1370, Gonghang-dong, Gangseo-gu, Seoul, KoreaHttp://www.koreanair.com
This publication is printed on the paper produced from the woods grown by sustainable forest management efforts.
Excellence in Flight 2009 KOREAN AIR ANNUAL REPORT
ReachingBeyond,LeadingtheAviationArena34 ERP System 36 Maintenance & Engineering 38 Safety 40 Fuel Management 41 SkyTeam Alliance
Profile02 Financial Highlights03 Share Performance 04 Message from the Chairman08 Board of Directors 09 Corporate Governance 10 2009 Highlights
GrowingGreenDreamsfortheGlobe14 Business at a Glance16 Passenger Business 20 Cargo Business 24 Aerospace Business 28 Catering & In-Flight Sales Business 30 Hotel & Limousine Business
LandingInaSafeandCleanEnvironment44 Environmental Responsibility 48 Social Contributions 50 Human Resources
FinacialSection53 Management’s Discussion & Analysis 72 Auditors’ Report 73 Financial Statements & Notes 123 Organization Chart 124 Executive Officers 126 Route Network 128 Domestic / China / Japan Network 129 Company Information
Excellence in Flight
Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely, producing an operating profit of KRW133.4 billion. New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport –Incheon – as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent. Korean Air’s cargo division returned to profitability for the first time in two years last October, due in part to the worldwide popularity of Korean brand products.
We also launched cargo service to Sweden, adding to the company’s already extensive European network. On top of the airline’s considerable financial achievements, we also improved Korean Air’s stature in the global airline industry. For the fifth year in a row, IATA ranked Korean Air the world’s largest commercial airline cargo operation. The airline has been on industry best lists and ranked tops by passengers around the world. Travel media from Business Traveler to Travel & Leisure have rated the airline as one of the world’s best. We are honored that travelers and critics across the globe are appreciating our hard work.
400
200
600
-20,000
-10,000
10,000
15,000
20,000
Operating Income ( in billions of KRW )
OPERATING RESULTS Operatingrevenues Grossprofit Selling,general&administrativeexpenses Operatingincome Incomebeforetax Netincome
FINANCIAL CONDITION Totalassets Totalliabilities Totalequity
FINANCIAL RATIOS (%) Returnonaverageequity Returnonaverageassets Debt-to-equityratio EBITDARmargin Fixedchargecoverageratio(times) PBR
PER SHARE DATA EarningsPerShare(InKRW)
2005
7,584.21,692.31,259.8
432.5254.7200.4
13,568.69,539.74,028.9
5.11.5
236.814.21.4252.9
2,989
2006
8,077.91,773.41,276.0
497.4487.9383.0
13,584.79,209.34,375.4
9.12.8
210.520.01.9854.7
5,725
2007
8,812.02,022.71,385.8
636.894.412.9
15,143.710,743.7
4,400.0
0.20.1
243.720.02.19
117.6
180
2008
10,212.61,391.21,490.5
(99.3)(2,450.8)(1,942.4)
15,867.613,044.2
2,823.4
NetlossNetloss
462.09.9
1.2390.9
-28,762
2009
9,393.71,413.71,280.3
133.4(125.4)
(98.9)
16,919.313,862.2
3,057.1
NetlossNetloss
453.513.51.44
121.3
-1,464
2009
8,045.31,210.81,096.5
114.2(107.4)
(84.7)
14,490.611,872.4
2,618.2
NetlossNetloss
453.513.51.44
121.3
-1.25
PROFILE
FINANCIAL HIGHLIGHTS
Financial Highlights
RevenuePassengerCarriedAvailableSeat-Kilometers(millionASK)RevenuePassenger-Kilometers(millionRPK)RevenueFreightTonsCarriedAvailableFreightTon-Kilometers(millionAFTK)RevenueFreightTon-Kilometers(millionFTK)
change (%)
-5.5%2.3%0.1%
-5.6%-7.3%-6.4%
2005
21,708,82168,65949,046
1,527,23810,831
8,140
2006
22,353,16971,89452,178
1,629,70311,662
8,857
2007
22,834,00376,18255,354
1,758,99712,992
9,678
2008
21,960,94077,14055,054
1,667,64712,180
9,005
2009
20,746,41378,94155,127
1,573,76111,289
8,426
Operational Results
5,000
10,000
05
13,5
68.6
06
13,5
84.7
07
15,1
43.7
08
15,8
67.6
09
16,9
19.3
0
05
200.
4
06
383.
0
07
12.9
08
(1,9
42.4
)
09
(98.
9)
0
05
432.
5
06
497.
4
07
636.
8
08
(99.
3)
09
133.
4
3,000
9,000
6,000
12,000
05
7,58
4.2
06
8,07
7.9
07
8,81
2.0
08
10,2
12.6
09
9,39
3.7
Operating Revenues ( in billions of KRW )
Net Income ( in billions of KRW )
Total Assets ( in billions of KRW )
KOREAN AIRANNUAL REPORT 2009
02
* Korean Won figures are translated, solely for the convenience of readers into U.S. dollars at KRW1,167.6 : USD 1.00, the rates prevailing as of December 31, 2009
(In billions of KRW)(In millions of USD)
FaceValue(KRW) NumberofShares TotalMarketCapitalization(KRWbillions) SharePriceHighest(KRW) Lowest(KRW) ForeignOwnership(%)
2009
5,00071,971,631
3,951 56,000 29,650 24.2%
2008
5,00071,971,631
2,735 80,000 25,550 7.8%
2007
5,00071,971,631
5,527 87,400 32,550 12.8%
SHARE PERFORMANCE
Korean Air’s Stock Facts
Cho,YangHo&FamilyHanjinCo.InhaUniversityFoundationJungseokFoundationKoreaResearchFoundationfor21CTreasuryStock Sub TotalNationalPensionFundMiraeAssetInvestmentHanaUBSAssetManagementKTBAssetManagementOthersTotal
Number of Shares
8,017,4227,127,0961,953,1571,409,485
237,5524,437,327
23,182,0393,363,6732,842,532
992,157916,631
40,674,59971,971,631
Ownership (%)
11.14%9.90%2.71%1.96%0.33%6.17%
32.21%4.67%3.95%1.38%1.27%
56.51%100.00%
Major Shareholders (As of Dec 31, 2009)
2009 Korean Air Foreign Ownership
03
2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.122009.01 2009.02 2009.03
30%
25%
20%
15%
10%
5%
0%
2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12
KOSPI(NumberofShares)
2009 KOREAN AIR SHARE PERFORMANCE vs KOSPI ( KOSPI, STOCK PRICE )
2,000
1,800
1,600
1,400
1,200
1,000
0
STOCK PRICE (KRW)
50,000
45,000
40,000
35,000
30,000
25,000
20,000
* Preferred stocks excluded.
Dear Shareholders,
Before I discuss corporate business, I want you to know how much Korean Air and I, personally, appreciate your support and encouragement during 2009. We would not have accomplished all we did without our shareholders’ commitment and for that we thank you.
Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely, producing an operating profit of KRW133.4 billion.
New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport – Incheon – as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent.
Korean Air’s cargo division returned to profitability for the first time in two years last October, due in part to the worldwide popularity of Korean brand products. We also launched cargo service to Sweden, adding to the company’s already extensive European network.
On top of the airline’s considerable financial achievements, we also improved Korean Air’s stature in the global airline industry. For the fifth year in a row, IATA ranked Korean Air the world’s largest commercial airline cargo operation. The airline has been on industry best lists and ranked tops by passengers around the world. Travel media from Business Traveler to Travel & Leisure have rated the airline as one of the world’s best. We are honored that travelers and critics across the globe are appreciating our hard work.
Korean Air fared relatively better than most and realized operating income of KRW133.4
billion due to the company’s concerted efforts to overcome the worst effects of the on-
going crises backed by the support by its loyal shareholders.
MESSAGE FROM THE CHAIRMAN
KOREAN AIRANNUAL REPORT 2009
PROFILE
05
PROFILEKOREAN AIRANNUAL REPORT 2009
06
Adhering to strict flight safety
practices
Leading a profit-oriented
business operation
Reinforcing capabilities to
deal with changing business
environments
Securing global
competitiveness for sustainable
growth
We also are continuing to expand our cultural and sports endeavors. We launched new audio guides that include the Korean language at the British Museum this year and continue to sponsor Korean language audio guides at Paris’ Louvre and Russia’s Hermitage museums.
In partnership with the Korean government, Korean Air became involved with the nation’s efforts to bring the 2018 Winter Olympic Games to PyeongChang. Korean Air’s global reach and mindset are benefits to this effort and we are working hard to communicate PyeongChang’s unique benefits to the world. In addition, Korean Air is sponsoring young talent through an athlete development program to enhance our nation’s brand value in the eyes of the world.
We have some aggressive objectives for the coming year: we will increase our global competiveness by operating a company that is profitable, productive yet flexible, and offering products customers want to return to.
Our aim is to reach KRW10,558.8 billion in operating revenue and KRW800.0 billion in operating income. We have set these objectives high, knowing that Korean Air and every one of our employees are focused on strategies and efficiencies that will support them.
We are energized by optimistic forecasts of economic recovery because recovery means increased air transport demand. So, in addition to maintaining one of Asia’s most extensive route networks, we will be expanding our reach into China and Russia. We also will benefit from some significant special events including the Shanghai EXPO, the G-20 Summit in Seoul and the 2010 World Cup Soccer Games in South Africa. We are determined to seize these and other opportunities to position Korean Air as a great global airline.
07
Respected Leader
in the World Airline
Community
We want to provide a unique product at Korean Air and investing in new aircraft is helping us achieve that. We are bringing in new B777-300ERs and A330-200s and look forward to introducing next generation A-380s and B-787-8s to our fleet. All to enhance our customer service, one of the tenets of the SkyTeam Alliance, of which Korean Air is a founding member. SkyTeam celebrates its 10th anniversary this year and we will continue to support its growth and value to our members and passengers.
Korean Air has achieved remarkable success over the past 40 years. We have grown from a small regional airline to a global carrier rated tops by travelers and critics around the world. Our promise to you is this: Together, with our 17,000 employees, we will strive to enhance your investment while raising the stature of Korean Air as a leading global carrier.
Again, thank you for your continued support. We look forward to sharing our successes with you in the future.
Best regards,
Cho,YangHoChairman & CEO
BOARD OF DIRECTORSThe Korean Air BOD is comprised of 11 members including highly capable executives who are leaders in the aviation industry and six non-standing directors who have high-level expertise in their respective areas
PROFILE
Cho,YangHoChairman & CEO
Chi,ChangHoonPresident & COO
Lee,TaeHeeGeneral Counsel
Lee,YunWooDirector, Counsel of Daewoo Securities
HyunJungTaikDirector, Professor Inha University
Suh,YongWonExecutive Vice President Korean Air Human Resources Division
Cho,HangJinExecutive Vice President KoreanAir Aerospace Busines Division
Park,OhSooDirectorProfessor Seoul National University
KimJaeIlDirectorProfessor Seoul National University
Lee,SogWooDirectorLawyerDoore Law Firm
Lee,HeeBeomDirectorChairman of STX Energy&Heavy Industries
KOREAN AIRANNUAL REPORT 2009
08
Korean Air emphasizes corporate ethics in the activities of all of our employees and management. The Company is also fully aware that corporate openness will enhance our corporate image and strengthen our competitiveness.
CORPORATE GOVERNANCE
Korean Air is fully committed to shareholder value through ethical behavior and social responsibility. In an effort to effectively deliver corporate transparency, the Company continues to maintain regulatory systems and operational processes ranging from major decision-making to everyday activities.
The Board of Directors makes important decisions of the company and guarantees independence in its work. Korean Air’s executive team reports to the Board at meetings so that all decisions can be made based upon a clear understanding of the business situation. The three committees under the Board - the Audit, Outside Director Nominating and Executive committees - maintain objectivity in business, impartiality in nominating directors, and expertise in decision- making.
Korean Air continues its efforts to encourage fair competition. Since the company announced its fair trade policies in 2004, Korean Air has maintained a ‘self-observance educational program’ to allow fair trade practices to take root and extend, while preventing unfair trade practices. Korean Air also is strengthening training programs to promote ethical practices among management and employees.
The Company emphasizes corporate ethics in the activities of all of its employees and management. Korean Air introduced standards for value judgment and behavior through its Corporate Code of Ethics and Practice Guidelines, and continues to make all employees aware of the importance of corporate ethics by providing relevant information and recurring training.
Since 2001, in particular, the Company has been helping all employees make corporate ethics a habit through mandatory corporate ethics courses, and all new employees are required to submit a written corporate ethics pledge. In 2006, Korean Air strengthened its ethical behavior principles on conducting business with interested parties.
In addition, Korean Air operates an Internal Misconduct Reporting System to help eliminate potential solicitations within the organization, unfair or unethical conduct, and irregularities in transactions with outside parties. Any of the above activities that are reported are thoroughly investigated by the Audit Department. To achieve corporate transparency, Korean Air is committed to increasing the reliability of all disclosed financial information and strengthening accounting transparency through our Internal Accounting Control system. Through an advanced internal accounting control system, we regularly monitor the efficiency of the internal accounting management and the operating status of internal controls.
Korean Air is fully aware that corporate openness will enhance our corporate image and strengthen our competitiveness. We will continue our efforts and practices to further achieve our goal of true corporate transparency.
09
2009 HIGHLIGHTS
PROFILE
Korean Air Adds Two A380 Aircraft to Fleet Order, Raising its A380 Order to TenIn February, Korean Air made the decision to purchase an additional two A380 aircraft. This raises the airline’s A380 order to ten aircraft.
Korean Air Celebrates 40th Anniversary: ‘Beyond 40 Years of Excellence’ Airline Announces Business Objectives for 2019In March, Korean Air celebrated its 40th anniversary and announced its slogan for the year and business goals for year 2019 (the 50th anniversary) at its world headquarters in Seoul. The new slogan “Beyond 40 Years of Excellence” stands in line with the corporate mission of Excellence in Flight and expresses the airline’s will to further pursue its vision “to be a respected leader in the world airline community” and possess an innovative and youthful spirit.
Korean Air Celebrates 40th Anniversary: Cabin Crew International Roadshow Showcases Uniform Design EvolutionAs part of its celebrations to mark the 40th anniversary of the airline, leading global carrier Korean Air showcased the evolution of its stylish uniform designs over the decades, culminating in today’s sophisticated Gianfranco Ferre design in the airline’s distinctive hallmark blue.
Korean Air CEO Yang Ho Cho Inducted into TIACA ‘Hall of Fame’In April, Korean Air Chairman & CEO, Yang Ho Cho, also Chairman of the Hanjin Group, was inducted to the TIACA (The
International Air Cargo Association) Hall of Fame. The induction was officially announced at a special celebration dinner on April 27th during the TIACA’s Executive Summit and Annual General Meeting in Vancouver, Canada.
Korean Air awarded Mongolian “Environmental Excellence Medal”In May, Korean Air, the South Korean flagship carrier which has volunteered to plant thousands of trees in order to prevent severe desertification in Mongolia, was awarded the “Environmental Excellence Medal” by the Mongolian government.
Korean Air, Number One Global Cargo Airline Five Years in a RowIn June, Korean Air topped the global rankings for commercial airline cargo operations for the fifth consecutive year in 2008, according to World Air Transport Statistics compiled by the International Air Transport Association (IATA).
Korean Air Sponsors Russia’s State Hermitage MuseumIn June, Korean Air announced the official launch of a Korean language guide service at Russia’s State Hermitage Museum in St. Petersburg. Korean Air also signed an MOU (Memorandum of Understanding) for further sponsorship over a five year period to produce the museum’s promotional materials, such as visitor guide maps and exhibition posters.
Korean Air Donates Mega-sized Collage Artwork to Russia’s State Hermitage MuseumIn August, Korean Air donated a mega-sized collage work created
05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25
KOREAN AIRANNUAL REPORT 2009
10
by a group of college students in South Korea to commemorate the airline’s sponsorship of the recently unveiled Korean multimedia guide service at Russia’s State Hermitage Museum.
Korean Air Named the Best North Asian AirlineIn October, Recognizing its commitment to “Excellence in Flight”, Korean Air, the flagship carrier of South Korea, was honored as ‘The Best North Asian Airline’ at the 20th TTG Travel Awards 2009 in Bangkok.
Korean Air Contracted as Boeing 747-8 Wing Part SupplierIn October, Korean Air was selected at the 2009 Seoul International Aerospace and Defense Exhibition to produce wing structure components for the new Boeing 747-8 aircraft. Korean Air Awarded by PAX International:“Global catering distinction award” In November, Korean Air was awarded the “Global catering distinction award” by PAX International magazine, a leading publication in the global travel catering industry. The results of the ‘2009 PAX International Readership Awards’ were announced at an event in Dubai’s International Convention Center on November 18th.
Korean Air expands its Global Cultural Sponsorship with a new initiative at the British MuseumIn December, Korean Air announced that it will further expand its global cultural sponsorship program by making a significant investment in the British Museum’s new handheld Multimedia Guides, with a five-year partnership lasting to 2014. In this
challenging economic climate, Korean Air is proud to continue its support of the arts at a time when it has never been more important to do so.
