Asiana Airlines’ inflight meal business has become a major hurdle to the integration of the carrier with Korean Air, which would be the biggest deal in South Korea’s aviation industry.
Korean Air, part of South Korea’s Hanjin Group, is conducting due diligence on Gate Gourmet Korea (GGK), Asiana Airlines’ inflight catering service provider, according to industry sources. GGK was established in 2016 as a joint venture between the carrier and Gategroup, which was then controlled by China’s HNA Group. Asiana Airlines holds 40% of the joint venture, with the remaining stake owned by the Swiss Air Lines caterer.
According to their agreement, Gategroup can exercise a put option to sell its interest in GGK at a specified price if the contract with GGK is canceled due to reasons attributable to Asiana Airlines. One of these reasons would be any change in control of the company.
However, revoking the contract is not an option for Korean Air because the exercise price is too high, according to sources. This was reportedly the reason that Hyundai Development Company – which eventually walked out of a deal with Asiana Airlines in September – had also tried to renegotiate the price with the meal supplier, rather than cancelling the contract.
Asiana Airline is also in a legal fight with its former inflight meal provider LSG Sky Chefs Korea, part of Lufthansa Group. The carrier’s contingent liabilities related to the catering services will likely amount to up to 1 trillion won ($911.2 million) after consideration of the expected redemption amount of the put option and litigation costs, industry watchers said.
Korean Air recently secured about 1 trillion won by selling its inflight catering business to private equity firm Hahn & Co. Some observers expect the airline to use the proceeds to buy 60% of GGK from Gategroup at a renegotiated price and settle the LSG Sky Chefs litigation.
Gategroup, which RRJ Capital purchased from HNA in March 2019, would have no reason not to sit at the negotiating table with Korean Air, as this could be a good exit opportunity. Lufthansa, LSG Sky Chefs’ parent, may also prefer a settlement, because it needs cash.
If Korean Air buys the remaining stake in GGK and resells the company to Hahn & Co, the airline would be able to receive inflight meal services at a lower price on average due to its increased bargaining power. Hahn & Co’s airline catering business also could serve the country’s largest combined full-service carrier as a sole provider.
“(Korean Air) may contact GGK and LSG Sky Chefs with its proposals and negotiations may take one or two years,” an industry insider said. (Reporting by Ik-hwan Choi)