flight was being used to gather intelligence—a claim hotly contested by KAL and the South Korean government. The incident was a severe setback for the airline and strained relations between South Korea and the USSR for several years afterward. KAL’s strategy for the next three years was to increase its freight network, and the airline invested heavily in freight terminals in Tokyo, Los Angeles, and New York.

KAL acquired a state-of-the-art control system for its freight network and in 1983 computerized its passenger reservation system with the introduction of a ticketing system called TOPAS. KAL scored a first in 1986 when it became one of the first airlines to supply Boeing with parts for its aircraft, in the form of a contract to deliver wing-tip extensions for the Boeing 747-400. KAL continued to be one of Boeing’s prized customers with an order for ten of the aircraft in 1988. In that year KAL began services to London, Vancouver, Toronto, Jakarta, and Frankfurt. The Olympic Games held in Seoul in 1988, although marred by a boycott from the USSR and other Communist nations, was a financial success for the country. KAL was named official carrier for the games and took advantage of the influx of visitors to the country to display the full range of comforts it offered passengers. Cho had long stressed the need to offer quality service on par with the world’s best airlines. As a result, KAL’s first-class service is noted worldwide for its comfort and convenience.

Company Perspectives:

Before privatization, the company was a small regional airline, lacking in resources like aircraft, network and managerial efficiency. Just seven months after Choong Hoon Cho, Chairman of The Hanjin Group took over, new flights were launched to Japan and Southeast Asia. Korean Air has gone a long way—via devotion and achievement—and now boasts extensive routes spreading to 74 cities in 27 nations with a youthful fleet of 112 aircraft.

Governmental restrictions on overseas travel by South Korean citizens were lifted in 1989, resulting in a 100 percent annual increase in passenger volume out of the country in each of the last two years, with more growth predicted in the near future. KAL’s first scheduled flight to Moscow from Seoul occurred in 1991, and the break-up of the USSR eased relations between South Korea and the former Soviet states. The airline aimed at continued aggressive expansion and sought strategic partners to achieve this. Leading contenders in this included the Philippines’ national airline, PAL.

The company also began serving Chinese destinations. Negotiation for “beyond” rights, however, the right to carry passengers from Beijing to another international destination, remained a point of contention. Still, KAL’s long-term ambitions included establishing Seoul as a gateway to China (contingent upon development of the Korea’s new airport at Inchon). In addition, scheduled cargo flights were not included in the Sino-Korean agreement.

Up and Down in the 1990s

In the 1990s, buoyed by generally excellent financial results, KAL maintained its ambition of being the “world’s best airline with a route network extending round the globe,” as Air Transport World reported. New routes were continually added. KAL became the first Asian airline to fly directly to Africa. A vigorous acquisition policy kept the company supplied with new planes. Operating revenues passed $3 billion in 1993 as Korean travelers took to the skies in unprecedented numbers, thanks to the relaxation of travel restrictions in 1988 and a booming domestic economy. The cargo market was even more robust. As the world’s third largest freight carrier, the company grew 20 percent a year in the mid-1990s. Operating revenue reached $4.4 billion in 1995. At the same time, increasing competition from international carriers and potential industry overcapacity gave KAL managers cause for concern.

In 1996, thanks to these worries and rising jet fuel prices, KAL lost money on revenues that remained steady from 1995. It was the first of three years of losses, compounded by unfavorable exchange rates. The 1996 deficit was $235.5 million and in 1997 it was $281.9 million.

A second catastrophic accident befell the company in August 1997 when Flight 801 crashed in Guam, killing 226 people. U.S. investigators implicated pilot error as the precipitating factor. KAL officials, however, blamed inadequate airport landing instruments.

In the late 1990s the devalued won had made Korea an attractive destination to Korean expatriates in the United States, and domestic travelers flew less. While its smaller rival Asiana lost a deposit on a large Airbus order, KAL coped with lessened demand by selling aircraft as new shipments of Boeings continued. The company also laid off a tenth of its upper level managers.

Aircraft production projects in the 1990s included the UH-60 Black Hawk helicopter for the Korean air force, as well as military fighter and trainer programs. The aerospace division had grown to 2,400 employees. The company also operated an extensive maintenance division, providing support for more than 30 airlines. Its catering operation served an equivalent number of carriers and garnered the International Flight Catering Association’s top in-flight meal award in 1998.

Such advantages allowed KAL to again announce a profit, of 250 billion won, for 1998. The results seemed to justify the company’s aircraft purchases, which let it boast one of the youngest fleets in the world, as well as sales of about 18 older aircraft in 1997. Asian and Pacific traffic was expected to account for half of all air travel by 2010, according to the International Air Transport Association. Still, a $5 billion debt guaranteed navigating the company would remain a challenge for Cho Yang Ho, who succeeded his father as president in 1992. KAL would also have to figure possible Korean unification into its plans.

Principal Subsidiaries

Air Korea Co. Ltd. (68%); Hanjin Construction Co., Ltd. (20%); Hanjin Heavy Industry Co., Ltd. (11.08%); Hanjin Information Systems and Telecommunication Co., Ltd. (99.35%); Hanjin International Corporation; Hanjin International Japan (55%); Hanjin Shipping Co., Ltd. (13.02%); Korea Air Terminal Service Co. Ltd. (11.2%); Pyunghae Mining Development Co., Ltd. (50.31%); T.O.M.I (25%); G.L.S. (27.01%); Korean French Banking Corp. (1.56%).