Sangyun Lee reviews the 2021 merger between Korean Air and Asiana Airlines, which was promoted by the government despite warnings from the majority of experts deeming it obviously anticompetitive and harmful to consumers. He finds that the merger is a paragon of how, under institutional constraints, the rational choices of actors and organizations can collectively lead to irrational, suboptimal outcomes.
The government of the Republic of Korea (henceforth, just “Korea”) is constitutionally mandated to prevent monopolization and promote competition (Article 119, Constitution). Nevertheless, in 2021, it initiated and cleared Korean Air’s acquisition of Asiana Airlines, thereby consolidating the domestic full-service aviation industry to one firm and granting Korean Air a monopoly. This merger also combined their low-cost carriers, which further reduced competition in the budget airline sector. Specifically, the Korea Development Bank (KDB) took the lead in initiating the merger of the two airlines, supported by the ministers of relevant departments and the Korea Fair Trade Commission (KFTC), Korea’s competition authority. They approved the merger with only limited remedies, including divesting slots at local airports and traffic rights on some international routes over the next decade when new competitors look to enter the market (without designating a remedy-taker), and some behavioral obligations, such as restrictions on airfare increases and service quality degradations.
From the beginning, it was obvious to those tracking the proposed merger that Korean Air’s acquisition of Asiana Airlines would only benefit Korean Air while reducing competition, harming consumer interests and related businesses, such as cargo customers (e.g., here, here, here, and here). After the acquisition, Korean Air would become a dominant airline on numerous international and domestic passenger routes (in the KFTC’s decision, considerable concentration and anticompetitive effects were found on 26 international round-trip routes and 14 domestic one-way routes, with the combined market shares on these routes ranging from 60% to 100%) and in the cargo air transport service sector (see the European Commission’s announcement; Japan Fair Trade Commission’s decision).
Some justified this merger by touting the synergies of mergers or the national interest of creating a national champion. However, even under these theories (putting aside the validity of the claim that creating a national champion would really benefit the national economy), the merger between Koran Air and Asiana Airlines was suboptimal.
For example, the Korean government and Korean Air promoted the merger as if it would create a competent mega carrier. However, there were many doubts about whether this merger could proceed as they expected from the beginning. It was clear that the deal would face serious antitrust headwinds worldwide and that the entire review process would be thorny, leading to hefty structural remedies, including divesting important assets, if it were not outright blocked. Indeed, over the last two years, the merging parties have faced orders by competition authorities in China, the United Kingdom, Japan, and the European Union to sell a significant number of slots, traffic rights, and cargo business units. Moreover, the United States, which has considered suing to block the planned merger since 2023, was recently reported to require slot divestitures from Korean Air (although this report was recently denied by the firm). This whole process has proven that the expectation of creating a national champion or a mega carrier with tremendous synergies was unfounded. Instead, the merger led to the loss of national interests, with many slots at international airports being transferred to foreign competing airlines, which Korean Air and Asiana Airlines could have continued to hold had they remained separate.
Some possible but unconvincing explanations for why the merger was approved
If so many antitrust experts anticipated a ruinous merger, why did the Korean government promote and approve it? In fact, one to two years before the government’s decision to push for the merger, there had been government-level discussions raising concerns about the general problem of limited competition and market concentration in the domestic air transport industry and initiatives for regulatory reforms to lower entry barriers. This makes the eventual approval of the merger even more perplexing.
Before I propose my theory explaining what explains this about-face, I will discuss two explanations that might seem substantial but lack credence.
Corruption or capture
One possible explanation is that industry lobbyists or influencers, such as Korean Air CEO Walter Cho, who stood to benefit the most from the deal, captured government decision-makers.
At the time of the deal, Cho was losing a boardroom conflict with several other shareholders. These shareholders had been increasing their shares to wrest control from Cho, and just before the decision, they managed to secure a higher shareholding percentage than Cho (46.71% versus 41.78%), putting him at risk of losing his management control in the upcoming general meeting.
