Plane Maker on the Block
S. Korea's KAI Sale Clouds Future of T-50 Trainer
By JUNG SUNG-KI
Published: 3 May 2009 Print | Email
SEOUL - Attempts to sell South Korea's T-50 supersonic trainer jet abroad are likely to suffer further setbacks amid talks of the sale of the aircraft's maker, Korea Aerospace Industries (KAI), industry sources and observers here anticipate.
Following the April 14 announcement by state-owned Korea Development Bank (KDB) that it will sell its 30.5 percent stake in KAI, the other three major shareholders - Samsung Techwin, Doosan Infracore and Hyundai Motor - are considering selling their 20.5 percent stakes in the country's only aircraft manufacturer. Doosan has already made public the decision to sell its stake. The other 8 percent in shares is held by KAI staff.
The announcement comes in the wake of KAI's losing bid to sell the T-50 Golden Eagle to the United Arab Emirates, which announced Feb. 25 that it selected the M-346, built by Alenia Aermacchi of Italy. The deal could involve up to 48 aircraft and total up to 1 billion euros ($1.31 billion). Other trainer jet contests are coming up in Singapore, Greece and Poland.
The prospective sale of KAI is part of a policy by the administration of President Lee Myung-bak to privatize state assets. Local and foreign companies are being invited to bid for KAI shares in coming weeks, according to officials with South Korea's Ministry of Knowledge Economy. Korean Air Lines (KAL), the national flag carrier, is close to taking over KAI to achieve its long-cherished dream of consolidating the country's aircraft-building sector into a single company.
The Aerospace Division (ASD) of Korean Air has built about 500 aircraft, including the F-5 fighter and UH-60 helicopter. The division also repairs and upgrades military aircraft, and makes spare parts for commercial jets.
Korean Air announced April 1 that it is consolidating into ASD other sectors of the company that handle commercial airplane maintenance and overhauls, and the repair of electronic systems, such as navigation gear. The restructuring is an effort to transform the firm's tech center in Busan into a national aerospace business hub, a "one-stop" center for the design, manufacture, assembly and repair of both commercial and military airplanes.
KAL's parent, the Hanjin Group, could act as the buyer of KAI shares on KAL's behalf, while a few major local defense companies, such as Hanwha and LIGNex1, have shown interest in a bid, according to sources.
Korean Air is expected to easily take more than 50 percent of the stake held by KDB, Doosan and other shareholders through a consortium with either domestic or foreign firms, according to the sources. They added that KAL wants to secure a stake of 70 percent or more to hold full management authority.
Under the regulations that created KAI, a foreign company can buy up to 10 percent of KAI's shares. But if the investor forms a consortium with local companies, it can buy up to 20 percent.
Among potential foreign bidders are the U.S. firm Boeing, the French-German consortium of EADS, Britain's BAE Systems and Italy's Finmeccanica group, an industry source told Defense News.
Since the issue of KAI's sale emerged early this year, Boeing and EADS, in particular, have been engaged in a "war of nerves," said the source, with both saying that if either buys major stakes in KAI, future arms deals will see one-sided competitions.
The two aerospace giants are competing for several big-budget deals here, including the AH-X attack helicopter acquisition program, which may begin later this year.
"We still prefer a South Korean firm's taking over of KAI, but are closely watching developments evolving and may participate in the KAI deal if conditions are met," a Boeing official said.
The Fate of the T-50
Some observers are worried about the timing of the privatization.
"Regardless of KAL ... any fuss about the KAI privatization at a time when trainer jet biddings are proceeding in other nations would likely have a negative impact on the stalled overseas sales of the T-50," an analyst at the state-funded Korea Defense Institute for Analyses said on condition of anonymity.
"I believe it will be more desirable to put the country's energy on exporting the indigenous T-50 trainer jet for the time being," he said.
KAI is preparing to compete for deals in Singapore, Poland and Greece. Singapore is scheduled to open a contest to acquire advanced trainers by June and select a final bidder by the end of the year, said Lee Myung-hwan, a KAI deputy senior manager.
Lee said, "If irreversible, we hope the privatization issue would be discussed at least after the current bid in Singapore is finalized."
KAI's labor union vehemently opposes the firm's prospective sale, especially a takeover by Korean Air, vowing to go on strike. The union argues there is no clear reason for the government to sell KAI at a time when the firm's sales are growing. Since it paid off most of its debts in 2006, KAI has seen its sales and operating profits grow steadily, it says.
Last year, the company earned 910 billion won ($678.3 million) in sales with an operating profit of 79.4 billion won. In 2006, KAI sales reached 704 billion won with 8.1 billion in operating profit.
KAI also claims KAL's takeover will not yield "synergy effects," saying there is no airline in the world that does all the activities of aircraft development, manufacturing, passenger flight service and other services.
"Let's say KAL has begun manufacturing passenger planes or military aircraft," said Lee of KAI. "Then do you think other airlines worldwide will buy jets built by [a] competitor?"
He added that Korean Air has few offset options, and lacks integrated logistics support programs, as it largely depends on spare parts sales.
KAL, however, rebutted the claims by saying its decades-old spare parts business and licensed production lines are solid enough to make annual sales of 370 billion won.
KAL officials also cite the airline's recent expansion of its Aerospace Division. The division made 380 billion won in sales last year and aims to make 520 billion won this year, with the goal of 1 trillion won by 2014, the officials said.
