Deal focus: Hahn puts faith in aviation rebound

The global aviation industry is at a crossroads, with airlines going bankrupt or requiring bailouts and no certainty as to how quickly passengers will return. The International Air Transport Association (IATA) projects revenue passenger kilometers (RPK) will be down 60% year-on-year in 2020, while a return to 2019 levels is unlikely before 2024. 

South Korea is no exception. In 2019, the country normally welcomed 17 million visitors, while 28 million Korean traveled overseas. In the first six months of this year, those numbers were 2.1 million and 3.8 million. Nevertheless, Hahn & Company had sufficient faith to acquire Korean Air’s in-flight catering and duty-free businesses for KRW990.6 billion ($835 million), the largest private equity buyout in the country so far this year. Korean Air will retain a 20% stake in the divested entity.

“When it comes back and how it comes back will be different in Korea to other markets,” says Scott Hahn, the PE firm’s founder. “I can’t think of a family that doesn’t have relatives living overseas, family members studying overseas, or businesses overseas. Exports are 50% of Korea’s GDP and many Korean multinationals have a dominant presence in China, Europe, and North America. You can’t run all of that on Zoom.” 

With RPKs down between 55% and 79% across all its major routes in the first half of 2020 – while revenue slumped by 30% and net losses widened by 47% – Korean Air needed liquidity. It has already raised KRW1.1 trillion in a rights issue and received KRW1.2 trillion in financial aid. Divestments were inevitable, even of relatively healthy businesses. In-flight catering and duty-free generate about KRW500 billion in annual revenue, according to a source familiar with the situation. 

For Hahn & Co, the investment is not just a bet on a swift recovery, but also on expansion of Incheon Airport. A second passenger terminal opened in 2018, taking capacity to 62 million passengers and 5.8 million tons of cargo per year. The next phase of development – which was scheduled for completion this year – will see capacity hit 100 million passengers and 7 million tons of cargo. This will make Incheon one of the 10 busiest airports in the world. 

“We expect our business from Korean Air to grow and we expect Incheon Airport to grow,” Hahn says. “It is widely favored as one of the Asia hubs when you are going to North America. A lot of the Southeast Asia flights go through Narita [in Japan] or Incheon, and increasingly it’s Incheon. The opportunity of capturing that third-party growth is there now that the business operates on an independent platform owned and controlled by our firm.”

The private equity firm has secured long-term exclusive contracts with Korean Air covering catering and duty-free. While most airlines run their duty-free operation in-house, catering is frequently outsourced, with 40% of Korean Air’s catering revenue coming from international carriers using Incheon. Demand should increase in tandem with the capacity of Korean Air and Incheon Airport, but Hahn & Co. has its eye on diversification into home meal replacement as well.

“Pre-COVID-19, this business was delivering 85,000 meals a day to airline customers,” Hahn notes. “The opportunity will require more investment and strategic planning, but if you can rapidly make packaged foods of high quality at a single site, there are other opportunities outside of airlines that can be pursued.”

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• Topics
• North Asia
• Buyouts
• Support services
• South Korea
• Hahn & Co
• Transportation