However, in this situation, the KDB made an offer under which, first, the state-owned bank “invested” 800 billion won; second, Hanjin KAL, the holding company that owns Korean Air, issued new shares to KDB through a third-party allotment; and third, Korean Air acquired Asiana Airlines. By accepting the government’s offer and securing the government as a friendly stakeholder, Cho could reinforce his leadership role over the company (for more details, see the author’s recent presentation, slides 32-33).
Given that the absence of the funding provided for the acquisition of Asiana Airlines would have led to Cho’s ousting, some may suspect that there might have been a backdoor deal between the government and the CEO regarding this merger.
However, there is no evidence of corruption or chicanery. While some suspicions were actually raised shortly after the merger plan was announced (due to the fact that Seok-Dong Kim, the chair of the Hanjin KAL board, was previously the chair of the Financial Services Commission, which oversees the KDB, and that Kim was high school mates with the then-chair of the KDB), I do not see any serious commentator, including ardent government critics, hold such a view in this case for the moment.
Lack of capacity or determination
The next theory suggests that the Korean government either lacked the resources or motivation to rigorously review the proposed merger according to its own mandate and guidelines. Indeed, the Korean government has historically been fond of industrial policy and partial to the creation of national champions, as evidenced by the approved merger between Hyundai Motors and Kia Motors in 1999.
However, contemporary Korea’s views toward industrial policy have changed significantly since the twentieth century. Most experts now recognize that the merger between Hyundai and Kia was a mistake. For instance, in 2007, during a workshop, the then-Vice Chair of the KFTC expressed a reflective (or critical) view of the agency’s Hyundai-Kia decision, reportedly stating that “while Japan’s automotive industry has dominated the global market through fierce domestic competition, our automotive industry has, in fact, become a monopoly, leading to decreased consumer welfare.”
Also, Korea’s political economy has shifted towards a free and competitive market system since the 1997 Asian financial crisis, and as recent research indicates, there is a high level of support for the market economy. Especially in merger control, the government, specifically the KFTC, has proven to be not unduly lenient (for the agency’s enforcement track record, see the author’s recent presentation, slide 9). As some experts rightly noted, the KFTC typically does not clear mergers that create a monopoly or that result in a combined market share of over 60%.
Then, is it a matter of capability? Not at all. In fact, as highlighted by Global Competition Review’s annual enforcement ratings, the KFTC’s enforcement capacity has significantly improved over the years and now operates at an almost top-tier level.
Institutional design explains the merger
Instead of capture or resource and ideological limitations, the best explanation assumes that Korean bureaucrats, like businesses, are goal-oriented, instrumentally rational, and heavily influenced by the institutional constraints they face when making decisions. The merger between Korean Air and Asiana represents a dilemma where individually rational choices collectively led to an irrational, suboptimal outcome of intensified monopolization.
KDB
First, the Korean Air-Asiana Airlines merger decision was initiated by the KDB. Why did KDB initiate this deal?
In November 2020, it was reported that KDB, the main creditor of Asiana Airlines, was in talks with Korean Air to sell the company. This came just two months after a previous deal with HDC Hyundai Development Company (HDC) to acquire Asiana fell through in September 2020 due to the outbreak of the COVID-19 pandemic crisis. The deal with Korean Air thus appears to have been a very hasty one. Why did KDB rush the process?
Facing growing criticism from the media and political circles over the taxpayer-funded state-run bank’s repeated failures in corporate restructuring and botched deals, KDB hurried the process to pass on the financial burden of supporting Asiana Airlines. Reportedly, KDB had injected trillions of Korean won into the struggling airline, with more expected during the COVID-19 pandemic. Statements by decision-makers at KDB repeatedly confirmed that the exit of public funds was a strong motivation. In a press interview, Dae-hyun Choi, then-Vice Chair (Head of the Corporate Banking Division) of KDB, stated, “If the two-company system is maintained as it is now, more than 4 trillion [Korean] won will be needed by the end of 2021, and there are concerns about losses for creditors due to the equity conversion of Asiana Airlines.” Dong-Gull Lee, then-chair of KDB, added, “This will not only minimize the scale of policy funds required for the normalization of the aviation industry, but it is also expected to greatly contribute to the recovery of the invested policy funds.”