( Global Traveler ) Readers Award Korean AirKorean Air was awarded the ‘Best Business Class Seat Design’ and ‘Best Airport Staff/Gate Agent’ by Global Traveler magazine in its 6th annual GT Tested Awards survey. The results of the awards were published in the magazine’s December issue, with the airline receiving the award at the Global Traveler’s awards dinner in New York on January 21, 2010.
Boeing, Korean Air Announce Order for New 747-8 IntercontinentalIn December, Boeing and Korean Air announced an order for five 747-8 Intercontinental jetliners. Korean Air is the first Asian airline to order the passenger version of the new fuel-efficient 747-8.
Korean Air best business class to Asia; Best Asian airline In December, Korean Air was rated as having the best business class to Asia by readers of Business Traveler magazine for the fourth consecutive year. The magazine’s readers also ranked Korean Air as the best airline in Asia for the third straight year. Furthermore, for the second year in a row, the magazine’s readers rated Korean Air’s advertising campaign the best in the business. Despite the global economic down turn, Korean Air has made a $200+million commitment to enhancing its fleet and attracting the attention and loyalty of business travelers.
05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25
11
KOREAN AIRANNUAL REPORT 2009
12
Korean Air generates profits from the transporting of passengers and cargoes in connecting cities around the world, and thereby contributes to economic development through the international exchange of resources and culture. In 2009, we transported 20,746 thousand passengers and 1,574 thousand tons of freight to and from destinations around the world, contributing to economic activities around the globe. In 2009, Korean Air generatedKRW9,393.7 billion in operating revenues.
Growing Green Dreams for the Globe
13
Growing Green Dreams for the Globe
5,462.9 billion 2,704.6 billion
KOREAN AIRANNUAL REPORT 2009
14
2009 HIGHLIGHTS PASSENGER BUSINESS
The Korean market, confronted with a prolonged decline in demand, prompted Korean Air’s Passenger Business Division to concentrate on the promotion of overseas sales, the development of new markets and expansion of the airline’s global network. The division also introduced the latest aircraft, upgraded cabin facilities and made scheduling arrangements more flexible. passenger revenue posted KRW5,462.9 billion for 2009.
CARGO BUSINESS
Korean Air Cargo posted KRW2,704.6 billion in revenue for 2009, a 10.6% decline from 2008 due to the economic recession that descended on the globe in the second quarter of 2008. However, boosted by a recovery in demand in the second half of the year, the company recorded a significant improvement during the peak season from October to December.
Businessataglance
OperatingRevenues OperatingRevenues
4,500.0
5,500.0
5,000.0
6,000.0
05
4,35
1.0
06
4,75
7.0
07
5,21
7.1
08
5,95
3.3
09
5,46
2.9
2,000.0
3,000.0
2,500.0
3,500.0
05
2,32
2.0
06
2,37
0.8
07
2,53
3.0
08
3,02
6.8
09
2,70
4.6
251.7billion 235.1billion 41.8 billion
15
AEROSPACE BUSINESS
At the 2009 Seoul International Aerospace and Defense Exhibition, Korean Air’s Aerospace Division had been selected to develop the wing structure for the Boeing 747-8. Korean Air’s Aerospace Division has also been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’ by the Korean Ministry of National Defense for excellence in quality and delivery to the Korean defense industry.
CATERING & IN FLIGHT SALES BUSINESS Korean Air Catering Division systematically manages the complete production process, from the purchase of food products and materials to the distribution of meals to individual aircraft. The division also utilizes Korean Air’s Food Safety Research Center attached to Inha University in Seoul, Korea.The center provides research and ensures Korean Air meals meet the industry’s highest quality standards in terms of taste and nutrition.
HOTEL & LIMOUSINE BUSINESS Korean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center]. Through the company’s hotel business, Korean Air not only maximizes customer satisfaction by providing high-quality services, but also creates synergies between the hotel’s and the airline’s core competencies.
OperatingRevenues OperatingRevenues OperatingRevenues
100.0
300.0
200.0
400.0
05
188.
0
06
211.
6
07
235.
1
08
367.
7
09
251.
7
150.0
250.0
200.0
300.0
05
213.
7
06
222.
1
07
260.
6
08
257.
9
09
235.
1
20.0
60.0
40.0
80.0
05
35.0
06
36.5
07
35.2
08
39.7
09
41.8
Passenger Business Division will continue to promote long-term growth strategies and management practices geared to the enhancement of profitability
PassengerBusiness
BUSINESS REVIEW IN 2009Where others see adversity, we at Korean Air see opportunity. Despite a variety of challenges, Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely. New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport - Incheon - as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent.
In 2009, the world’s airline industry was hit by a global economic recession that stemmed from a financial crisis in the U.S. and a new strain of the H1N1 influenza, further depressing economic activity. In particular, the number of outbound Korean travelers decreased by about 24 percent from the previous year. The Korean market, confronted with a prolonged decline in demand, prompted Korean Air’s Passenger Business Division to concentrate on the promotion of overseas sales, the development of new markets and expansion of the airline’s global network. The division also introduced the latest aircraft, upgraded cabin facilities and made scheduling arrangements more flexible.
REVENUE ENHANCEMENT ACTIVITIESIn May 2009, Korean Air stepped up efforts to increase revenues with the introduction of an Incheon-Xian route, with flights running five times a week. We also started flights to Mudanjiang and Shizuoka. The airline also sought to create new markets and increase demand with the extension of charter flight operations beyond Japan to other countries. Furthermore, routes of high demand, such as New York, Ho Chi Minh City and Jakarta were equipped with upgraded seating and cabin facilities to maximize operating revenue. At the same time, Korean Air conducted marketing activities in association with the Incheon Airport Authority and the City of Metropolitan Seoul to attract more foreign visitors.
Korean Air sought to create new markets and increase demand with the extension of charter flight operations beyond Japan to other countries
KOREAN AIRANNUAL REPORT 2009
16Growing Green Dreams for the Globe
OPERATING PERFORMANCE BY ROUTEOn the whole, overseas demand increased by 19 percent in 2009 while demand from within Korea dipped by 16 percent. Demand from Japan rose by 37 percent due to the strength of the Japanese yen and the preference of many Japanese for short-distance travel, whereas travel in the opposite direction, from Korea to Japan, decreased sharply by 24 percent over the same period. Overall, demand between Korea and Japan increased by 15 percent, with Japanese tourists more than making up for the shortfall in Korean visitors to Japan.
As for Korean Air’s routes to China, the number of passengers flying to or transferring through Korea increased by 14 percent because of the weak Korean won and intensified efforts to increase Chinese demand for flights to Korea. Korean Air introduced a free sale code share with China Southern Airlines on April 27, 2009, and created a total of seven code share routes. This improved access to Chinese destinations allowed the airline to offer more convenient scheduling and a better network of routes to customers.
For Southeast Asia, the effects of the global economic recession and widespread fears of the H1N1 influenza caused a 17 percent drop in Korean demand and an overall drop in demand of 3 percent for travel to the region. On routes to Oceana, the number of overseas passengers increased by 13 percent due to the strength of local currencies, whereas demand from Korea to Oceana dropped by 19 percent. Overall demand for transportation to this region declined by 4 percent.
The introduction of the U.S. Visa Waiver Program and Canada’s Open Skies agreement helped to create a steady growth of passengers to North America of 6 percent, encouraging results considering the trend of falling demand for tourism in most places across the world. In particular, the number of passengers traveling to Hawaii, a popular destination for honeymooners,
0
80
2030
40
5060
70
1090
5,462.9billion
PassengerRevenue
17
+ Seat Class Composition by Revenue Terms (Unit:%)
First Class 2% Business Class 17% Economy Class 81%
saw an increase of 14 percent from the previous year and demand continues to rise on many North American routes. In Europe, Korean Air flexibly adjusted its capacities in response to the depressed tourist market in the region, combining the Tashkent to Cairo route and reducing the frequency of flights bound for Europe. In addition, Korean Air signed a free sale code share agreement with Uzbekistan Airways and Aeroflot to enhance flight scheduling and the company’s network of routes to Central Asia and Russia.
COST SAVING ACTIVITIESKorean Air’s Passenger Business Division is continually looking at ways to reduce high costs and optimize productivity throughout the organization. For instance, we arranged charter flights, making effective use of standby aircraft at night, and increased aircraft utilization by improving flight connectivity. In regards to unprofitable flights, appropriate measures were taken to adjust capacities on a regular basis. Additionally, Korean Air’s major divisions collaborated on reducing costs by shortening routes, lowering aircraft fuel costs, facility charges, etc.
IT-BASED SERVICEAt Korean Air, we embrace technology that can help our customers enjoy a more pleasant experience. That starts at the airport. We have expanded the installation of KIOSK systems for international flight check-ins and developed the airline’s ‘Domestic Web Check-in’ system as part of efforts to enhance customer convenience and satisfaction. With the activation of Korean Air’s new ERP system, the Passenger Business Division has developed a Passenger Revenue Analysis BI system, which enables users to analyze operating and ticketing data on a real-time basis. The system facilitates decision-making processes, effectively improving business management practices.
CUSTOMER SERVICESKorean Air has continued to introduce new aircraft while upgrading seating and cabin entertainment facilities for the greater customer satisfaction. We also opened an exclusive check-in counter at Incheon International Airport called the China Express and launched an online service called ‘Travel Planner’ to assist foreigner travelers planning a vacation to Korea. Korean Air has extensively promoted culture to the Korean general public with the airline’s support of Korean language guides at major world museums, such as Le Musee du Louvre, The British Museum and the Hermitage Museum.
10.0%
30.0%
20.0%
40.0%
05
39%
06
38%
07
37%
08
37%
09
40%
Korean Air’s Passenger Business Division is continually looking at ways to reduce high costs and optimize productivity throughout the organization
+ International Passenger Market Share
(koreain/outboundNo.ofPassengers)
KOREAN AIRANNUAL REPORT 2009
18 Growing Green Dreams for the Globe
AWARDSKorean Air was selected as the best airline in Asia for the third straight year and best business class flights to Asia for the fourth consecutive year by Business Traveler magazine readers. The magazine also awarded the airline for the ‘Best Airline Advertising Campaign’ for 2009. Korean Air also received accolades from well-known Chinese travel magazines for the airline’s efforts to enhance service to China. We debuted the China Express check-in desk at Incheon International Airport, made significant enhancements to fleet and services on Chinese routes, and made social contributions to Chinese society. In particular, Korean Air was recognized as the ‘Best Overseas Airline’ by the Global Times, included in the ‘Top 5 Carriers’ by National Geographic Traveler China, and chosen as ‘The Most Favorable Overseas Airline’ as selected by Chinese passengers and by Travel+Leisure magazine.
GOING FORWARDAs the world economy has begun to recover since the third quarter of 2009, the airline industry expects demand for air transport to gradually improve in 2010. However, competition is also expected to intensify due to a combination of high fuel prices and aggressive expansion of networks by low-cost carriers.
Nonetheless, despite such adversity, the Passenger Business Division will continue to promote long-term growth strategies and management practices geared to greater profitability. Such efforts will include intensified high-end marketing, the continual delivery of new aircraft and new retrofits to existing aircraft, and the development of overseas markets and a global network to ensure that Korean Air ranks as one of the top airlines in the world.
20.0%
60.0%
40.0%
80.0%
05
66%
06
65%
07
62%
08
58%
09
46%
+ Domestic Passenger Market Share
(No.ofPassengers)
20.7million
RevenuePassengerCarried
19
Boosted by a recovery in demand in the second half of the year, Korean Air recorded a significant improvement during the peak season from October to December.
CargoBusiness
Korean Air’s Cargo business was proud to celebrate another major accomplishment in 2009. For the fifth consecutive year, we were ranked No. 1 in the world in freight tonnage kilometers by the International Air Transportation Association (IATA). This remarkable achievement can be attributed to Korean Air’s competitive schedule, diversified route network, the flexible operation of routes in response to changing market demand, and improved customer service through investments in cargo terminals and IT infrastructure.
Korean Air is constantly working to discover and nurture long-term growth engines through new opportunities and the expansion of our overseas network. The company has built a network of cargo transport hubs connecting Europe, India, Southeast Asia and Korea. And, with Korean Air’s participation in the Navoi Development Project in Uzbekistan, the company has added a logistics hub for Central Asia. In addition to new routes, this unique location gives the airline an advantageous position in the Central Asian market with its strong potential for growth. This hub is expected to serve as the Cargo division’s core engine for sustainable growth for the long term. In October, 2009, cargo services to Hanoi, Vietnam were added as the airline explores new routes in Southeast Asia.
Korean Air also has been aggressively expanding to build market share in China -- the factory of the world -- which continues to grow by leaps and bounds. As of the end of 2009, Korean Air flew dedicated freighters to seven destinations in China including Shanghai, Hong Kong and Beijing, with a cargo terminal under construction in Tianjin. Grandstar Cargo, a joint venture between Korean Air and Chinese cargo giant, Sinotrans, currently operates a cargo transport business headquartered in Tianjin.
Korean Air Cargo achieved a 75 percent load factor, up 1 percent from the previous year due to the division’s flexibility in responding to changes in cargo demand. Boosted by a recovery in demand during the second half of the year,
As of the end of 2009, Korean Air flew dedicated freighters to seven destinations in China including Shanghai, Hong Kong and Beijing, with a cargo terminal under construction in Tianjin
KOREAN AIRANNUAL REPORT 2009
20Growing Green Dreams for the Globe
the company recorded a significant improvement through the peak season from October to December.
Korean Air Cargo posted KRW2,704.6 billion in revenue for 2009, a 10.6 percent decline from 2008 due to the economic recession that impacted businesses worldwide.
ACTIONS TAKEN TO INCREASE PROFITABILITYIn late 2009, demand for air cargo transport began to rebound, following the recession in the first half of the year. In response to sagging demand in the early part of the year, Korean Air reduced the number of unprofitable routes, cushioning the effects of price cuts and losses in revenue, and expanded the number of profit-generating routes during high seasons to maximize profitability. As a result, the airline realized relatively sound performances, with moderate declines of -6 percent and -7 percent in transport and supply, respectively, in comparison to the air cargo business worldwide, which suffered declines of -10 percent and -8 percent (according to a December survey by IATA). In particular, Korean Air Cargo’s load factor grew from the previous year due to the flexibility of the division’s operations, resulting in merely a slight reduction in transport compared to a larger decline in supply.
Korean Air also adjusted prices, which had declined during off seasons, raising them again when market demand picked up and maximizing profitability during peak seasons. At the same time, the airline invested in improving the quality of its transport service through reinforcements of safety operations, the IT system and cargo terminal projects, hence the potential for enhancing customer satisfaction.
OUTLOOK IN 2010 The International Monetary Fund (IMF) forecasts that the economic growth rate in advanced economies of Europe and the U.S. will bounce back and that China’s
2,704.6 billion
CargoRevenue
21
growth rate will rebound to double-digit growth. The IMF estimates that global economic growth this year will be 3.9 percent. In addition, IATA predicts that global demand for cargo transport will grow by 7 percent in 2010, suggesting a much-improved business environment over last year. A global market trend of increasing demand for IT products, which are mostly transported via air, and the conclusion of a Korea-EU FTA (Free Trade Agreement) and a Korea-India CEPA, are expected to have a positive impact on Korean Air’s cargo business.
Nonetheless, risks remain. Potential risk factors include rising oil prices fueled by economic recovery, the possibility of a double-dip recession and the potential for radical change in such external variables as foreign exchange, oil prices and fiercer competition from competitors who have streamlined their operations. In response, Korean Air has developed a contingency plan and a variety of activities designed to reduce or avoid such risks.
BUSINESS PLAN IN 2010Although conditions in the market are turning favorable with the recovery of the global economy, uncertainty remains due to concerns about the possibility of a double-dip recession and hikes in oil prices. Against this backdrop, Korean Air Cargo will continue to respond flexibly and proactively to changes in external business environments while aiming to maximize profitability through enhancements to customer service.
Korean Air Cargo aims to establish a more effective profit-generating structure with a revenue target this year of 25 percent over that of 2009, a year in which the volume of business was seriously affected by the economic slowdown. Costs are expected to increase by 12 percent given the growing volume of business and rising oil prices. To attain this goal of a 25 percent increase, the division has devised three core strategies:
Korean Air has developed a contingency plan and a variety of activities designed to reduce or avoid potential risk factors.
KOREAN AIRANNUAL REPORT 2009
22Growing Green Dreams for the Globe
Profit-oriented route operationsIn response to instability in the markets and rapidly changing demand for air cargo services, Korean Air plans to alter route choices, expanding profitable ones while reducing the number of unprofitable ones. The airline will also manage pricing and make more effective use of load yields to cushion the effect of price cuts in off seasons. In addition, we will utilize the airline’s accumulated knowledge in flight operations and reputation for high-quality service in the transport business to attract high-yield specialty cargo, thus improving profitability.
