Korean Air steadily climbing
Korean Air prepares for growth with the ongoing expansion of its fleet, while keeping an eye on business diversification. In March-June 2015, ING closed two 12-year loans for EUR 113 million each for the purchase of two new Airbus A330-300 aircraft, delivered in the same months.
As the global economy slowly rebounds, and global demand for cargo and passenger transportation continues to grow amid the falling oil prices, global air carrier Korean Air (KAL) has seen the rapid expansion of its global network with new routes and increased overseas sales. Founded in 1969, the company currently operates 153 aircraft with scheduled flights to 128 cities across 45 countries, including 12 cities in Korea.
With total sales of over USD 11 billion in 2014, of which more than 90 percent was generated by air transportation related businesses, KAL has recently looked to diversify its business model with in-flight meals, duty-free sales, while also tapping related industries, including aerospace and hotel management. KAL’s approach has been to create synergy effects by taking full advantage of its presence in different parts of the world, as it helps raise Korea’s international profile.
To this end, the company is focused on building a platform to sustain its profitable growth for years to come. This ambition is supported by a large capex programme aimed at launching new routes in new markets, upgrading its planes for greater fuel efficiency and support the continued growth of its core business of passenger and cargo transportation and other ventures.
In March and June 2015, ING closed two 12-year loans for EUR 113 million each guaranteed by the French export credit agency COFACE for the airline’s acquisition of two Airbus A330-300 aircraft, delivered in the same months. Stemming from ING Seoul’s longstanding relationship with KAL, the financing was led and arranged by ING’s Structured Export Finance team in New York, while ING Germany was the sole lender, funding the entire transaction in euros on a floating rate basis.
The mandate follows two earlier financing deals in 2013 and 2014 covering one Airbus A380-800 and two Airbus A330-300 aircraft, that were also led and arranged by ING’s Structured Export Finance team in New York and funded by ING Germany. These transactions were also denominated in euros, and involved spot euro/US dollar FX trades for the same amount as the loans, in order to pay Airbus in their operational currency (US dollars), which FM New York executed on behalf of ING.
Although KAL’s capex programme is geared mainly towards the purchase of fleet, spare parts and refurbishments, it includes other important investment ventures that have become one of its main capex requirements. This includes the development of IT systems and the re-modernisation of a new hotel under construction in downtown Los Angeles in the United States.
‘KAL is looking to diversify its investment programme, according to market needs and opportunities’
“A sizable portion of our capex programme is for new US-bound aircraft, but KAL is looking to diversify its investment programme, according to market needs and opportunities,” says a spokesperson for the finance team at KAL. “We have operated the hotel for around 12 years and now are reconstructing and modernising it, which is a big programme for KAL. It is really a synergy pact for us and our customers. The hotel is operated by us and is one of many we operate overseas, but it is a strong offer for our customers.”
The 900-room hotel is the largest upscale InterContinental hotel in North America and is set to open its doors to the public in 2017. It will sit atop the USD 1.1 billion WilshireGrand project, which KAL is developing alongside parent company Hanjin Group. The WilshireGrandCenter will feature luxury hotel rooms, cutting edge restaurants, businesses and attractive nightlife offerings. It will be the tallest structure west of the Mississippi, adding to the rich cultural and economic revival of the city’s downtown area.
By contrast, the investment cycle for airplanes is around 15 years long. Even though the aircraft themselves last between 25 and 30 years, Korean passengers demand a young fleet, so KAL is normally looking to replace old fleet with new ones every 15 years. This affects the funding structures for aircraft, which has an impact on the type of funding and lenders that KAL can engage, as they are required to be long term and with low pricing.
“It’s important to work with financial partners with a lot of deal experience in the sector,” the KAL-spokesperson explains. “In that sense ING has a lot of experience, which is important for us as it is closely related to their execution abilities. In addition to that, we generally consider two key factors when considering funding sources. One is obviously price, but the other is diversification."
In the past KAL has depended entirely on the bank loan market, but currently sees a trend in companies tapping capital markets, either domestic or international, as loan markets become less competitive. As a long-term partner, KAL is confident that ING will continue to deliver performance and quality in their deal work that will enable the business to achieve its long-term strategic goals.