Korean Air-Delta JV set to boost tourism but may impact capacity elsewhere in Asia

Delta Air Lines and Korean Air are moving towards implementing their JV. Korea has given clearance to the partnership, adding to pre-existing US approval. Korean approval has come with a requirement meant to protect competition. Delta and Korean Air will have to maintain capacity on five US-Korea routes, two of which are served by Delta and Korean Air, and the remaining three of which are served by only Delta or Korean Air.

Korea’s approval is the final hurdle for the JV

Korea’s Mar-2018 approval of the Korean Air-Delta Air Lines JV is the last major regulatory hurdle. Delta and Korean Air have held US approval for over a decade but never implemented their partnership.

There were unsuccessful attempts to have the Delta-Korean Air JV undergo new scrutiny. The thrust of the argument was that Delta and Korean Air announced in 2017, which is a vastly different market than when the partnership was approved last decade.

Amongst the many trans-pacific changes between the original application and now is the key merger between Delta and Northwest Airlines. When Delta and Korean Air originally requested US approval, the objective of the partnership was to balance the trans-pacific network of Northwest Airlines. Although Korean Air was strong in the trans-pacific market over a decade ago, Delta had a token presence. Delta’s merger with Northwest gave Delta a large presence in Asia.

So, the argument went, Delta’s merger with Northwest eliminated a key argument for the Delta-Korean Air JV.

The US did not re-open the Delta-Korean Air file but is requiring the two to submit their JV framework and plans.

Korea has anti-competitive concerns about the JV

Korea’s approval signals a mixed message about JVs. Korea has fundamental concerns about the JV reducing competition between Korea and the United States. But Korea ultimately decided these concerns could be more than offset by a combined Delta-Korean Air operation strengthening the Seoul Incheon hub and boosting its profit in the Asia-North America market.

Seoul Incheon’s declining transfer traffic has been a top-level concern for Korean aviation. This is despite growing questions, especially from middle-management of Seoul Incheon airport and Korean regulatory organisations, of the actual benefits of transfer traffic.

Korea imposes capacity commitments

Korea’s approval came with the carve out that Delta and Korean Air must commit to a certain amount of capacity on five Korea-US routes. All of the flights are from Seoul Incheon (no other Korean airport has services to continental North America).

Korea-continental US seat capacity by airline and airport: week commencing 02-Apr-2018

Source: CAPA – Centre for Aviation and OAG

Two of the five routes have existing service from both Delta and Korean Air: Atlanta and Seattle. Notably both of these airports are Delta hubs. Delta and Korean Air are the only operators to Atlanta, while Asiana Airlines serves Seattle.

The remaining three routes have service from only Delta or Korean Air: Detroit, Washington DC and Las Vegas. Detroit is another Delta hub.

The US tends not to impose route-specific capacity commitments, but has required some city-pairs to have reduced service. Australian authorities have imposed capacity commitments for partnerships under their jurisdiction. The EU can require airlines to make slots available for other airlines wanting to enter market-pairs the EU deems under-served after the implementation of a partnership.

Implications of JV approval are fairly limited

The full Korean approval of the partnership is not disclosed. But it appears that if Delta and Korean Air wanted to reduce capacity in a carve-out market, they could instead reduce capacity in a different market and re-direct passenger connections.

Yet the forthcoming growth out of Asia makes it impractical to suggest Delta and Korean Air would in the medium-term reduce their presence from today’s size. Regulators would have been more prudent to instead require the JV to grow, such as by stipulating a certain percentage.

Evaluating the JV is difficult since the Korea-US market is only one (albeit large) part of the trans-pacific market. The Delta-Korean partnership could see Delta pull down capacity elsewhere in Asia, such as by continuing to shrink its Tokyo hub. These reductions would fall outside the scope of Korean regulators.