Strengthening data-based sales activitiesKorean Air plans to augment its sales and distribution activities based on data collected from analysis of results. Our analysis includes prices, yields, returns on routes, research on demand by customers and according to product, and demand by nation and forwarder. Based on systematic data analysis, the company will expand its platforms for meeting market demand by rapidly responding to changes in the market, including the development and timely introduction of new products and a redoubling of efforts to select and attract new market demand.
Building a global leading serviceWith a focus on improving customer satisfaction, Korean Air plans to improve the quality of its services for its overall transport processes. For example, we plan to improve convenience for customers using IT services with an expansion of the ‘E-freight’ system and the introduction of an integrated portal service that allows for email tracking at each stage of transport and services covering related claims. To improve operational safety, the airline will reinforce security check procedures at its overseas branches and agencies. We will also strengthen our special cargo transport service and establish a ‘special care service’ to monitor and oversee the entire shipping process, from reservation to delivery. The goal of these efforts is to provide customers with excellent service befitting a leading global carrier.
1.6 millionRevenueFreightTonsCarried
23
20.0%
60.0%
40.0%
80.0%
05
47%
06
47%
07
47%
08
48%
09
50%
+KE’s Share in Korean Market (Unit:%)
Aerospace Division has been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’
AerospaceBusiness
INTRODUCTION Korean Air’s development of the 500MD helicopter marked the beginning of the Korean aerospace industry. Having accumulated experience in system integration with the development of the F-5 fighter (Jegong-ho), the UH-60 helicopter and the Chang-Gong 91, Korean Air’s Aerospace Division developed the 500MD as Korea’s first indigenous commercial aircraft. Over the past 30 years, the division has continued to strengthen its capabilities in military and commercial aircraft MRO (Maintenance, Repair & Overhaul), while expanding its capabilities in the manufacture of structures for commercial aircraft, the development of satellites and space launch vehicles, as well as in other related areas.
Korean Air’s Aerospace Division also participated in the joint development of the KT-1 Trainer, the KF-16 Fighter Jet and the Korean Utility Helicopter, the SURION, and is a leader in the development of UAVs (Unmanned Aerial Vehicles). Based on capabilities accumulated from the development and manufacture of aircraft fuselages and wings for major aircraft manufacturers, Korean Air has developed the capacity to contribute or lead such advanced projects.
The headquarters of Korean Air’s Aerospace Division is the Tech Center, located in Busan in an area encompassing 705,000m2, which includes assembly/maintenance hangars, and facilities for painting, the overhaul of electronic components and fabrication of parts and components. The division also utilizes Korean Air’s R&D Center in the Daeduck Science Town encompassing an area of 150,000m2, for the development and design of state-of-the-art technologies for aircraft, UAVs, satellites and launch vehicles.
As the leading MRO facility in the Asia-Pacific region, the Tech Center’s employees have performed heavy maintenance on over 3,500 military aircraft and 2,000 commercial aircraft. The center also provides logistic support for the F-4 Fighter, the P-3C anti-submarine patrol aircraft, the 500MD, UH-60, CH-47,
Aerospace division has continued to strengthen its capabilities in military and commercial aircraft MRO (Maintenance, Repair & Overhaul), while expanding its capabilities in the manufacture of structures for commercial aircraft, the development of satellites and space launch vehicles, as well as in other related areas
100.0
300.0
200.0
400.0
05
109
06
126
07
158
08
245
09
150
+Revenue(Commercial) (InbillionsofKRW)
KOREAN AIRANNUAL REPORT 2009
24Growing Green Dreams for the Globe
Lynx, ALT-III helicopters (in conjunction with the Korean government), A-10 Attacker, F-15 and F-16 Fighters, and the CH-53 and CH-47 Helicopters for the U.S. government. In addition, the Aerospace Division not only services Korean Air’s fleet, aircraft, the 500MD, UH-60, CH-47, Lynx, ALT-III helicopters (in conjunction with the Korean government), A-10 Attacker, F-15 and F-16 Fighters, and the CH-53 and CH-47 Helicopters for the U.S. government. In addition, the Aerospace Division not only services Korean Air’s fleet,
but those of other airlines, including United Airlines, Grand Star, Southern Airlines, etc. We conduct heavy maintenance services on more than 120 aircraft every year backed by a large staff of in-house experts. The division also performs modifications of In-Flight Entertainment (IFE) Systems and cabin upgrades for Boeing 747-400s and 747-700s, as well as conversions of Boeing 747-400s from passenger to freight aircraft.
Every year, Korean Air conducts high quality maintenance on over 15,000 components utilizing advanced technology and the company’s accumulated experience in avionics, including communication and navigation systems, power systems and display units. The division also manufactures and repairs over 11,000 parts every year, and uses advanced testing equipment to monitor the performance of fuel systems, pneumatic valves and hydraulic systems. Moreover, Korean Air has been certified by the FAA, EASA and CAAC, which has enabled the company to expand its third-party business in maintenance and repair.
BUSINESS REVIEW IN 2009In 2009, Korean Air’s Aerospace Division participated in the KHP (Korea Helicopter Program), developing the aft fuselage and the tail rotor system andperformed structural and aviation equipment upgrades on the U.S. Air Force’s F-16 Fighter. The division also recently began similar upgrades for the U.S. Air Force’s A-10, as well as re-wiring of the electrical systems for the Force’s F-15.
50.0
150.0
100.0
200.0
05
79
06
86
07
77
08
122
09
102
+Revenue(Military) (InbillionsofKRW)
251.7billion
AerospaceRevenues
25
Since the 1980s, Korean Air’s Aerospace Division has designed and manufactured wings and fuselages for the Boeing 737, 747, and 777, as well as the Airbus 330 and 380. The division has also worked with Boeing for several years to develop the next generation Boeing 787 Dreamliner, and is now taking a leading role in the joint development and manufacture of this highly advanced aircraft. Korean Air is one of seven international partners in the development program for the 787, and has developed and invested in new equipment and facilities requiring advanced designs and manufacturing techniques for the manufacture of advanced composite products for the 787. Working in conjunction with major aerospace companies from around the world, Korean Air’s participation in this program constitutes a turning point for the company and will enable Korean Air to move forward in terms of the development of new technologies while becoming a world leader in in aircraft design and development.
At the 2009 Seoul International Aerospace and Defense Exhibition on October 21st, 2009, it was announced that Korean Air’s Aerospace Division had been selected to develop the wing structure for the Boeing 747-8. The Aerospace Division also received an award at the exhibition as ‘Supplier of the Year’ for its contributions to Boeing, having previously won the award in 2000 and 2006, and won as ‘Best Supplier’ for its efforts in supplying Sorgema of EADS in 2008 and 2009.
Korean Air’s Aerospace Division has also been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’ by the Korean Ministry of National Defense for excellence in quality and delivery to the Korean defense industry. The Aerospace Division has continued to expand its stake in the space business sector. For instance, in 2009, the company completed such major milestones as the system integration of the KSLV-1 (Korea Space Launch Vehicle) program, the development of the main bus for the Arirang 3 and 5 satellites and the development of the test module for the Arirang 5 satellite. As was previously
KOREAN AIRANNUAL REPORT 2009
26Growing Green Dreams for the Globe
reported in 2007, the division succeeded in developing a Close-Range Surveillance UAV named the KUS-7, and in November of this year, this success culminated in the successful first flight of the KUS-9, known as the Tactical Close-Range UAV. Another major accomplishment of 2009 was the formation of a new business unit for the development of UAVs. This unit is expected to be in a favorable position for the development of a follow-on UAV program due to the Aerospace Division’s advanced technical knowledge in the areas of systems integration, embedded software development and the manufacture of composite parts for fuselages, wings and radomes.
GOING FORWARDDue to the remarkable development, manufacture and on-time delivery of high quality components for the Boeing 787, the Aerospace Division has begun development on derivatives of the 787 aircraft and is currently in discussion with Airbus on participation in the development of the A350 extra-wide body. In 2010, the division will continue to expand its participation in the development of such new aircraft as the Boeing 787-9 and the succeeding models of the 737 and A320. The division is also aligning available resources and capacities in preparation for increased demand for the new 787.
Korean Air’s Aerospace Division is also planning to expand in the areas of heavy maintenance for commercial and military aircraft, equipment modification and cabin upgrades, as well as the overhaul of components. In addition, the division will continue to research the integration of liquid rocket engine systems, develop test facilities and focus on UAS (Unmanned Aerial Systems) for defense and civilian use so as to expand in the space and launch vehicle sector. The division’s target for revenue is KRW357 billion ($330 million) in 2010 and KRW1.2 trillion ($1.1 billion) in 2015. To achieve $1.1 billion in revenue, the Aerospace Division has announced its new vision, which focuses on excellence in technology, quality, and competitiveness.
27
We aim to better meet customer needs and increase customer satisfaction with continuous research and strict quality management
Catering&InFlightSales
CATERINGKorean Air’s catering business offers world-class, delicious cuisine suited to a wide range of tastes and preferences. Korean Air and its client airlines create menus based on customer preferences, and meals are prepared at Korean Air’s production centers and delivered on time in accordance with airline flight plans. In the air, flight attendants re-heat meals and serve passengers promptly to guarantee freshness.
Korean Air’s production facilities have all received HACCP (Hazard Analysis Critical Control Points) certification from the Korean Food & Drug Administration. The Catering Division systematically manages the complete production process from the purchase of food products and materials to the distribution of meals to individual aircraft. The division also utilizes Korean Air’s Food Safety Research Center attached to Inha University in Seoul, Korea. The center provides research and ensures Korean Air meals meet the industry’s highest quality standards in terms of taste and nutrition.
In line with the launch of Korean Air’s new corporate identity, we have installed sophisticated new equipment and developed a variety of new menus. These efforts have resulted in Korean Air winning accolades from the readers of PAX International magazine for the fifth year in a row.
Korean Air’s Catering Division aims to please its customers and provide delicious, nutritious, and healthy foods created in hygienic conditions. As we continue to strive for greater customer satisfaction, Korean Air aims to demonstrate the excellence of traditional Korean cuisine while developing new menus sensitive to regional and route-based preferences – all with a focus on the unique needs of customers.
Korean Air’s Catering Division aims to please its customers and provide delicious, nutritious, and healthy foods created in hygienic conditions
KOREAN AIRANNUAL REPORT 2009
28Growing Green Dreams for the Globe
IN-FLIGHT SALESKorean Air’s In-flight Sales Business sells duty-free items to Korean and international passengers while in transit. Recently, we have worked to enhance the efficiency of our sales through an in-flight, pre-order system for duty-free items. We constantly strive to better meet our customers’ needs and increase their satisfaction with continuous research and strict quality management, all while providing a wide variety of items at attractive prices.
In 2010, Korean Air expects revenue to increase by further improving our passengers’ in-flight sale experience through continued cabin crew training, introducing new and upgraded goods, and enhancing our pre-order service.
235.1billion
Catering&InFlightSalesRevenue
29
Through the company’s hotel business, Korean Air maximizes customer satisfaction by providing high-quality services
Hotel&Limousine
KOREAN AIR HOTELSKorean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center]. Through the company’s hotel business, Korean Air not only maximizes customer satisfaction by providing high-quality services, but also creates important synergies between the hotels and the airline.
Combining contemporary design and state-of-the-art technologies with culinary expertise and classic standards of service, the Hyatt Regency Incheon offers guests world-class luxury, innovative dining and engaging entertainment. Despite fierce competition in the hotel business, the Hyatt Regency Incheon and KAL Hotels recorded an increase in revenue of 2.1 percent and 15.3 percent, respectively, as they promoted their specialized strengths.
With large long-term investments, the Wilshire Grand Hotel has proceeded with major renovations, including guest rooms and meeting facilities. These investments will make the hotel more profitable and provide customers with a more hospitable experience.
Korean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center].
KOREAN AIRANNUAL REPORT 2009
30Growing Green Dreams for the Globe
KAL LIMOUSINE BUSThe KAL Limousine Bus Service provides customers with the most convenient way to get around by connecting domestic and international airports with major hotels and other destinations in Seoul. Revenue from the service posted a 0.9 percent decrease from 2008 to KRW17.8 billion, a result of the global economic downturn during the year 2009.
The installment of card readers for public transportation cards in the limousine buses is providing customers with added convenience. Meanwhile, the service is improving its quality by replacing older vehicles with new ones and offering better schedules and routes.
The KAL Limousine Bus Service provides customers with the most convenient way to get around by connecting domestic and international airports with major hotels and other destinations in Seoul.
31
41.8 billionHotel&LimousineRevenue
KOREAN AIRANNUAL REPORT 2009
32
33
Korean Air set a goal to accomplish when it reaches its 50th anniversary. By 2019, the carrier aims to achieve KRW25 trillion in operating revenue and KRW2.5 trillion in operating profit. To achieve this goal, the airline plans to be one of the global top ten ranking in the passenger field. Already the global leader in cargo, Korean Air predicts it will retain this title and increase its annual cargo tons carried up to 2.5 million by 2019.
Reaching Beyond, Leading
the Aviation Arena
Korean Air kicked off its ERP Project in October 2007 and successfully introduced new systems in Finance, Procurement, Facilities, ASD, Revenue Accounting (RA) and Managerial Accounting (MA), consecutively.
ERP
In November 2009, Korean Air successfully introduced Revenue Accounting (RA) and Managerial Accounting (MA), the third phase of its ERP (Enterprise Resource Planning) Program.
KEY BENEFITS Korean Air kicked off its ERP Project in October 2007 and successfully introduced new systems in Finance, Procurement, Facilities, ASD, Revenue Accounting (RA) and Managerial Accounting (MA), consecutively. There are several key benefits of the new ERP Program, including a feed of revenue data within two hours that shortens the accounting closing period and facilitates decision-making processes. Also, by using the Manufacturing/Maintenance ERP System as a basis, Catering & ASD can make integrated plans and maximize the utilization of resources.
Financial Accounting (FA) Area – Fast & Transparent Global Integration System The FA System went live in January, 2009 and is now under stable operation. It encompasses the paperless environment based on e-documents/e-approvals, a fast and transparent approval/audit system, a Global Cash Management System interfacing with financial institutions to support credit/debit functions and a Payment Factory run by region for the centralization of funds at Korean Air’s headquarters.
Revenue Accounting Area – Flight Revenue Confirmation within 2 Hrs from Departure In 2009, all RA functions including audit, inter-line settlement and internal/
Reaching Beyond, Leading the Aviation Arena
KOREAN AIRANNUAL REPORT 2009
34
external billing & settlement went live. By integrating e-Tickets and Oracle ERP, Korean Air has become the first airline to make it possible to confirm sales & revenue on a real-time basis and to complete the accounting process accordingly.
Managerial Accounting Area – Faster Decision-Making By integrating the FA/RA ERP and other relevant systems based on a standardized database, the MA ERP System can display real-time profitability information upon flight departure/arrival (three hours from departure). This creates a remarkable reduction in lead time until the information is received, and the MA System will serve as infrastructure to support faster decision-making in management.
Catering Area – Integrated Costing Information Management System The overall functions of the catering business from planning to loading, the management of in-flight items for domestic/overseas flights and purchasing for overseas catering have all been integrated to maximize resource utilization and make information of each function more accurate.
Maintenance Area – Improved Aircraft Utilization & Reliability Based on
Standardization & ERP ASD Maintenance has gone live as recently as January 2010, physically integrated with ASD Manufacturing. The benefits accruing from pre-cost management & resource-based production scheduling are expected to be seen gradually on the horizon. Currently, M&E (Monitoring and Evaluation) at the headquarters -- the last phase of the ERP Project -- is underway and scheduled to go live in January, 2011. When the system becomes operational, it will represent the integration of all aircraft maintenance processes incorporating maintenance planning, engineering, reliability and costing, and will mark the end of the three-year-long journey of the ERP Project, ultimately making standardization and integration complete.
35
Korean Air’s quality maintenance supports the airline’s mission of operational reliability and excellence in safety, and its maintenance operation continues to live up to the airline’s vision of ‘Operational Excellence’.
Maintenance&Engineering
Korean Air has achieved the highest levels of maintenance quality and competitiveness in the global airline industry. The reliability of the company’s maintenance operations continues to live up to our mission of ‘Operational Excellence.’ In November 2009, Korean Air was awarded the ‘A300-600 Operational Excellence Award’ from Airbus. Since introducing Airbus aircraft to its fleet in 1974, Korean Air has won several awards for its operation of the A300, A300-600 and A330 aircraft types. According to the operation reliability report released by Boeing & Airbus, Korean Air is one of the most reliable operators in the world.
Our Maintenance & Engineering Division, with state-of-the-art facilities and 2,600 highly skilled personnel, performs airframe, engine and component maintenance services for its own fleet and international customers at three maintenance bases in Gimpo, Incheon and Bucheon. We demand that our employees have specialized knowledge in this field and are highly skilled in maintenance techniques.
