Omnichannel opportunity beckons

What Hahn & Company will do with the inflight duty free business is as fascinating as the sale itself, wrote Martin Moodie last month as negotiations were confirmed.

While Korean Air’s duty free business has been in steady decline over recent years, it still offers a high-class assortment (dominated by high-end skincare and liquor) and has a well-established pre-order and ecommerce business.

Free of airport concession fees and with a desirable passenger profile largely based on Korean and Chinese customers, the airline has a big opportunity to develop a full-fledged omnichannel business that could thrive as the market recovers.

Hahn & Company will realise that and will have no shortage of suitors if it follows the well-worn private equity path of reshaping and then divesting its acquisition.

SOUTH KOREA. Korean Air has announced that a deal has been struck to sell its inflight retail and catering business to Korea’s second-largest private equity fund (PEF) Hahn & Company, writes The Moodie Davitt Report Senior Retail and Commercial Analyst Min Yong Jung*.

As reported, the parties entered negotiations last month, with a deal for KRW990.6 billion (US$834 million) confirmed in a filing to the Korea Stock Exchange today. Under the terms, Korean Air can later repurchase a 20% in the business.

Korean Air representatives told analysts that it may take 2-3 months until the agreement is finalised. The business will be acquired by Hahn and Company excluding pension benefit obligations.

The sale provides much needed liquidity for Korean Air – creditors had recently pressed the airline to come up with KRW2 trillion (US$1.7 billion) in cash to support its continuing activities.

In April the state-run Korea Development Bank and the Export-Import Bank of Korea pledged KRW1.2 trillion (US$1 billion) in a bailout package.

Under the agreement Korean Air was separately required to secure KRW2 trillion in cash. It had already raised KRW 1.1 trillion (US$927 million) in a rights offering and the sale of the inflight catering and duty free business brings the figure close to KRW2 trillion.

Korean Air, hit hard by the COVID-19 crisis, has long run the world’s most successful inflight retail business (see historical sales below).

Last year sales hit US$134-135 million, down by -5.6% year-on-year, though the depreciation of the Korean Won against the US Dollar implied that duty free sales were actually flat in a difficult year. This year’s performance will be ruined by COVID-19 but given Korean Air’s high-spending passenger profile and strong Chinese route network, the business is likely to bounce back as the crisis eases.

Korean Air duty free sales 2011 to 2019. Source: Moodie Davitt Business Intelligence Unit. Click to enlarge

How the inflight retail mix has evolved over recent years. Source: Moodie Davitt Business Intelligence Unit. Click to enlarge

Breakdown of sales by category for the past two years. Source: Moodie Davitt Business Intelligence Unit. Click to enlarge

Inflight duty free sales for Korean airlines; Source: National Assembly Member Jung-woo Kim, Moodie Davitt Business Intelligence Unit; Click to enlarge

*Note: Korean national Min Yong Jung, formerly based in London and now in Seoul, is Senior Retail and Commercial Analyst at The Moodie Davitt Report. His appointment in June 2019 was the first of its kind in travel retail media. It marked the creation of the Moodie Davitt Business Intelligence Unit, a new division designed to provide a previously unseen level of research and analysis for the travel retail channel.

Do you have research needs related to the Korean and Asia Pacific travel retail and luxury markets? Min Yong Jung can be contacted at minyong@moodiedavittreport.com

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