The KDB’s rashness could also be attributed to a lack of information about the antitrust risks of the deal. In the aforementioned press interview, Choi said, “If you combine the market share of the two major national airlines and LCCs (low-cost carriers) (based on 2019 figures), the domestic market share in 2019 was 42% for FSCs (Korean Air and Asiana Airlines) and 24% for LCCs (Jin Air, Air Seoul, Air Busan), totaling 66%.” He added, “Although there are cases where conditional approvals with some adjustments have been granted, it is worth noting that it is hard to find cases where a merger between airlines has been disapproved by the relevant authorities.”
Sadly, his perception of relevant markets, market shares, and global trends in airline merger control were all incorrect. For example, in airline mergers, the relevant market is defined by origin-destination pairs. Consequently, the combined market shares of the two airlines across these numerous routes (relevant markets) were much higher, ranging from 60%-100%. It would have been better if KDB’s decision-makers had sought the necessary information to make more optimal decisions, such as from external competition experts. However, no evidence suggests that such efforts were made. In part, this is because there are no mechanisms to incentivize or compel them to do so.
Government Ministries
Although KDB took a leading role, it was not the only government entity that approved the merger. The minister of finance and economy, the chair of the Financial Services Commission, the minister of land, infrastructure and transport, the senior presidential secretary for economic affairs, and a high-ranking official under the prime minister all approved the merger at a high-level council meeting held on November 16, 2020.
It is difficult to find concrete evidence or official records regarding their discussions and how they reached that conclusion. The circumstances only allow us to speculate that KDB’s proposal was accepted by the attendees, who were either unaware of the antitrust risks or lacked the incentives to seriously consider and address them. For instance, Sung-soo Eun, then-chair of the Financial Services Commission, stated that “If HDC Hyundai Development had acquired Asiana Airlines, the two-company system could have continued. However, HDC withdrew its acquisition intention, and other potential buyers were approached but to no avail.” He added, “The only option left is independent survival, which is difficult given the current uncertainty in the airline industry. Therefore, the creditors concluded that a merger is the only alternative to reduce the taxpayer burden and maintain employment, as continuous taxpayer support for both airlines is unsustainable.”
What’s noteworthy here is that the chair of the KFTC, Korea’s competition authority, was not among the attendees of the meeting.
Korean Air
KDB approached Korean Air and, as explained above, promised to invest 800 billion Korean won into its parent company, Hanjin KAL, to facilitate the acquisition of Asiana Airlines. For Korean Air, there was little reason to refuse this offer. By leveraging government funds, it could secure a monopolistic position and alleviate financial distress, especially during the COVID-19 crisis. Additionally, as mentioned above, CEO Cho likely had a strong personal motivation to accept the deal and secure KDB as a friendly stakeholder to maintain control over the company. Despite the significant financial challenges faced by Asiana Airlines and anticipated scrutiny from foreign regulators, for Korean Air and its CEO, there was no more optimal choice than to accept KDB’s offer.
KFTC
Fourth, the KFTC, after receiving the merging parties’ notification and conducting a year-long review, cleared the deal with several structural and behavioral remedies. However, these remedies proved insufficient during subsequent reviews in other jurisdictions, as discussed above. Why didn’t the KFTC oppose and block the monopoly deal?
Within the Korean government’s institutional framework, KFTC lacks a degree of independence that other enforcers, such as its American counterpart, have. First, the KFTC follows an “integrated agency model,” where investigatory and adjudicatory functions are established within a single organization (though the functions are separated internally and the review process before the commissioners is adversarial), which inherently weakens its independence, as explained by Michael Trebilcock and Edward M. Iacobucci. Second, the KFTC answers directly to the president or prime minister, making it susceptible to influence from supervising authorities and other ministries. Third, the president has the sole authority to appoint all commissioners, including the chair and vice-chair of the agency. Although the commissioners have guaranteed terms, as the Constitutional Court once rightly pointed out (albeit in a dissenting opinion), “commissioners who wish to be reappointed or bureaucratic commissioners who expect transfer or promotion to other high-ranking positions may be subject to government influence” (see the author’s presentation, slide 39).