In 2004, Korean Air started a heavy aircraft maintenance and engine business for overseas customers to keep costs down while using resources more effectively. The highly reliable technical excellence of the Maintenance & Engineering Division has boosted Korean Air’s prestige and enabled the company to make contracts with global customers. For example, United Airlines (UA) selected Korean Air to perform aircraft cabin upgrade modifications and the painting of fuselages because of its increased satisfaction with Korean Air’s heavy maintenance work on UA aircraft.
KOREAN AIRANNUAL REPORT 2009
36Reaching Beyond, Leading the Aviation Arena
Furthermore, Korean Air has contracted with Thai Airways for heavy maintenance on engines since 2008. Korean Air has been expanding its presence in the global MRO market and continues to improve customer satisfaction with shorter turn-around times and high-quality maintenance services. In the past six years, Korean Air has run a successful MRO business, enabling the company to gain a reputation as the most reliable MRO service provider in Northeast Asia.
Since September 2009, Korean Air has installed new cabin IFE (In-Flight Entertainment) systems with new seats in its Boeing 777 & Airbus A330 aircraft to provide a more comfortable flight experience. These upgrades are among our efforts to continuously improve customer convenience and satisfaction.
Korean Air is constantly looking to expand and modernize its maintenance capabilities to remain a leader in the Maintenance & Engineering field. The company’s new ERP project will replace current systems with cutting-edge IT systems and will increase Korean Air’s reliability and competitiveness among the world’s premier airlines.
37
Korean Air’s safety standards exceed global standards and the company is ranked with the world’s leading airlines, and validation and recognition of this excellence continued in 2009
Safety
Korean Air completed its 10th consecutive year of accident-free operations at the end of 2009. Korean Air’s safety standards exceed global expectations, and we are proudly ranked with the world’s leading airlines. Validation, recognition and appreciation of our efforts continued in 2009. Safety has always been a top priority and core value at Korean Air, and we will continuously strive to improve operational safety to be the world’s safest airline.
We strengthened our accident prevention program, established the Safety Management System (SMS) and integrated our Safety Management IT System, called ‘SafeNet.’ SafeNet was rolled out at the end of October 2009. Korean Air established the company-wide standardization of Safety Data Management by: 1 ) encouraging active safety reporting by all employees 2) identifying, analyzing and correcting any safety hazard before it becomes an issue 3) and accumulating and utilizing Safety Data
In support of the new SMS environment at Korean Air, the Safety, Security and Compliance Department will: * continue to provide the corporation with an invaluable source of expertise in
the fields of safety, security and quality assurance * anticipate and identify systemic trends and coordinate/suggest appropriate,
scientifically-based countermeasures targeted at mitigating human error and wherever possible eliminating these errors
* ensure that positive management control exists over anything directly related to the safety, quality and security of Korean Air’s products and services, including a well-designed system of procedural controls
KOREAN AIRANNUAL REPORT 2009
38Reaching Beyond, Leading the Aviation Arena
Since its initial audit in 2005, Korean Air has undergone IATA Oversight Safety Audit (IOSA) recertification audits in 2006 and 2008. Each time, Korean Air successfully renewed its IOSA status with an impeccable record. Korean Air contracted to the U.S. Department of Defense (DOD), underwent its biennial DOD on-site survey, and once again, no finding was observed. In addition, Korean Air has joined a pool of IATA Safety Audit for Ground Operations (ISAGO) member airlines for the improvement of operational safety in the airport ground environment. Korean Air is taking a leading role in the IATA’s efforts to ensure operational safety.
Korean Air has not experienced any security problems for more than 30 years. This record of success is a direct result of our ongoing, company-wide effort. We have continued to sharpen our intelligence management procedures, repeatedly preformed mock emergency drills and updated security equipment to prevent the occurrence of a security incident.
The Safety Strategy theme for 2010 is: “Leadership, Communication, and Coordination.” Enhancing the Korean Air SMS and implementing a Just Culture at Korean Air.”
The theme supports the Vision & Mission of Korean Air: “To be a Respected Leader in the World Airline Community” and “Excellence in Flight.”
Korean Air expects its employees to be forthcoming and honest when they make mistakes. We foster a supportive environment that will help employees “learn” from errors to avoid bigger problems in the future. A strong culture that effectively supports the reporting of safety concerns can only be achieved in a fair and just environment where Korean Air employees feel that they can provide specific details and submit hazard reports regarding their mistakes without fear of punishment.
Korean Air will continue to advance a culture based on safety, including the reporting of safety concerns and the installment of a fair and Just culture. We will invest in the training of employees and identify additional partnership opportunities with all divisions and departments.
Everyone at our company will remain steadfast in striving for continued operational excellence in 2010 and beyond.
39
FuelManagement
Korean Air has consistently and proudly fulfilled its responsibilities as an environment-friendly corporate citizen. Our airline is committed to the slowing of global warming, and we’re focused on the government-driven, green growth initiative. To accomplish our goals, we employ fuel management policies to reduce our emissions of greenhouse gases and noise pollution. And, in preparation for the EU’s Emissions Trading Scheme (ETS), which is slated for implementation in 2012, we are upgrading related systems to improve the reliability of our fuel consumption data.
In 2009, fuel consumption improved by about 144 million pounds through eco-friendly fuel management programs. Consequently, emissions of carbon dioxide declined 205,000 tons, a significant achievement in terms of green growth and environmental protection initiatives. Specifically, of the 48 total missions that have been implemented since last year, 33 have been continued from 2008 and 15 were newly developed and applied in 2009.
The missions, broken down by category, are described as follows: * Flight Operations: to expand the application of low-noise, eco-friendly and economic
flight operation procedures such as the Continuous Descent Approach and to strengthen monitoring
* Flight Planning: to improve fuel policies through revision of regulations on legal contingency fuel * Ground Support: to check and improve the implementation of fuel management
missions at airports—to encourage the use of the ground power system (GPS) and ground power unit (GPU) to minimize the waste of fuel on the ground, to improve jet re-fueling procedures at domestic and international airports, and to discourage overloading of jet fuel
Korean Air has several major initiatives in store for 2010, including: * Preparing for changes in external business environments, including the
implementation of the EU ETS in 2012 * Reinforcing capacities for undertaking analyses by upgrading current systems of fuel management * Improving standards and procedures in order to establish rational jet fuel loading standards * Conducting continuous check-ups in the field, especially on airports with low fuel
efficiency so as to develop measures for improving fuel efficiency customized to the specific needs of airports.
In preparation for the new EU ETS regulations, Korean Air will develop fuel management policies that improve fuel efficiency while protecting the environment. As a responsible, environment-friendly corporate citizen, we continue striving to create a cleaner, greener world.
KOREAN AIRANNUAL REPORT 2009
40
Korean Air employ fuel management policies to reduce our emissions of greenhouse gases and noise pollution
Reaching Beyond, Leading the Aviation Arena
SkyTeam
Korean Air has always enjoyed an ambitious vision of a worldwide partnership with other airlines that share a similar dedication to unparalleled customer service.
Hence, SkyTeam was launched in June 2000. We originally founded the SkyTeam alliance with Delta Airlines, Air France and Aero Mexico. The response has been nothing short of phenomenal. Since it began, SkyTeam has added new partners, including CSA Czech Airlines, Alitalia, KLM Royal Dutch Airlines, Aeroflot, China Southern Airlines and two associate airlines, Air Europa and Kenya Airways to become a global-leading alliance of airlines.
Today, SkyTeam’s extensive network of hubs provides our 384 million annual passengers with access to more than 13,133 daily flights to major destinations around the world. Remarkably, during the last nine years, SkyTeam has increased the number of FFP (Frequent Flyer Program) members from 40 million to 116 million and the number of destinations from 451 cities to 856 cities.
Through SkyTeam’s extended network, passengers enjoy more choices of flights and convenient departure schedules when traveling with SkyTeam carriers. It also offers customers improved benefits such as access to lounges worldwide, a reward program for loyalty and consistent high-quality service at all member airlines’ counters. With confirmation that Vietnam Airlines and Tarom will join SkyTeam in June 2010, the alliance will increase the range of its seamless service, especially in the regions of South Asia and Eastern Europe.
As expressed in its slogan, “Caring more about you,” SkyTeam has developed new benefits, ensured consistency in its services and offered products that enhance the customer experience. Newly opened in November 2009, the SkyTeam’s dedicated facility at London Heathrow T4 offers an array of customer benefits to meet individual needs, including: * a one-stop transfer system * a premium check-in area * self-service kiosks * a co-branded lounge with luxurious amenities
In addition, in keeping with SkyTeam’s “Corporate Social Responsibility Statement,” each member of the alliance is committed to conducting business with eco-friendly policies and best practices of the airline industry. SkyTeam’s members also aim to promote social responsibility while promoting the concept of equitable economic prosperity for all stakeholders.
SkyTeam will continue to intensify its efforts to exceed the expectations of its customers and the international community in 2010.
41
SkyTeam’s extensive network of hubs provides our 384 million annual passengers with access to more than 13,133 daily flights to all major destinations all around world
KOREAN AIRANNUAL REPORT 2009
42
Landing in a safe and clean
Environment
Korean Air has made consistent efforts to preserve the environment and minimize the company’s impact on the environment through environmental management policies and mid- to long-term environmental objectives. In the future, Korean Air will continue to pursue prosperity for the benefit of humankind through balanced development of the aviation industry and the environment.
43
Korean Air was involved in the seventh round of the carbon disclosure project (CDP7) in 2009, disclosing the risk and opportunity factors of the CO2 emissions of its flight operations. In the CDP8 in 2010, the company will offer further information on its internal strategies for countering climate change
EnvironmentalResponsibility
TACKLING CLIMATE CHANGESince Korean Air’s maiden voyage more than 40 years ago, we have prided ourselves on being an environmentally conscious organization across the globe. The aviation industry’s responsibility to the environment coincides with the growing demand for global air transportation. That’s why Korean Air strives to minimize the growth in its CO2 emissions while making consistent efforts to meet the rising demand for air travel. Emissions of CO2 from flight operations account for approximately 2 percent of total CO2 emissions caused by human activities.
We have an ambitious goal: Zero emissions of CO2 by 2050. To reach that milestone, the company has implemented a four-pillar strategy: Improve technology, infrastructure, and operations while building a “green” economic approach to address climate change. In particular, Korean Air will concentrate on improving operational efficiency, while introducing new high-efficiency aircraft, the most effective countermeasure to climate change in the short term.
A rising global demand for air travel has created more than 60 percent growth in transportation demands since 2000. Korean Air’s emissions of CO2 peaked at 50 percent growth during the same period, saving 10 percent on environmental surcharges. The company’s emissions intensity against the 2000 level decreased by 9 percent.
FLEET MODERNIZATION Korean Air is always looking toward the future, challenging itself to be better, smarter and more efficient. We are replacing older aircraft, such as the B747 and
Landing in a safe and clean Environment
KOREAN AIRANNUAL REPORT 2009
44
A300, with the highly efficient, next-generation B787 and A380 aircraft. Both of these aircrafts offer 20 percent higher fuel efficiency.
By 2015, our plan is to phase in 45 new passenger aircrafts: * 10 A380s * 10 B787s * 12 new freighters, including 5 B747-
8Fs and 5 B777Fs
A380 : The Airbus A380 is an eco-friendly jumbo jet with a 40% higher maximum take-off weight than the B747, which allows for a reduced number of take-offs and landings, while consuming less than 3.0 liters per 100 passenger-kms of fuel. Starting in 2010, Korean Air plans to adopt the A380 for its high-demand long-haul routes connecting hub airports.
B787 : Developed by Boeing, the B787 is the first private aircraft to employ a light carbon complex over the entire fuselage, with 30% higher fuel-efficiency per seat than the B767 thanks to state-of-the-art engine technology. Korean Air plans to adopt the B787 starting from 2011 for its new long-haul routes and mid-range commercial routes.
IMPROVING OPERATIONAL EFFICIENCY OF AIRCRAFT Korean Air has consistently improved the efficiency of its fuel management procedures to reduce greenhouse gas emissions. By implementing a total of 48 missions for fuel efficiency management in four categories in 2009: flight operations procedures, flight planning, weight management and improvements in aircraft performance, the company reduced its carbon dioxide emissions by 205,000 million tons.
45
ALTERNATIVE FUELWe are committed to tackling climate change. Korean Air is currently working to develop a bio-fuel as an alternative jet fuel. Going forward, we will work with aircraft manufacturers and fuel suppliers in verifying the safety and ethical responsibilities of using bio-fuel. We are constantly weighing the balance between safe and secure flight operations and reducing the environmental impact on plants
CARBON DISCLOSURE AND CARBON OFFSETSKorean Air was involved in the seventh round of the Carbon Disclosure Project (CDP7) in 2009, disclosing the risk and opportunity factors of the CO2 emissions of its flight operations. In the CDP8 in 2010, the company will offer further information on its internal strategies for countering climate change. In addition, we are reviewing adoption of the carbon offset program, allowing passengers to voluntarily purchase credits to offset the CO2 emissions created by their own air travel. Korean Air will wait until a reliable program with an objective calculation formula to determine a customer’s CO2 emissions, a reasonable level of offset costs and a transparent fund and investment vehicles is established.
GREEN FORESTATION PROJECTAt Korean Air, being environmentally friendly is more than just a slogan, it’s a mindset. In a bid to slow down climate change due to deforestation, we have been planting forests in the deserts of Baganuur in Mongolia and Kubuchi in China since 2004. A total of 36,000 trees are growing in a 50,000m2 Korean Air Forest in Mongolia. In the Kubuchi Desert, the airline plants trees every year with a goal of planting a total of 1.8 million trees on the 6 million m2 site by 2011. Korean Air’s unique global green initiatives also include a tree-planting campaign in Los Angeles, California, which began in March, 2009 as part of an urban forestation project.
KOREAN AIRANNUAL REPORT 2009
46Landing in a safe and clean Environment
Korean Air participates in a variety of eco-friendly activities to save energy and curtail the amount of greenhouse gas emissions arising from energy consumption during ground support activities.
EU ETS (EMISSIONS TRADING SCHEME) Korean Air operates in the global community. We have developed a comprehensive internal procedure that encompasses monitoring, reporting and verification. The company’s IT systems are consistently updated to maintain accurate and consistent control of its CO2 emissions. Recently, the Council of the European Union passed a bill that applies an emissions trading scheme to the aviation industry. In 2012, all airlines flying in and out of Europe are subject to the regulations for limiting CO2 emissions. Airlines will be required to purchase credits for their CO2 emissions in excess of regulatory standards through the emissions trading scheme. Korean Air prefers global measurements under an international agreement to address climate change as instituted by the Post-Kyoto Protocol and ICAO. We always have believed that objective, international agreement is more fair, honest and equitable than regional climate change countermeasures, such as that of the EU ETS.
CLIMATE CHANGE AND ISO 14001Korean Air participates in a variety of eco-friendly activities to save energy and curtail the amount of greenhouse gas emissions arising from energy consumption during ground support activities. In 1996, we earned the prestigious ISO14001 certification, an international standard for environmental management systems. This certification covers the company’s five divisions; Maintenance & Engineering, Aircraft Manufacturing, Catering, Headquarters & General Affairs, and the Hotel Business. Recently, we instituted specified regulations and guidelines for our environmental management system suited to the characteristics of the airline business to minimize the impact of the company’s flight operations on the environment. More details on Korean Air’s initiatives and performances in addressing climate change are available in the 2010 Korean Air Sustainability Report .
47
Korean Air’s “sharing management” continued on the airline’s 40th anniversary in 2009. Under the slogan of “Wings of Love, Wings of Hope,” our social contribution activities go beyond borders to deliver hope to local communities in every corner of the world.
Under the slogan of “Wings of Love, Wings of Hope,” Korean Air’s charitable contributions transcend borders to deliver hope to local communities in every corner of the world.
Our founding chairman, Joong Hoon Cho, believed that “a company’s profits should be given back to society and an altruistic attitude enlightens the spirit of community.” Korean Air actively engages in volunteer work for the underprivileged, the environment, culture, education, sports and medical aid. We encourage our employees to volunteer their time to worthy causes.
Corporate social responsibility is part of the fabric and soul of Korean Air. We have formed networks and partnerships to create an organized community service program, where our employees actively participate. In recognition of these endeavors, Korean Air was awarded the Korea Ethical Management Grand Prix (KEMG) in 2008 and the grand prize at the 2009 Korea Ethical Management Awards by the Korea Economic Magazine and Hankook Business Daily newspaper.
Our Korean Air Volunteer Corps includes 23 in-house, service groups. Each month, these groups assist teenage mothers and fathers, sponsor scholarships, care for the disabled and senior citizen shut-ins, and visit charities to volunteer their time. Volunteers fly to remote regions in Malaysia, the Philippines, Mongolia and other isolated areas to deliver love and care to people in need.
Committed to improving local communities, the Korean Air Volunteer Corps routinely donates rice and conducts kimchi-making events for people in need.
