Hanjin KAL Corporation, the parent of Korean Air (KE, Seoul Incheon), has agreed to buy local rival Asiana Airlines (OZ, Seoul Incheon) for KRW1.8 trillion won (USD1.6 billion) in a transaction propped up by the state-owned Korea Development Bank (KDB).

Hanjin Group, which is active mostly in the aviation and shipbuilding sectors, said in an investor update that it would receive a KRW800 billion (USD720 million) investment from KDB, including KRW500 billion (USD450 million) by issuing new shares to the bank through a third-party allotment and KRW300 billion (USD270 million) through the issuance of exchangeable bonds.

The entire sum will immediately be loaned to Korean Air, which will invest KRW300 billion in Asiana Airlines convertible bonds. A further KRW300 billion will be used as a down-payment for the acquisition of the rival carrier.

The airline itself plans to subsequently raise an additional KRW2.5 trillion (USD2.25 billion) in fresh capital early next year.

Since KDB is investing in Hanjin KAL and not directly in Korean Air, Hanjin KAL will remain the airline's holding company.

The conglomerate underlined that South Korea was unusual among countries of its size in having two commensurate flag carriers.

"[It] gives it a competitive disadvantage compared to countries like Germany, France, and Singapore with a single major airline. However, Korean Air’s acquisition and the expansion of its routes, fleet, and capacity will give the airline the competitiveness to compete with global mega airlines," it said.

The proposed acquisition has yet to be greenlighted by the Korea Fair Trade Commission.

Boosted by its strong cargo revenues, Korean Air posted a KRW7.6 billion (USD6.9 million) operating profit in the third quarter of 2020. While still in black, the airline's result was 94% lower than during the same quarter of 2019.