These institutional characteristics suggest that even if the KFTC thought the merger was anticompetitive and should be blocked, it lacked sufficient independence and authority to oppose the president and prime minister or the collective votes of the other influential ministries. Indeed, in a press interview, a former head of the KFTC’s Merger Division, who wished to remain anonymous, stated, “If Korean Air had independently decided to acquire Asiana Airlines and notified the merger, it would have been 100% disapproved,” adding, “If I were in the position of reviewing the merger of the two airlines, I wouldn’t have had the courage to oppose a pre-decided government action with my life on the line.” Another former senior official involved in numerous corporate mergers affirmed this sentiment in the same report, noting the KFTC’s lack of power within the government.
Their perceptions are backed by empirical research. According to Jae Rok Oh’s findings on the Bureaucratic Power Index (BPI) of various central administrative agencies in Korea (here, here, and here), the KFTC’s influence and power within the government turned out to be only at a mid-level and have diminished over time (2000-2015) (For the rankings of different agencies based on their BPI over times, see the author’s presentation, slide 37).
Third Parties
Last but not least, significant public outcry from consumers and related businesses might have been able to prevent the merger. However, while there were some efforts, Korea’s institutional framework lacked the mechanisms to effectively vocalize consumer concerns and exert them into policy decisions. For example, in terms of the antitrust system alone, the Korean competition regime does not have a provision similar to the US Clayton Act, which allows third parties who have suffered antitrust injury to have standing to sue to block an anticompetitive merger. In the absence of such mechanisms, it is understandable that rational individuals, either consumers or businesses, chose to endure limited direct harm caused by the monopolistic Korean Air-Asiana Airlines merger rather than mobilize or organize public opposition, given the enormous costs required for effective political resistance.
Conclusion
Undoubtedly, the Korean Air-Asiana Airlines merger should have either been prohibited or handled with more deliberation, negotiating with other willing buyers from the outset. In fact, contrary to initial concerns, Asiana Airlines experienced an improvement in operational performance during the pandemic due to increased cargo revenue from higher air freight rates. Also, there were other potential buyers, including HDC, who posed fewer competition concerns. These factors contributed to the KFTC’s rejection of Korean Air’s failing firm defense for the merger (see the decision, paras. 2897-2901, 2917-2925).
Some critics denounce this merger as a notable example of capture or agency incompetence or ideological atavism, which led to a suboptimal outcome. However, as we have examined, the failure to reach an optimal collective decision was not due to any malicious actions or significant mistakes by individual actors. Rather, the cause lay in the institutional arrangements at the time, which compelled the actors to make decisions that were suboptimal at the societal level, though rational at the individual level.
The lesson from the Korean case is that it may be somewhat naive to expect optimal outcomes merely by assigning mandates to the government when setting and implementing policies. The real world is far more complex, and policy failures can occur even when relevant actors make the most rational choices within their constraints, without any special malice or incompetence on their part. To prevent such unintended policy failures, particularly in the context of the Korean merger control policy, one could propose institutional reforms aimed at enhancing a whole-of-government effort, similar to the one promulgated by the U.S. White House Competition Council. Furthermore, the Korean government should ensure the independence of Korea’s competition authority and broaden the scope for third-party interventions in government decision-making on mergers.
However, these suggested measures may have limited applicability in other jurisdictions. A more general implication of the findings is the need for continual exploration of alternative, improved institutional arrangements to deliver more efficient and effective public services.
Author’s note: This article is based on my recent paper, “Why Korea’s Merger Control Occasionally Fails: A Public Choice Analysis of Korean Air/Asiana Airlines,” which I co-authored with Hwang Lee at Korea University (The paper in Korean is available here, and the English slides are here). However, this ProMarket article is solely my work, and the views expressed here are mine alone. They may not necessarily represent the views of all authors of the aforementioned paper.
Author Disclosure: the author reports no conflicts of interest. You can read our disclosure policy here.
Articles represent the opinions of their writers, not necessarily those of the University of Chicago, the Booth School of Business, or its faculty.