SocialContributions
KOREAN AIRANNUAL REPORT 2009
48Landing in a safe and clean Environment
In addition to our sisterhood tie with Myeongdong-ri in Hongcheon-gun, Gangwon Province, we tied a second sisterhood knot with Songsan-dong in Seogwipo-si, Jeju, providing volunteer and medical service programs. Korean Air also actively participates in the Habitat for Humanity program for the homeless. Dedicated to protecting cultural assets, we entered into an agreement to protect the Woljeongsa Temple on Odaesan Mountain.
Marking the 40th anniversary of the foundation of Korean Air, the company invited children of underprivileged families from across the nation to a three-day, two-night camp on Jeju Island and hosted a heartwarming event called the “Sky Love Bazaar.” All of the proceeds were donated to the local community.
Korean Air has also spearheaded the providing of disaster relief and environmental management activities. In February 2009, we donated 5,000 boxes of bottled water to regions suffering from drought. We are proud of our tree-planting programs in Mongolia as part of the “Korean Air Forest” project and the Kubuchi Desert in China that is included in the company’s Green Eco-Forestation Project.
Korean Air’s company-wide ethos of sharing and caring transcends geographical, cultural and economic boundaries. While striving to provide reliable, creative customer services along with excellence in safety and reliability, we will work hard to help build a society where people can enjoy better lives.
49
Korean Air’s “sharing management” continued on the airline’s 40th anniversary in 2009. Under the slogan of “Wings of Love, Wings of Hope,” our social contribution activities go beyond borders to deliver hope to local communities in every corner of the world.
The “Company is the People” is a philosophy that has guided Korean Air’s human resources (HR) strategies and management philosophies since our inception. The philosophy is based on the corporate principle of our late chairman and founder, Joong Hoon Cho, who said “people create the company and the company evolves upon the people’s endeavors.” From the very beginning, Korean Air has placed a significant focus on creating effective human resource policies and strategies. We’re proud that Korean Air has consistently been at the forefront of practicing effective human resource management.
Korean Air’s HR philosophy encompasses three basic principles: a) People are the company’s most valuable resource b) Corporate development is achieved through people c) Co-development of the company and people is essential
KALMANSHIP is the term used to describe the ideal type of employee that Korean Air wants and needs to hire, and a person we must retain to succeed.
Korean Air respects and supports those who have a very proactive mindset, possess an open-minded view of the world, are highly service-oriented, and have good discipline. This KALMANSHIP is based on the HR philosophy, the “Company is the People” and is reflected in the company’s HR policies.
a) Proactive Mindset *Always thinks innovatively *A future-oriented mindset that breaks stereotypesActive and creative mindsets are significant factors in recruiting new employees to
HumanResources
KOREAN AIRANNUAL REPORT 2009
50Landing in a safe and clean Environment
Korean Air. To this end, Korean Air offers employees various educational programs aimed at stimulating a proactive mindset. Korean Air also includes innovative thinking in the employee appraisal system.
b) Open-minded view of the world * Able to understand and embrace different cultures from all over the world
without being self-centered *Open-minded with extensive cultural knowledge along with proficiency in other languages Korean Air has implemented various policies and rules to foster an open-minded view of the world in our employees. We strive to instill the concept of cosmopolitan and worldly citizenship in our new employees through our annual commitment to international volunteer services. Korean Air also dispatches employees at the level of assistant manager to foreign stations for a one-year term, thus providing opportunities to acquire knowledge of foreign cultures and lifestyles. In addition, several employees are sent to world-renowned MBA schools to gain highly advanced academic knowledge.
c) Service-oriented mindset and politeness *Neat appearance, warm-hearted, well-mannered *Professional and polite in all situations involving customers During the recruitment process, Korean Air carefully monitors the service-oriented mindset of candidates to ensure that each is a good fit with the standards of the company. A service-oriented mindset is one of the key factors in the evaluation of all Korean Air employees and the company operates an institute that trains employees to be service-oriented.
d) Good discipline *Fully responsible for the job assigned *Maintains good interpersonal relationships with other employees in the organization With service and safety being crucial factors in the airline business, Korean Air places a high value on the integrity and teamwork of its employees. Those values are directly reflected in the employment, education, appointments and evaluations of our personnel.
51
Financial Section
KOREAN AIRANNUAL REPORT 2009
52
Independent financial statements such as business results and forward-looking statements in this
Management’s Discussion and Analysis has been prepared in accordance with accounting principles generally
accepted in Korea (Korean GAAP). This document contains projections, plans and estimates related to Korean
Air’s financial information, operational performance and business. It also discusses management’s plan and
strategy. Forward-looking statements that have been directly expressed or implied include known and unknown
risks, and may differ from actual results as a result of uncertain factors. These differences could be materially
important. The Company does not make any representation or warranty, expressed or implied, as to the
accuracy or completeness of the information contained in this section, and nothing contained herein is, or shall
be relied upon as, a promise, whether as to the past of the future. Since business results and forward-looking
statements include projections, plans and estimates that reflect political and economic circumstances that the
Company will face in the future, investors should not place undue reliance above reasonable levels on such
statements. Since the projections, plans and estimates represent conditions as of the date they were made, the
Company undertakes no obligation to provide additional information as to potential future events. Going
forward, unless there is no other qualifying description, the term “the Company” used hereinafter shall refer to
“Korean Air Lines.”
I. ExEcutIvE Summary
1. ECONOMIC ENVIRONMENT2009 was a meaningful year in the history of the global and domestic economic. After the Lehman Brothers crisis, the confusion in the financial markets and contraction in sentiment of all parties that followed projected an economic recession that would last a long time. However, as a result of various countries’ financial stabilization and expansion policies to overcome the global economic crisis, the domestic and international economies witnessed a turnaround at a relatively short time span. From a domestic economy’s perspective, although the Korean economy has substantially grown in size, the economic crisis has reconfirmed the domestic economy’s current and growing high dependency on the global economy. Any changes in the global economy tend to create greater fluctuations for the domestic economy.
The real domestic economy significantly slowed down after the Lehman Brothers crisis, but then entered a recovery phase starting in early 2009. The domestic economy achieved a compound annual growth rate of 10% for the 2nd and 3rd quarter of 2009 with the help of increased exports due to the depreciation of the FX and aggressive economic support measures by the government. If the economic recovery was led by exports during the 1st half of 2009, the domestic sector, including investments and consumption, showed a fast growth in the 2nd half amidst the slowdown in exports during the same period. This was due to various major economic recovery factors affecting the real economy with a time lag.
+ GDP GROwTh RaTE
+ CURRENCY DEVELOPMENT (aNNUaL aVERaGE)
maNaGEmENt’S DIScuSSION & aNaLySIS
53
2005 2006 2007 2008 2009
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
4.2%
5.0% 5.0%
2.5%
0.2%
2005
2,100,00
1,800,00
1,500,00
1,200,00
900,00
600,00
300,00
20092008
(UNIT : Krw)
2006
USD JYP 100 GBPEUR
2007
Financial SectionKOREAN AIRANNUAL REPORT 2009
54
The global market share of domestic corporates in the 5 major sectors, semiconductor, mobile phone, display, automobile and shipbuilding significantly increased in 2009 at unprecedented levels. In the semiconductor sector, with the recovery in PC demand and increase in substitution demand for next generation memory (DDr 3) chips, Korean semiconductor manufacturers achieved a global market share of more than 60%, overwhelmingly maintaining its number 1 position. As for mobile phones, domestic corporates have been able to secure diverse general purpose mobile phones (touch screen) that meet the needs of each market segment, resulting in a global market share exceeding 30%. Despite the declining global demand of automobiles, aggressive marketing initiatives have elevated Korean automobile manufacturers as a new powerful player globally. This has led the Korean automobile manufacturers to expand their market share in the U.S. market.
Exports by domestic corporates declined at a relatively steady rate. This was despite the decrease in global demand and trade due to the global financial crisis. Compared to the previous year, the decline in exports by 14% in 2009 was quite acceptable considering the global trade flow.
The favorable external environment, including the “3 lows,” such as FX, interest rate and oil price, the strengthening of the Japanese Yen, and China’s large scale economic stimulus packages contributed to improvement of corporate results. The level that the Korean won depreciated off-set the disadvantageous internal and external market factors helping play a role in enhancing export competitiveness and performance.
2009 was also a year focused on “Green Growth” to help overcome the 3 challenges related to the environment, resource and economics. As the environment and resources have come into spotlight as a potential crisis due to the recent changes in climate and depletion of resources, various governments have adopted the “Green Industry” as a new growth engine to help counter this crisis on a mid- to long-term basis. Governments have also planned large scale eco-friendly investments. with environmental-related regulations emerging as a new trade barrier, it has become critical to secure core “Green Technologies” related to green house gas reductions and energy efficient improvements. As such, no matter the size of the airline, the international airline industry is also carefully observing the trends of the “Green Competition.”
2. aIRLINE INDUsTRY OVERVIEwIn the midst of the H1N1 virus and global economic crisis, the international passenger and cargo performance declined last year, whereas domestic passenger performance increased.
According to the 2009 survey on airline transport performance carried-out by the Ministry of Land, Transport and Maritime, international transport passengers showed another minus growth in 2009. Total international transport passengers decreased by 5.4% or 33,440,000 passengers in 2009 compared to the previous year. International cargo transportation also decreased to 2,910,000 tons, a 3.1% decrease over the previous year. However, with the advent of new low cost carriers, domestic passenger transportation recorded 18,020,000 passengers in 2009, a 6.1% increase compared to the previous year. Carefully analyzing the potentials, there are signs that the airline transport business is expected to show a recovery in 2010.
Based on documents by the Ministry of Land, Transport and Maritime, international passenger transportation is expected to continue decreasing until the summer peak period when it is expected to turnaround, achieving a two-digital growth by December 2010. Since its opening 8 years ago, passengers at the Incheon International Airport also exceeded 5 million. Passenger increased from 15% to 18.6% in 2010. International cargo processing also showed a minus growth rate for two consecutive years. However, the two digital minus growth rate during the 1st half of 2009 showed a recovery starting in September due to the increase in exports of IT products.
55
+ CaRGO TRaNsNPORTaTION aT IIaC (TON)
+ CaRGO TRaNsPORTaTION (TON)
The Ministry of Land, Transport and Maritime alluded to the many positive factors providing the road to positive growth in 2010. The positive factors include improved consumer sentiment as a result of the steady recovery trend of economic indices since the 2nd half of 2009, suppressed expansion of the H1N1 virus, increased number of new low cost international carriers, expected G20 High Level Conference and hosting of the 2010 world Cup in South Africa and Asian Games in Guangzhou, China. As a result of these positive factors, the Ministry of Land, Transport and Maritime projects international passenger demand, domestic passenger demand and international cargo demand to increase by 9.7%, 4.8% and 13%, respectively in 2010.
According to an official at the Ministry of Land, Transport and Maritime, “These growth rates exceed the projected average global demand growth rates.” He also went on to mention that “Airline passenger and international cargo transportation will recover to levels similar to that before the global economic crisis in 2008.”
130.000
120,000
110,000
100,000
90,000
80,000
70,000
Korean Air Cargo Transportation
2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12
250,000
225,000
200,000
175,000
150,000
100,000
50,000
(IIAC) Incheon International Airport
2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12
Financial SectionKOREAN AIRANNUAL REPORT 2009
56
+ PassENGER TRaNsPORTaTION aT IIaC (ThOUsaNDs)
+ PassENGER TRaNsPORTaTION (ThOUsaNDs)
However, according to major international organizations and groups such as ICAO-IATA, global passenger transportation will increase by 3~5% and cargo transportation by 6~7% in 2010 in the midst of increasing international oil prices and fixed asset administrative expenses, making it difficult to fully recover to levels prior to the global economic crisis.
+ aIR TRaVEL aND FREIGhT VOLUMEs ON INTERNaTIONaL MaRKETs
* Source : IATA
2005 2006 2007 2008 2009 2010 2011
280
260
240
220
200
180
160
13.5
13.0
12.5
12.0
11.5
11.0
10.0
PASSENGErrPKs(left scale)
FrEIGHTFTKs(right scale)
Contribution toavg. 2010growth fromstarting point inJanuary
2009 avg. FTK
2010 avg. FTK
rPK billion FTK billion
1,300
1,200
1,100
1,000
900
800
700
Korean Air Passenger Transportation
2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12
3,000
2,800
2,600
2,400
2,200
2,000
1,800
(IIAC) Incheon International Airport
2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12
57
+ INDUsTRY NET PROFIT aND EBIT MaRGIN
* Source : IATA
+ INTERNaTIONaL aIR TRaFFIC VOLUME
* Source : IATA
Affected by the global economic crisis and H1N1 virus the previous year, international passenger transportation and cargo transportation declined by 5.4% and 3.1%, respectively. However, domestic passenger transportation increased by 6.1%.
According to 2009 airline transportation results, international passenger transportation decreased by 5.4% to 33,440,000 passengers. In addition to the 4.1% decrease in 2008 due to the economic crisis, 2009 showed a minus growth rate for 2 consecutive years. In case of domestic passenger transportation, it increased by 6.1% to 18,020,000 due to expansion of low cost carriers. International cargo transportation declined by 3.1% to 2,910,000 tons, which was slightly better that the decrease in 4.5% compared to that of the previous year.
Looking at the results more closely, international airline passengers decreased due to the economic stagnation and consumer sentiment contraction. However, a turnaround occurred starting in the summer peak period in 2009. In December, there was a two-digit growth compared to the previous year, a significant turnaround. Since opening the airport 8 years ago, passengers at Incheon International Airport exceeded 5 million in 2009.
YTD 2009 vs. YTD 2008
Africa
Asia/Pacific
Europe
Latin America
Middle East
North America
Industry
RPK Growth
-7.80%
-6.80%
-5.30%
-0.30%
10.40%
-6.10%
-4.20%
ASK Growth
-3.60%
-6.70%
-4.40%
1.70%
13.50%
-5.40%
-3.20%
PassengerLoad-Factor
69.7
73.5
76.5
72.8
73.1
79.4
75.4
FTK Growth
-14.90%
-12.40%
-17.70%
-7.80%
1.60%
-13.00%
-12.70%
AFTK Growth
-4.20%
-12.60%
-10.80%
-0.30%
6.10%
-9.80%
-9.20%
SYSTEM-wIDE coMMERcIAL AIRLINES EBIT MARGIN, % REvENuES Net profits, uS$ billion
Global
including exceptional items
Regions
North America
including exceptional items
Europe
including exceptional items
Asia-Pacific
including exceptional items
Middle East
Latin America
including exceptional items
Africa
2007
3.9%
5.5%
4.0%
2.9%
0.0%
2.0%
1.0%
2008
-1.6%
-1.8%
0.1%
-4.7%
1.0%
2.3%
-0.9%
2009E
-0.1%
1.3%
-1.9%
0.0%
-0.9%
3.9%
-1.7%
2010F
1.6%
1.9%
-0.6%
3.7%
0.2%
4.1%
-0.6%
2007
12.9
14.7
3.7
5.5
6.4
6.4
3.0
3.0
-0.1
0.1
0.1
-0.2
2008
-15.9
-36.0
-9.5
-24.3
0.1
-0.9
-5.0
-9.0
-0.3
-1.2
-1.5
-0.1
2009E
-9.4
-9.4
-3.1
-3.1
-3.8
-3.8
-2.7
-2.7
-0.5
0.8
0.8
-0.2
2010F
-2.8
-2.8
-1.8
-1.8
-2.2
-2.2
0.9
0.9
-0.4
0.8
0.8
-0.1
Financial SectionKOREAN AIRANNUAL REPORT 2009
58
Domestically, the recent appreciation of the FX resulted in passengers changing their international destination to Jeju Island. As a result, whereas other domestic routes declined by 4.6%, the Jeju Island route increased by 10.6%.
In addition, although international cargo processing showed a minus growth rate after the 4.5% decline in 2008, and a double-digit minus growth rate in the 1st half of 2009, starting in September 2009, international cargo processing showed a turnaround due to the recovery of the economy and increase in IT products such as LCDs and semiconductors. This turnaround allows a speedy economic recovery projection.
Based on the Ministry of Land, Transport and Maritime, the effects from the improvement of consumer sentiment as a result of the steady recovery in economic indices starting from the 2nd half of 2009, suppression of H1N1 expansion, expansion of low cost carriers(LLC), 2010 South Africa world Cup, G20 High Level Conference, and Guangzhou, China Asian Games is projected to increase international passenger transportation, domestic passenger transportation and cargo transportation by 9.7%, 4.8% and 13%, respectively, in 2010.
This positive projection far exceeds average global airline demand growth rate, enabling a recovery to levels prior to the 2007 global economic crisis.
According to the major international organizations and groups such as the ICAO-IATA, global passenger transport and cargo transport volume is projected to increase by 3~5% and 6~7%, respectively in 2010. Due to the increase in global oil prices and fixed asset administrative expenses, this growth rate will not be sufficient to help performance recover to levels prior to the 2007 global economic crisis.
