Seoul approves three new airlines
Long-awaited policy decision more significant than expected. Consolidation may occur. Read More »
Korea has approved business licenses to three new airlines, a decision that may kickstart operating efficiencies and consolidation. The airlines must secure an AOC and will add to six existing LCCs as well as Korean Air and Asiana.
Two of the approved airlines are LCCs: Aero K will be based at Cheongju with A320s while Fly Gangwon will be based at Yangyang with 737s. Both previously had their plan rejected, which was less to do with substance than policy questions of new entrants and competition.
Air Premia was approved as a Seoul-based airline. It plans to fly long-haul with 787-9s under a hybrid format.
Aero K and Fly Gangwon will be required to stay at their base for three years. There will be scrutiny over what exactly it requires for the regional LCCs to remain in their provincial base. Flying from larger cities like Seoul and Busan is a future objective.
Seoul had been deliberating for a few years how to respond to a growing number of proposed start-ups. Seeking to add pressure, the start-ups signed tentative aircraft deals, employed staff and partnered with local governments. Korean regulator MOLIT was initially against allowing more airlines, a view that reflected the interests of incumbents. However, Korea’s competition authority wanted more airlines permitted and for the market to decide survival.
The decision is understood to have rested with MOLIT, not the competition authority, but there was significant political influence. Allowing three new airlines was more than industry observers expected.
Korea will continue to stand out as a major market without a foreign LCC (the same as in China). The Korean LCC market came close on a few occasions to consolidating, but the additional airlines may now finally spur merger and acquisition activity. This could introduce foreign investment, or a foreign investor could purchase a single airline. There had long been unconfirmed rumours AirAsia was interested in Aero K, which has in its senior management former AirAsia North Asia CEO James Rhee.
CUHK Assistant Law Professor Jae Woon Lee believes the Korean “government and public are getting more relaxed on the idea of foreign investment”. This is partially due to their own thinking but also seeing other regions permitting it with success.
The Asian LCC market saw an early test of ownership and control rules when Seoul in 2008 denied a license to Incheon Tiger Airways, which had ownership from former Singapore-based Tiger Airways and majority ownership from Incheon Metropolitan City Government.
“The Korean market has been growing with many positive factors. But there will be difficult times in the near future by external factors. Not all of the LCCs will be able to sustain the hardship,” Lee says. He predicts consolidation, including foreign investment.
The licensing decision oddly came three days before Korea announced Jeong-ho Choi as new MOLIT minister. He was vice minister for transportation and replaces the outgoing minister who resigned in order to run for political office.
Regional Korean carrier Air Philip ended business. The airline had a number of setbacks, including with its shareholder and being unable to change its license from a regional to mainline carrier.