+ GROwTh IN PassENGER NUMBERs BY MaRKET
* Source : Paxls
3. KOREaN aIR’s OVERVIEw
BUsINEss aCTIVITIEs As of the end of December 2009, Korean Air had a fleet of 127 aircrafts, with passenger and cargo routes to 117 cities in 39 countries, concentrating on enhancing customer convenience as an air transport business. In addition to the air transport business, Korean Air is creating synergies with diverse businesses including aerospace, focused on research & development of aircraft parts manufacturing, maintenance and satellites, in-flight catering, in-flight duty free sales, and hotel operations. Korean Air is also part of the SkyTeam, a global alliance. The air transport business includes passenger transport, cargo transport, maintenance service, training, and building lease, taking up 95% of total sales. International passenger transport comprised of the largest portion at 54%. As of the end of 2009, within the Korean airline industry, Korean Air’s market share in international passenger transport and cargo transport stood at 39.9% and 50.1%, respectively.
2006 2007 2008 2009
30%
20%
10%
0%
-10%
-20%
-30%
Middle - East - Asia
within Asia
within - EuropeNorth Atlantic
North & Mid Pacific
Change over year
59
2009 was a year filled with hardships and successes. As situations worsened due to the global economic slowdown which emanated from the U.S., on top of the sharply declining demand for cargo transportation and business travel, demand for global travel also dropped as a result of the H1N1 virus, creating one of the worst external environments the airline industry can experience.
Despite the hardships, Korean Air was able to receive various prestigious awards from the U.S. and many top awards from China, as a non-Chinese airliner. As a result, 2009 became a year enabling Korean Air to enhance its influence within the global airline industry. Domestically, through the unique “Fun” management, Korean Air was selected as one of the best large conglomerates to work for.
Korean Air was able to position itself from a national carrier representing Korea to a sensational young global airline.
II.rESuLtS Of OpEratION
1.OVERVIEwThe difficult business environment persisted in 2009 with the sharp decline in air transport demand due to the economic stagnation and H1N1 virus, and the increase in foreign currency costs as a result of the appreciation in the FX. In the midst of all this, Korean Air was able to turn profitable on an annual basis stemming from the recovery of passenger and cargo transportation demand during the 2nd half of last year. By enhancing Incheon International Airport’s connection schedule as a hub, Korean Air aggressively attracted transit customers and increased revenues from overseas locations, resulting in a positive Krw133.4 billion in operating income. Despite the difficult external environment, these results were the due to the continuous efforts to enhance customer convenience as a premier airline by flexibly adjusting flight routes that reflects the market situation, and by adding new high quality aircrafts to the existing fleet.
Korean Air achieved Krw9,393.7 billion in operating revenue, an 8% decrease compared to the previous year. The Company made a turnaround by realizing Krw133.4 billion in operating income. This was a significant recovery considering that Korean Air recorded an operating loss of Krw99.3 billion in 2008. By realizing Krw98.9 in net loss, the Company was able to reduce the level of loss recorded in 2008, which was Krw1,942.4 billion. This was mainly due to the positive turnaround of the operating income stemming from decreased oil prices and reduction in net foreign currency translation losses.
4th quarter 2009 operating revenues stood at Krw2,578.3 billion, a 4.9% decline compared to the same period the previous year. However, during the same period, operating income increased 580.9% to Krw154.0 billion due to the depreciation of the FX by 14.3% and decrease in fuel expenses by 22.2%. Net income stood at Krw122.3 billion.
The thing that was most notable in the 4th quarter was that the cargo sector achieved rapid progress. As AFTK increased by 6.0%, L/F also increased by 5.9%p. The US$ based yield also increased by 13.4%. In relation to fuel, the yield, excluding fuel related ancillary expenses, reached a historical high, enabling cargo profitability to improve rapidly.
One of the main reasons for this rapid improvement is the significant increase in outbound cargo, which improved yield. However, in the passenger sector, outbound passenger profitability substantially improved by the end of the year. In spite this improvement, the affects of the H1N1 virus limited the yield improvement level.
with the increase in exports of IT products and automobile components in the 4th quarter, cargo revenues increased 22% compared to the same period the previous year.
Financial SectionKOREAN AIRANNUAL REPORT 2009
60
Korean Air’s annual revenues in 2009 decreased 8.0% to Krw9,393.7 billion due to the decline in international transportation and cargo transportation revenues. with the reduction in flight expenses by Krw1,097.5 billion, gross profit increased by 1.6% to Krw1,413.7 billion.
+ REVENUE BREaKDOwN BY BUsINEss
* In Flight sales revenue included in “others”.
+ REVENUE BREaKDOwN BY ROUTE - PassENGER
* Beginning in 2005, Hong Kong was classified as China, which was previously included as part of Southeast Asia, resulting in a decrease in passengers on Southeast Asia routes, while passengers on the China route witnessed a significant jump.
+ REVENUE BREaKDOwN BY ROUTE - CaRGO
* Hong Kong is classified as China.
2. BUsINEss sEGMENT PERFORMaNsE2009 was another difficult year for the airline industry with the economic stagnation as a result of the financial crisis, and the decline in demand that followed. In addition, the increase in foreign currency expenses due to the appreciation of the Krw/US$ FX, and the global expansion of the H1N1 virus, added to difficulty surrounding the airline transportation industry.
Domestic
Japan
china*
Southeast Asia
oceania
North America
Europe / Middle East
Total
2009
1.0
4.1
10.8
11.5
1.3
43.2
28.1
100.0
2008
0.9
4.0
10.2
13.3
1.4
40.7
29.5
100.0
2007
1.0
4.1
8.3
14.0
2.4
41.8
28.4
100.0
2006
1.2
4.7
7.5
16.7
1.3
42.7
25.8
100.0
2005
1.4
5.6
11.8
12.0
1.1
38.1
30.0
100.0
Domestic Passenger
International Passenger
cargo
Aerospace
catering
Hotel/Limousine
others
Total
2009
489.7
4,973.2
2,704.6
251.7
45.5
41.8
887.2
9,393.7
2008
601.5
5,351.8
3,026.8
367.7
58.0
39.7
767.1
10,212.6
2007
585.5
4,631.6
2,533.0
235.1
58.4
35.2
733.2
8,812.0
2006
612.2
4,144.8
2,370.8
211.6
51.3
36.5
650.6
8,077.8
2005
618.5
3,732.5
2,321.7
187.9
49.4
34.6
639.6
7,584.2
(Krw in billions)
Domestic
Japan
china*
Southeast Asia
oceania
North America
Europe / Middle East
Total
2009
9.4
15.2
8.9
12.4
6.3
32.9
14.9
100.0
2008
10.5
13.0
10.0
12.9
6.2
30.2
17.2
100.0
2007
11.2
12.9
10.1
13.0
6.4
29.7
16.7
100.0
2006
12.9
13.4
9.3
12.5
6.4
29.3
16.2
100.0
2005
15.1
14.1
9.6
10.7
6.5
29.1
14.8
100.0
(%)
61
The total number of passengers transported through the Incheon International Airport in 2009 decreased 5%. In the midst of this overall decrease, Korean Air’s annual passenger transport continued to grow starting in July 2009 when its growth turned positive. However, there were concerns due to a momentary slowdown in growth as a result of the H1N1 virus in October, but starting in December, growth showed a swift recovery. This positive shift enabled Korean Air to achieve 20,746,413 in passenger transports. In December alone, Korean Air’s international passenger rPK increased 13.9% compared to the same period in 2008. This increase provides a positive projection for 2010.
+REVENUE-PassENGER-KILOMETERs
+INTERNaTIONaL PassENGER RPK GROwTh RaTE
PassENGER BUsINEss The 2009 global economic stagnation and the decline in airline transportation demand due to the H1N1 virus deteriorated the performance of airlines globally. Looking at the monthly passenger transport performance of major airlines in 2009, Korean Air’s monthly performance showed a faster recovery in comparison to its competitors. To counter the decrease in Korea outbound demand, the Passenger Transportation Business Division flexibly adjusted its routes sales composition reflecting the market and demand conditions and was able to attain a more stable level of traffic compared to other airlines.
45,000
55,000
50,000
60,000
2005 2006 2007 2008 2009
49,0
46
52,1
78
55,3
54
55,0
54
55,1
27
(million rPK)
2007.01 2007.03 2007.05 2007.7 2007.09 2007.11 2008.01 2008.03 2008.05 2008.07 2008.09 2008.11 2009.01 2009.03 2009.05 2009.07 2009.09 2009.11 2009.12
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
Financial SectionKOREAN AIRANNUAL REPORT 2009
62
Starting from July 2009, Korean Air’s rPK increase rate realized a turnaround compared to the same period the previous year. In December 2009, rPK increased by 13.9%. Korean Air’s rPK growth rate turned positive within an 11 months period. International passenger transport, which comprised 52.9% of total revenues, decreased by 7.1% to Krw4,973.2 billion in 2009. This was a result of the passenger segment yield being maintained at a low level up to the 4th quarter in preparation of the decrease in demand from the affects of the H1N1 virus, although passenger demand showed a recovery after the 3rd quarter.
CaRGO BUsINEss In 2009, Korean Air’s annual cargo transport also dropped by 5.6% to 1,574 thousand tons. However, cargo transport at Incheon International Airport in December 2009 increased by 36.2% compared to the same period the previous year to 216 thousand tons. Since the growth in cargo transport turned positive to 4.3% in September, cargo transport growth has continued to show a positive for 4 consecutive months. Considering the minus growth rate starting in September 2008 due to the global economic slowdown, in addition to the partial base effect, this positive result is due to the expansion in demand of IT products. Korean Air’s cargo FTK in December increased by 25.2% compared to the same period in 2008.
+CaRGO TRaNsPORT GROwTh RaTE
Korean Air is highly competitive in the international cargo transport segment. Starting in January of 2009, Korean Air’s
monthly cargo FTK trend showed a turned around, resulting in a 75.6% cargo load factor during the 4th quarter 2009.
As a result of the recovery in the global economy and the economic stimulus packages initiated by various countries’
government, the recovery in cargo transport demand showed a recovery starting in Asia during the 4th quarter. The
increased demand in IT products, focused on display products, and industrial products also played a role in this
turnaround. The continuous effects of the global economic slowdown after the 2nd half 2008, resulted in a decrease
of 10.6% yoy to Krw2,704.6 billion.
However, as a result of operating flexibly to manage the changes in cargo transport demand, load factor stood at 75%, a 1%p increase from the previous year. with the recovery trend in cargo transport demand during the 2nd half 2009, there was a significant improvement in performance between October and December, traditionally a peak period for the cargo transportation business. As of the end of 2009, Korean Air’s international cargo transport market share increased by 1.9%p to 50.1%.
30.0%
20.0%
10.0%
0.0%
-10.0%
-20.0%
-30.0%
2007.01 2007.03 2007.05 2007.7 2007.09 2007.11 2008.01 2008.03 2008.05 2008.07 2008.09 2008.11 2009.01 2009.03 2009.05 2009.07 2009.09 2009.11 2009.12
63
+ REVENUE-FREIGhT-TON-KILOMETERs
OThER BUsINEss Other Business, which comprises 13.2% of revenues, includes aerospace, catering/in-flight sales, hotel/limousine businesses.
+ OPERaTING ExPENsEs
Considering that fuel expenses take up 31.7% of total operating expenses, fuel expenses can directly affect profitability for airline companies. Total operating expenses decreased by 10.2% over the previous year to Krw9,260.3 billion as a result of a decrease in fuel expenses stemming from a decline in average unit purchase price, and the decrease in overall expenses. The total fuel consumption in 2009 stood at 1,244 million gallons, a 1.3% decrease over the previous year. As the number of rentals decreased, other rentals declined by 1.7% yoy in 2009, whereas depreciation increased to Krw786.0 billion, a 3.7% increase over the previous year due to 3 new additions to Korean Air’s existing fleet.
NON-OPERaTING INCOME / ExPENsEs Mostly affected by the gain on foreign currency transactions and gain on foreign currency translations, non-operating income showed a significant increase in 2009. Non-operating income in 2009 increased by Krw253.4 billion, a 28.2% increase, to Krw1,150.7 billion. The Krw/US$ increased by Krw319.3 from 938.20/1$ in 2007 to 1,257.50/1$ in 2008.
7,000
9,000
8,000
10,000
2005 2006 2007 2008 2009
8,14
0
8,85
7
9,67
8
9,00
5
8,42
6
(millions FTK)
Jet Fuel
Maintenance
Labor
Ground handling
Landing Fee
Rental
Depreciation
Insurance
others
Total
2009
2,938.7
559.9
1,355.7
357.7
267.8
329.3
786.0
32.8
2,632.4
9,260.3
2008
4,195.1
433.9
1,319.6
334.3
242.4
335.0
758.2
28.4
2,664.9
10,311.9
2007
2,606.4
313.2
1,079.4
293.8
229.0
366.6
696.7
31.4
1,162.6
6,789.3
2006
2,371.0
230.4
1,010.1
278.1
213.2
389.8
675.5
45.7
1,090.7
6,304.5
2005
2,022.3
289.3
949.8
262.5
202.3
357.6
676.5
61.5
1,070.1
5,891.9
change
-29.9%
29.0%
2.7%
7.0%
10.5%
-1.7%
3.7%
15.5%
-1.2%
-10.2%
(Krw in billions)
Financial SectionKOREAN AIRANNUAL REPORT 2009
64
However, the Krw/US$ decreased by Krw89.9 as of the end of 2009 compared to that of 2008 from 1,257.50/1$ to 1,167.6/1$, resulting in gains of foreign currency transaction increasing. Korean Air’s gain on foreign exchange transactions increased by 283.0% to Krw348.3 billion, while loss on foreign exchange transactions recorded a decrease to Krw385.7 billion, a 1.8% decrease. Since the Company’s foreign currency liabilities of Krw6,971.3 billion were greater than its foreign currency assets of Krw995.9 billion, the depreciation of the Korean won positively affected the Company’s performance. Net interest gains decreased to Krw515.0 billion due to an increase in interest expenses stemming from an increase in interest bearing debt.
Non-operating expenses in 2009 decreased by 56.6% from Krw3,248.9 billion in 2008 to Krw1,409.5 billion. Loss on foreign currency translation declined by 94.1% to Krw119.4 billion from Krw2,022.8 billion in 2008 as a result of the Korean won depreciation.
NET INCOME FOR ThE YEaRAs the gain on foreign currency translation improved, net loss before income tax substantially decreased to Krw125.4 billion. The income tax rate in fiscal 2009 was 22%, resulting in an after tax loss of Krw98.9 billion. Net loss after tax in 2008 was Krw1,942.4 billion. As of the end of 2009, earnings per share(EPS) stood at negative Krw1,464.
+NON-OPERaTING INCOME/ExPENsEs
EBITDaREBITDAr is profitability index that shows a company’s currency generation capabilities through business activities. In 2009, Korean Air’s EBITDAr stood at Krw1,265.2 billion, while the EBITDAr margin increased by 3.6%p to 13.5%.
Non-operating Income
Interest Income
Dividend Income
Gain on Foreign Exchange Transaction
Gain on Foreign currency Translation
Gain on Disposal of Property, Plant and Equipment
Gain on Equity-Method
others
Non-operating Expenses
Interest Expense
Loss on Foreign Exchange Transactions
Loss on Foreign currency Translations
Loss on Disposal of Property, Plant and Equipment
Loss on Equity Method
others
Loss before Income Taxes
2009
1,150.7
32.0
1.4
348.3
637.2
1.5
22.8
107.5
1,409.5
547.0
385.7
119.4
143.6
165.1
48.7
-125.4
2008
897.3
46.3
1.8
90.9
471.6
1.9
49.5
235.3
3,248.9
486.3
392.6
2,022.8
166.7
55.4
125.1
-2,450.8
(Krw in billions)
65
+OPERaTING INCOME Vs EBITDaR
OPERaTIONaL PLaN FOR 2010New investments in 2009 increased to 189.9% yoy to Krw1,670.7 billion. Out of the total investments in 2009, 77.5% or Krw1,294.9 billion was invested in aircrafts. In 2010, Korean Air plans to invest Krw1,978.3 billion or 93% of total investment (Krw2,131.3 billion) on aircrafts. The Company plans to acquire 6 new aircrafts in 2010. They include 2 A330-200 from Airbus, 3 B777-300Er and 1 B747-8F from Boeing. Our operational plans assume an oil price of US$80 per barrel based on west Texas Intermediate (wTI), while a foreign exchange of Krw1,200/US$ in 2010.
Korean Air projects its revenues for 2010 at Krw10,558.8 billion. This projection is 12% higher than the revenue of Krw9,393.7 billion realized in 2009. It is also higher than the historical high of Krw10,212.5 billion in 2008.
The Company also projects operating income at over Krw800.0 billion in 2010. Korean Air’s operating income in 2008 was a negative Krw99.3 billion, while it rebounded in 2009 with a Krw133.4 billion operating income. In 2010, operating income is projected to significantly improve. These projections are not only a reflection of Korean Air’s strong commitment to maximize profitability and effectively improve the cost structure through an aggressive sales strategy, but also a result of indications pointing towards an economic recovery, increased demand for travel, and relative positive projections towards oil price and FX.
(Krw in billions)
OPERaTING INCOME
2009 2008
133.
4
-99.
3
0.0
130.0
100.0
160.0
EBITDaR
900.0
1,200.0
1,000.0
1.400.0
2009 2008
1,26
5.2
1,01
1.7
(Krw in billions)
Financial SectionKOREAN AIRANNUAL REPORT 2009
66
III. fINaNcIaL cONDItION
1. assETs
+assETs
Total assets stood at Krw16,919.3 billion as of the end of 2009, a 6.6% increase from the previous year. This increase was mainly due to the increase in non-current assets which comprises 85.2% of total assets. Current assets increased by 26.3% to Krw2,496.1 billion, while non-current assets also increased by 3.8% to Krw14,423.2 billion. Cash & cash equivalents increased to Krw716.0 billion, a 44.8% increase over the previous year, while trade receivables also increased by 28.9% to Krw870.3 billion.
2. FLEETAircraft assets comprise the largest portion of total assets. To modernize and enhance efficiency of its core assets, Korean Air is in the process of acquiring next generation aircrafts from Boeing of the U.S. and Airbus of Europe. Korean Air was the first Asian airline to acquire Boeing’s B747-8. The B747-8 will be adopted steadily between 2013 and 2015. The Company has already placed an order for a B747-8 cargo aircraft. In addition to the 5 B747-8 passenger aircrafts that have already been ordered, a total of 12 B747-8 next generation aircrafts are expected to be added to the fleet.
In addition, the 10 A380 aircrafts to be delivered between 2011 and 2014 are next generation eco-friendly high-tech aircrafts that consume less fuel, with a noise level and exhaust gases reduced compared to other large aircrafts. The reason for acquiring the mega A380 aircrafts is part of Korean Air’s plan to take a leap forward as a prestigious airline leading the global airline industry. The A380s will be assigned to long routes with great demand, such as LA, New York and Paris in order to provide customers with spacious and comfortable services.
Current Assets
cash & cash Equivalents
Trade Receivables
Inventories
other current Assets
Non-current Assets
Investment Assets
Property, Plant & Equipment, net of Accumulated Depreciation
Intangible Assets, net of Accumulated Amortization
other Non-current Assets
Total Assets
2009
2,496.1
716.0
870.3
320.3
589.5
14,423.2
1,554.6
11,681.7
296.7
890.2
16,919.3
2008
1,975.6
494.5
675.3
251.0
554.8
13,892.1
1,580.2
11,285.2
215.9
810.8
15,867.6
change (%)
26.3%
44.8%
28.9%
27.6%
6.3%
3.8%
-1.6%
3.5%
37.4%
9.8%
6.6%
(Krw in billions)
67
+FLEET BY TYPE
3. LIaBILITIEs & EQUITY
+LIaBILITIEs
Total liabilities increased by 6.3% compared to the previous year to Krw13,862.2 billion. Current and non-current liabilities increased by 7.6% and 5.6% to Krw4,614.9 billion and Krw9,247.3 billion, respectively, in 2009. Under current liabilities, short-term borrowings and current portion of long-term liabilities (including lease) both increased by 3.0% and 23.4% to Krw811.9 billion and Krw2,673.4 billion, respectively.
Despite the sharp decrease in foreign currency long-term loans, Korean won long-term loans and bonds, net of discount on bonds showed an increase, causing non-current liabilities to increase by 5.6% to Krw9,247.3 billion. However, obligations under capital leases decreased by 10.8% to Krw2,807.7 billion in 2009.Common stock remained at the same level as the previous year, while accumulated other comprehensive income increased by Krw332.6 billion to Krw761.8 billion in 2009 as a result of the substantial decrease in derivative product valuation losses. As of the end of 2009, total equity increased by 8.3% to Krw3,057.1 billion.
Passenger
cargo
Type
B747-400
B777-200/300
A330-200/300
A300-600
B737-800/900
Sub-total
B747-400F
A300-600RSF
Sub-total
Total
2009
22
25
19
8
31
105
22
0
22
127
2008
22
22
19
8
29
100
22
2
24
124
2007
24
20
19
8
32
103
21
2
23
126
2006
26
16
19
9
31
101
19
1
20
121
2005
24
15
19
10
29
97
19
0
19
116
Current Liabilities
Trade Payables
Short-term Borrowings
current Portion of Long-term Liabilities (incl. lease)
other current Liabilities
Non-current Liabilities
Bonds, net of discount on bonds
obligations under capital Leases
Long-term Borrowings
Long-term obligations under Installment Purchases
others
Total Liabilities
2009
4,614.9
158.2
811.9
2,673.4
971.4
9,247.3
2,801.4
2,807.7
2,075.7
-
1,562.5
13,862.2
2008
4,288.5
96.1
788.2
2,166.4
1,237.8
8,755.7
2,544.7
3,148.4
1,876.5
157.1
1,029.0
13,044.2
change (%)
7.6%
64.6%
3.0%
23.4%
-21.5%
5.6%
10.1%
-10.8%
10.6
n.a
51.8%
6.3%
(Krw in billions)
Financial SectionKOREAN AIRANNUAL REPORT 2009
68
4.Cash FLOw aNaLYsIs Operational activities are the most important source for a company’s cash flow. Korean Air generated approximately Krw489.9 billion cash flow through its business activities. with a sharp increase in investment assets such as financial products and securities, and fixed assets including land and equipment, the cash flow from investing activities in 2009 stood at negative Krw1,636.7 billion. Cash flow from financing activities stood at Krw1,368.3 billion as a result of financial activities such as short-term borrowings, bonds, net of discount on bonds and long-term loans.
Cash inflow from investing activities includes cash from the divestiture of aircrafts and aircraft engines of Krw352.9 billion and withdrawal of guarantees of Krw115.7 billion. Major cash outflow items include the increase in construction in progress assets of Krw1,221.1 billion and acquisition of aircraft and aircraft engine lease assets. In addition, there was a payment outflow of Krw159.3 billion to purchase land.
Cash outflow from financing activities in 2009 increased by Krw1,026.3 billion from Krw2,303.7 billion in 2008 to Krw3,330.0 billion in 2009. The results were from the difference between short-term borrowings that include current portion of long-term liabilities and the withdrawal of lease liabilities in 2009. Korean Air continues to improve its financial structure by reducing the debt ratio from 462.0% in 2008 to 453.5% in 2009 using the cash generated from operating activities. As a result of Korean Air’s effort to establish a sound financial structure, cash was increased by Krw221.5 billion to Krw716.0 billion as of the end of 2009.
CaPExAccording to the public disclosure statement for listed companies on new equipment investments, Korean Air invested Krw3,978.0 billion for purchase of aircrafts. This was the highest amongst listed companies in Korea. Korean Air will continue to develop ways to enhance profitability through establishment of new routes and acquisition of the most up-to-date equipment.
+Cash FLOws
Iv. rISk rEpOrt
Since 2001, Korean Air has been implementing risk management policies in oil prices, FX. risk management can be segmented into Natural Hedging and Active Hedging.
Korean Air’s risk management strategy is based on utilizing the above two methods to minimize market risk factors.
jET FUEL PRICE KAL’s fuel hedging strategy is the use of a mix of basic hedge and additional hedge : it intends to hedge regularly within 25% of its fuel consumption regardless of market condition (“Basic Hedge”). In addition to the Basic Hedge, KAL may enter an additional hedge up to 50% of its fuel consumption if market condition is favorable compared to a historical price level (“Additional Hedge”)
KAL has entered into oil price swap and zero-cost collar based on wTI to fix the prices within a range.
cash Flow from operating Activities
cash Flow from Investing Activities
cash Flow from Financing Activities
Increase (Decrease) in cash
cash and cash Equivalents at Year-end
2009
489.9
(1,636.7)
1,368.3
221.5
716.0
2008
(118.4)
(570.3)
494.7
(194.0)
494.5
(Krw in billions)
69
CURRENCYOver the last few years, KAL tried to eliminate some of its currency risk via natural hedging of the balance sheet. In other words, KAL has increased its won and Yen denominated borrowings instread of dollar denominated financing to match currency cash balance.
v. EmpLOyEES
NUMBER OF EMPLOYEEs As of the end of 2009, the total number of Korean Air’s employees stood at 15,734, with female employees taking up approximately 30% or 5,406 employees. Female administrative employees comprised 36% of total female employees, while male administrative employees stood at 10,328, or 23% of total male employees.
+EMPLOYEEs sTaTUs
VOCaTIONaL aND PROFEssIONaL TRaINING Korean Air enabled each employee to acquire basic capabilities required as an airline employee through an “Airline Transport Basic Course” that deals with common sense on airline transport operations across all areas and work knowledge by business segment. The Company encourages enhancement of work capabilities and strengthening of self-learning through the “Compulsory Completion Program” by job classification. Korean Air operates an Airline Management School (AMS) as a compulsory program for promotion to general manager status by fostering managers equipped in professional knowledge of the airline industry, management mind-set, and administrative capabilities. For executive managers, the “Korean Air Executive Development Program,” an MBA program, was made compulsory. In addition, every year the Company selects 10 or so core employees to attend prestigious MBA programs in Korea and overseas to foster future leaders.
To overcome the difficulties of a group training program within a time shift work system, and to satisfy the training requirements of various job classifications, Korean Air promotes online training. Korean Air developed a job function enhancement course to enhance administrative capabilities and online contents related to airline transportation duties. These courses are operated on a permanent basis.
As a role model leading the airline and service industry, Korean Air strives to standardize service training and provide global customers with the same service standards. Service training is provided to employees that directly provide service to customers and to administrative staff employees to promote uniformity of services provided.
Office Staffs 2,461 Flight / Cabin Crew 2,488 Engineer 5,022 Others 357
Office Staffs 1,958 Flight / Cabin Crew 3,370 Engineer 27 Others 51
Male 10,328 Female 5,406
(Excluding 1,661 overseas regional staff)
0
80
2030
40
5060
70
1090
Male (unit : persons)
0
80
2030
40
5060
70
1090
Female(unit : persons)
0
80
2030
40
5060
70
1090
Male / Female(unit : persons)
Financial SectionKOREAN AIRANNUAL REPORT 2009
70
vI. 2010 OutLOOk
ECONOMIC OUTLOOK The domestic economy in the 1st half of 2010 is expected to grow at 5.8% due to the recovery of demand and base effect. However, the reduced base effect due to the economic slowdown is projected to limit economic growth at the 3% level in the 2nd half of 2010. On average, the domestic growth rate for 2010 is expected to be 4.6%.
As exports and speedy recovery of demand eases in 2010, the overall economic growth rate is expected to be slow. In the midst of global financial market risk factors persisting, the global economy recovery is projected to occur steadily. Although China’s high growth rate may contribute to domestic exports, as the Korean won continues to maintain its strength, export growth is expected to show a slowdown. In addition to the superior supply capabilities and new product introduction capabilities compared to overseas competitors, the demand recovery of major IT products such as semiconductors, LCDs and mobile phones is expected to lead Korea’s exports in 2010.
Despite the global economic crisis, profitability for corporates did not deteriorate substantially. The IT industrial sector, which takes up 30% of total equipment investments, has significantly improved in terms of business performance. However, this year’s investment in equipment cannot be expected to show a V type recovery.
Although the current account balance is expected to maintain a surplus trend in 2010, the surplus amount is expected to be substantially reduced. Import growth in 2010 is projected to increase to over 20% due to the recovery of domestic consumption, strengthened Korean won and increased raw material costs. As overseas travel that slowed down due to the economic stagnation and depreciation of the Korean won steadily recovered, the service balance deficit is expected to increase. The current account balance surplus that was supposed to increase to over US$40 billion in 2009, is projected to decline to below US$20 billion in 2010.
Factors that are enhancing inflationary pressures in 2010 are expenses such as oil and raw material prices, and labor expenses. International oil prices are expected to increase 34.6% over the previous year. This can be a factor in increasing inflation, but the depreciation of the Korean won offset the increasing effects.
The steady depreciation trend of the foreign exchange after the 2nd quarter of 2009, is expected to continue in 2010 at a steady rate. The current account balance is expected to maintain a surplus trend, while net capital inflow is also projected to continue focused on foreign invested capital and portfolio investments.
As the Japanese Yen continued to weaken after the financial crisis, along with the strengthening of the Korean won in 2010, the won/Yen is expected to decrease.
INDUsTRY OUTLOOK The airline industry in 2010 is projected to show an increase in passenger and cargo transport demand as a result of the economic recovery. Airline demand is expected to increase as a result of the economic recovery, depreciation of the won / Dollar exchange rate, elimination of the effects of the H1N1 virus, favorable government policies towards the airlines and slowdown in competitors’ sales.
Macro variables such as FX and oil price are expected to favorably affect the airlines in 2010. with positive expectations on the recovery of the global economy, FX is projected maintain its stability. As for airline fuel, despite the wTI rebounding, there are signs of a limited increase in price. Since the airline fuel price spread is decreasing, the fuel cost burden on airlines is not expected to increase substantially. This is despite the rebound of the wTI.
71
In addition to the rebound in cargo transportation demand, international passenger transport demand has also recently recovered significantly. Favorable airline transport trends are expected to continue as a result of the enhanced purchasing power due to the strengthening of the Korean won, recovery of the economy, and extermination of the effects from the H1N1 virus. In 2010, the recovery of the long distance American route is expected to accelerate since the route provides a high margin.
FUTURE EaRNINGs In addition to the 2009 business performance disclosure, Korean Air announced its 2010 transportation and business objective guidance. Korean Air announced its projections for 2010. revenues and operating income is projected at Krw10,558.8 billion and Krw800.0 billion, respectively. Expenses are also projected to decrease with the strengthening of the Korean won and improving flight efficiencies. Major assumptions to the projection is wTI US$80/barrel and Krw1,200/US$. Korean Air’s 2010 passenger and cargo supply plans include passenger kilometers at 79,426 million and cargo kilometers at 12,505 million tons, while actual transportation targets are 56,936 million km and 9,332 million ton km. Korean Air expects the boarding and embarking rate at 71.7% and 74.6%, respectively. Korean Air’s investment plan for 2010 is Krw2,131.3 billion, while investments in aircrafts are planned at Krw1,978.3 billion.
OPPORTUNITIEs In addition to the increased demand as a result of the economic recovery, there are many factors alluding to the success, including the Shanghai EXPO, the Seoul G20 High Level Conference, and the South African world Cup. Utilizing these opportunities, Korean Air expects to achieve an operating income of Krw800 billion in 2010. In addition to concentrating on financial stabilization and continuous growth, Korean Air will strengthen its ability to voluntarily counter the changes in the business environment by establishing measures to regulate CO2 emissions.
Although expenses are expected to increase as international oil prices rise in 2010, revenues are projected to increase expediently as a result of strengthened demand. In the past, Korean Air’s dependence on domestic passengers was great in terms of profitability. As a result of the effects of the FX and the economy, Korean Air witnessed the effects of these changes. In cases where oil prices increased when domestic demand slows down, profitability sharply decreased. However, the current Korean Air’s profitability structure shows a prominent change. As the financial crisis and the H1N1 virus are coming to an end, in addition to the strengthening of the Korean won, overseas travel is expected to sharply increase. Additionally, Korean Air is projected to establish a stable source of profitability since China is focused on Korean routes, JAL is in the process of restructuring, and Incheon International airport has been elevated as a transit hub. with the recovery of the U.S. and E.U. economies and the increased cargo demand from enhanced IT products, Korean Air believes that this will be an opportunity to enhance profitability to its maximum since the foreign currency crisis.
Financial SectionKOREAN AIRANNUAL REPORT 2009
72
The Board of Directors and Stockholders Korean Air Lines Co., Ltd.
We have audited the accompanying statements of financial position of Korean Air Lines Co., Ltd. (the “Company”) as of December 31, 2008 and 2009, and the related statements of operation, dispositions of accumulated deficit, changes in equity and cash flows for the years then ended, all express in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above express in Korean won present fairly, in all material respects, the financial position of Korean Air Lines Co., Ltd. as of December 31, 2008 and 2009, and the results of its operations, its changes in accumulated deficit and equity, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.
We have also reviewed the translation of the 2009 financial statements mentioned above into United States dollar amounts on the basis described in Note 2 to the accompanying financial statements. In our opinion, such statements have been properly translated on such basis.
Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in accumulated deficit and equity, and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are knowledgeable about Korean accounting principles and auditing standards and their application in practice.
March 5, 2010
This audit report is effective as of March 5, 2010, the independent auditors’ report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors’ report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report.
INDEPENDENT AUDITORS’ REPORT
73
STATEmENTS Of fINANcIAl POSITION
Korean Air Lines Co., Ltd.
Assets
Current assets:
Cash and cash equivalents (Note 4)
Short-term financial instruments (Note 4)
Short-term investment securities (Note 5)
Trade accounts and notes receivable, less allowance for
doubtful accounts of ₩8,151 million as of December 31, 2009
(₩5,928 million as of December 31, 2008) (Note 21)
Other accounts receivable, less allowance for doubtful
accounts of ₩1,756 million as of December 31, 2009
(₩65 million as of December 31, 2008)
Inventories (Note 6)
Advance payments
Prepaid expenses
Accrued income, less allowance for doubtful accounts of₩460 million as of December 31, 2009
(₩682 million as of December 31, 2008)
Short-term derivative instrument assets (Note 14)
Current portion of deferred income tax assets (Note 18)
Total current assets
Non-current assets:
Long-term financial instruments (Note 4)
Long-term investment securities (Notes 7 and 15)
Equity method investments (Notes 8 and 15)
Long-term receivable under capital lease (Note 21)
Long-term loans receivables
Guarantee deposits
Long-term derivative instrument assets (Note 14)
Deferred income tax assets (Note 18)
Property, aircraft and equipment (Notes 9, 15 and 24)
Intangible assets (Notes 10, 15 and 24)
Other non-current assets
Total non-current assets
Total assets
2008
₩ 494,488
16,072
876
675,338
25,617
250,975
87,363
57,057
68,267
88,597
210,921
1,975,571
14
61,520
1,494,814
23,815
3,984
247,272
1,280
340,900
11,285,161
215,910
217,387
13,892,057₩ 15,867,628
2009
₩ 715,956
106,055
151
870,280
64,716
320,265
142,138
78,926
45,492
41,621
110,465
2,496,065
947
89,108
1,443,291
21,266
-
140,663
-
358,608
11,681,659
296,739
390,926
14,423,207₩ 16,919,272
Korean won in millionsUS dollars
in thousands (Note 2)
2009
US$ 613,186
90,832
129
745,358
55,427
274,293
121,735
67,597
38,962
35,647
94,609
2,137,775
811
76,317
1,236,118
18,213
-
120,472
-
307,133
10,004,847
254,144
334,812
12,352,867
US$ 14,490,642
(Continued)See accompanying notes
As of December 31, 2008 and 2009
Financial SectionKOREAN AIRANNUAL REPORT 2009
74
Korean Air Lines Co., Ltd.
Liabilities and equity
Current liabilities:
Short-term borrowings (Notes 12, 14 and 15)
Trade accounts and notes payable (Note 21)
Other accounts payable (Note 14)
Advance receipts from customers
Withholdings
Accrued expenses
Income taxes payable
Unearned revenues (Note 21)
Current portion of long-term liabilities, net of discount on
bonds and present value discount (Notes 13, 14 and 15)
Current portion of obligations under capital leases
(Notes 13, 14 and 15)
Short-term derivative instrument liabilities (Note 14)
Total current liabilities
Non-current liabilities:
Bonds, net of discount on bonds (Notes 13, 14 and 15)
Long-term borrowings (Notes 13, 14 and 15)
Long-term obligations under installment purchases, net of
present value discount (Notes 13, 14 and 15)
Obligations under capital leases
(Notes 13 and 15)
Guaranteed loans, net of present value discount
(Notes 13, 15 and 21)
Asset-backed securitization loans (Note 13)
Long-term other accounts payable (Note 14)
Long-term withholdings
Long-term advance receipts from custormers
Severance and retirement benefits (Note 16)
Unredeemed mileage liabilities
Total non-current liabilities
Total liabilities
2008
₩ 788,162
96,124
110,629
272,227
72,495
421,074
1,520
2,310
1,490,270
676,153
357,546
4,288,510
2,544,739
1,876,489
157,054
3,148,449
52,845
31,499
188,625
47,315
3,465
469,970
235,275
8,755,725₩ 13,044,235
2009
₩ 811,930
158,160
130,334
492,510
65,304
268,355
-
8,749
1,900,964
772,392
6,232
4,614,930
2,801,423
2,075,735
-
2,807,695
48,236
480,000
175,140
43,794
-
535,424
279,841
9,247,288₩ 13,862,218
Korean won in millionsUS dollars
in thousands (Note 2)
2009
US$ 695,384
135,457
111,626
421,814
55,930
229,835
-
7,493
1,628,095
661,521
5,337
3,952,492
2,399,300
1,777,779
-
2,404,672
41,312
411,100
150,000
37,508
-
458,568
239,672
7,919,911
US$ 11,872,403
(Continued)See accompanying notes
STATEmENTS Of fINANcIAl POSITIONAs of December 31, 2008 and 2009
75
Korean Air Lines Co., Ltd.
Liabilities and equity (cont'd)
Equity:
Capital stock (Note 17):
Common stock
Preferred stock
Capital surplus
Paid-in capital in excess of par value
Asset revaluation surplus
Other capital surplus
Capital adjustments:
Treasury stock (Note 17)
Accumulated other comprehensive income:
Gain on valuation of long-term investment securities
(Notes 7 and 19)
Loss on valuation of derivative instruments
(Notes 14 and 19)
Equity adjustment arising from
equity method investments (Notes 8 and 19)
Revaluation surplus arising from
property, aircraft and equipment (Note 19)
Gain on valuation of other non-current assets (Note 19)
Accumulated deficit (Note 17):
Appropriated
Undisposed
Total equity
Total liabilities and equity
2008
₩ 359,858
6,896
366,754
191,077
2,815,926
1,760
3,008,763
(65,399)
(65,399)
4,229
(269,777)
54,052
635,537
5,161
429,202
930,500
(1,846,427)
(915,927)
2,823,393₩ 15,867,628
2009
₩ 359,858
6,896
366,754
191,077
1,915,926
1,724
2,108,727
(65,399)
(65,399)
19,160
(5,373)
112,471
635,537
-
761,795
-
(114,823)
(114,823)
3,057,054₩ 16,919,272
Korean won in millionsUS dollars
in thousands (Note 2)
2009
US$ 308,203
5,906
314,109
163,649
1,640,910
1,477
1,806,036
(56,011)
(56,011)
16,410
(4,602)
96,327
544,311
-
652,446
-
(98,341)
(98,341)
2,618,239
US$ 14,490,642
(Continued)See accompanying notes
Financial SectionKOREAN AIRANNUAL REPORT 2009
76
Korean Air Lines Co., Ltd.
Operating revenues (Notes 21, 23 and 24):
Passenger
Cargo
Others-revenues
Operating expenses (Notes 14, 21, 22, 23 and 24):
Flight operations
Maintenance and overhaul
Passenger and cargo services
Station and ground operations
Others-expenses
Gross profit
Selling and administrative expenses (Note 22)
Operating income (loss) (Notes 23 and 24)
Other income (expenses):
Interest income
Dividend income
Interest expense
Bad debt expense
Reversal of allowance for doubtful accounts
Loss on disposal of Long-term investment securities
Loss on foreign exchange transactions, net
Loss on foreign currency translation, net
Equity in loss of equity method investments (Note 8)
Loss on disposal of equity method investments
Gain on valuation of derivative instruments (Note 14)
Gain on settlement of derivative instruments, net (Note 14)
Gain on valuation of interest rate swap contracts (Note 14)
Loss on valuation of long-term obligations under
installment purchases (Notes 13 and 14)
Loss on disposal of property, aircraft and equipment, net
Impairment loss on property, aircraft and equipment
Reversal of impairment loss on property, aircraft and equipment
Gain on disposal of investments
Donations
Others, net
2008
₩5,953,328
3,026,849
1,232,401
10,212,578
5,800,826
647,310
870,737
829,281
673,214
8,821,368
1,391,210
1,490,507
(99,297)
46,312
1,783
(486,349)
-
2,077
-
(301,685)
(1,551,171)
(5,878)
(14,867)
101,990
23,152
4,238
(4,238)
(164,753)
(39,454)
41,495
2,439
(16,827)
10,201₩(2,351,535)
2009
₩5,462,948
2,704,599
1,226,156
9,393,703
4,703,346
757,522
952,584
894,123
672,440
7,980,015
1,413,688
1,280,312
133,376
31,982
1,384
(546,986)
(1,691)
223
(444)
(37,434)
517,776
(142,275)
(10,808)
26,677
40,191
226
(226)
(142,058)
-
-
6,608
(15,740)
13,838₩(258,757)
US dollars in thousands (Note 2)
2009
US$ 4,678,784
2,316,375
1,050,151
8,045,310
4,028,217
648,786
815,848
765,779
575,916
6,834,546
1,210,764
1,096,533
114,231
27,391
1,185
(468,470)
(1,448)
191
(380)
(32,061)
443,453
(121,853)
(9,257)
22,848
34,422
194
(194)
(121,667)
-
-
5,659
(13,481)
11,852
US$ (221,616)
Korean won in millions
(Continued)See accompanying notes
For the years ended December 31, 2008 and 2009
STATEmENTS Of OPERATIONS
77
Korean Air Lines Co., Ltd.
Loss before income taxes
Benefit from income taxes (Note 18)
Net loss (Notes 19 and 23)
Basic loss per share (Notes 20 and 23)
(Korean won and US$ in units)
2008
₩(2,450,832)
508,402
(1,942,430)
₩(28,762)
2009
₩(125,381)
26,485
(98,896)
₩(1,464)
US dollars in thousands (Note 2)
2009
US$ (107,385)
22,683
(84,702)
US$ (1.25)
Korean won in millions
(Continued)See accompanying notes
Financial Section
Korean Air Lines Co., Ltd.
Retained earnings before appropriations
(accumulated deficit before dispositions):
Unappropriated retained earnings (undisposed accumulated
deficit) carried forward from the prior year
Net loss for the year
Transfer from other reserve
Reserve for foreign currency valuation
Reserve for research and human resources development reserve
Reserve for facility usage
Reserve for improvement of financial position
Legal reserve
Asset revaluation surplus
Uundisposed accumulated deficit carried forward
to the next year
2008
₩ 96,003
(1,942,430)
(1,846,427)
170,000
130,000
620,000
-
10,500
900,000
1,830,500
₩(15,927)
2009
₩(15,927)
(98,896)
(114,823)
-
-
-
-
-
-
-
₩ (114,823)
Korean won in millionsUS dollars
in thousands (Note 2)
2009
US$ (13,639)
(84,702)
(98,341)
-
-
-
-
-
-
-
US$ (98,341)
For the years ended December 31, 2008 and 2009
(Continued)See accompanying notes
KOREAN AIRANNUAL REPORT 2009
78
STATEmENTS Of DISPOSITIONS Of AccUmUlATED DEfIcIT
STATEmENTS Of chANgES IN EqUITy
Commonstock
₩366,754
-
-
-
-
-
-
-
-
-
-₩ 366,754
₩ 366,754
-
-
-
-
-
-
-₩ 366,754
US$ 314,109
Capitalsurplus
₩3,006,749
1,825
-
-
254
(65)
-
-
-
-
-₩3,008,763
₩3,008,763
(900,000)
-
(36)
-
-
-
-₩ 2,108,727
US$ 1,806,036
Capitaladjustments₩ (65,399)
-
-
-
-
-
-
-
-
-
-₩ (65,399)
₩ (65,399)
-
-
-
-
-
-
-₩(65,399)
US$ (56,011)
Accumulated other
comprehensiveincome (loss)₩46,415
(17,344)
-
-
-
-
(26,937)
(271,098)
61,444
635,537
1,185₩429,202
₩429,202
-
-
-
14,931
264,404
58,419
(5,161)₩761,795
US$ 652,446
Retainedearnings
(accumulateddeficit)
₩ 1,054,230
6,792
(34,519)
(1,942,430)
-
-
-
-
-
-
-₩ (915,927)
₩ (915,927)
900,000
(98,896)
-
-
-
-
-₩(114,823)
US$ (98,341)
Total₩ 4,408,749
(8,727)
(34,519)
(1,942,430)
254
(65)
(26,937)
(271,098)
61,444
635,537
1,185₩ 2,823,393
₩ 2,823,393
-
(98,896)
(36)
14,931
264,404
58,419
(5,161)₩3,057,054
US$ 2,618,239
Korean Air Lines Co., Ltd.
As of January 1, 2008
Cumulative effect of changes
in accounting policy
Cash dividends
Net loss for the year
Capital in excess of par value
Other capital surplus
Loss on valuation of long-term
investment securities
Loss on valuation of derivative instruments
Equity adjustment arising from
equity method investments, net
Revaluation surplus arising from
property, aircraft and equipment
Gain on valuation of other
non-current assets
As of December 31, 2008
As of January 1, 2009
Disposition of accumulated deficit
Net loss for the year
Other capital surplus
Gain on valuation of long-term
investment securities
Gain on valuation of derivative
instruments
Equity adjustment arising from
equity method investments
Loss on valuation of other
non-current assets
As of December 31, 2009
As of December 31, 2009
US dollars in thousands (Note 2)
Korean won in millions
For the years ended December 31, 2008 and 2009
(Continued)See accompanying notes
79
Financial SectionKOREAN AIRANNUAL REPORT 2009
80
Korean Air Lines Co., Ltd.
Cash flow from operating activities:
Net loss
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation
Amortization
Provision for severance and retirement benefits
Provision for allowance for doubtful accounts
Reversal of allowance for doubtful accounts
Bad debt expense
Mileage expenses
Amortization of present value discounts
Amortization of discounts on bonds
Interest income
Dividend income
Loss (gain) on foreign currency translation, net
Equity in loss of the equity method investments, net
Loss on disposal of equity method investments, net
Gain on valuation of derivative instruments
Gain on valuation of interest rate swap contracts, net
Loss on valuation of long-term obligations under installement
purchases, net
Loss on disposal of property, aircraft and equipment, net
Impairment loss on property, aircraft and equipment
Recovery of impairment loss
Gain on disposal of the investments
Others
Changes in operating assets and liabilities:
Trade accounts and notes receivable
Other accounts receivable
Inventories
Advance payments
Prepaid expenses
Accrued income
Derivative instrument assets
Deferred income tax assets
2008
₩(1,942,430)
758,231
17,778
96,793
-
( 2,077)
-
42,616
47,583
20,135
(36,981)
(65)
1,593,377
5,878
14,867
(101,990)
(4,238)
4,238
164,753
39,454
( 41,495)
(2,439)
(7,009)
207,070
20,427
28,009
20,868
64,484
26,034
40,928₩(516,700)
2009
₩(98,896)
785,986
16,572
104,749
2,223
( 223)
1,691
44,566
19,117
21,515
-
(85)
(518,445)
142,275
10,808
(26,677)
(226)
226
142,058
-
-
(6,164)
(1,286)
(198,352)
(41,115)
(69,290)
(54,775)
(21,870)
23,028
63,272₩(24,892)
US dollars in thousands (Note 2)
2009
US$ (84,700)
673,164
14,193
89,713
1,904
(191)
1,448
38,169
16,373
18,427
-
(73)
(444,026)
121,853
9,257
(22,848)
(194)
194
121,667
-
-
(5,279)
(1,101)
-
(169,881)
(35,214)
(59,344)
(46,912)
(18,731)
19,723
54,190
US$ (21,319)
Korean won in millions
(Continued)See accompanying notes
For the years ended December 31, 2008 and 2009
STATEmENTS Of cASh flOwS
81
Korean Air Lines Co., Ltd.
Other non-current assets
Trade accounts and notes payable
Other accounts payable
Advance receipts from customers
Withholdings
Accrued expenses
Income taxes payable
Unearned revenues
Derivative instrument liabilities
Long-term withholdings
Long-term advance receipts from customers
Payment of severance and retirement benefits
Deposits for severance and retirement benefits
Withdrawal of severance and retirement benefits
from the Korean National Pension Service
Total adjustments
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Decrease (increase) in short-term financial instruments, net
Decrease in short-term investment securities
Decrease (increase) in long-term investment securities, net
Prcoceeds from disposal of equity method investments
Acquisition of equity method investments
Decrease in long-term loans, net
Decrease (increase) in guarantee deposits, net
Proceeds from disposal of property, aircraft and equipment
Acquisition of property, aircraft and equipment
Acquisition of intangible assets
Dividend income
Decrease in long-term receivable under capital lease
Increase in other assets
Net cash used in investing activities
2008₩15,887
(164,700)
(49,654)
(213,074)
(30,500)
(131,000)
(22,752)
(2,545)
(1)
(4,040)
3,465
(126,175)
46,092
2,533
1,824,065
(118,365)
3,349
268
1,997
139,101
(35,993)
124,128
(30,058)
806,906
(1,595,345)
(1,574)
16,616
290
-₩(570,315)
2009₩8,728
64,525
23,054
272,702
(3,113)
(152,241)
(1,520)
6,439
-
(2,566)
( 3,465)
(42,354)
3,212
677
588,764
489,868
(106,450)
876
(8,956)
-
(34,893)
3,984
98,594
353,726
(1,952,027)
(2,031)
9,649
928
(53)₩(1,636,653)
US dollars in thousands (Note 2)
2009
US$ 7,475
55,263
19,745
233,558
(2,666)
(130,388)
(1,302)
5,514
-
(2,198)
(2,968)
(36,274)
2,751
580
504,252
419,552
(91,170)
750
(7,670)
-
(29,884)
3,412
84,441
302,951
(1,671,829)
(1,739)
8,264
795
(45)
US$ (1,401,724)
Korean won in millions
(Continued)See accompanying notes
Financial SectionKOREAN AIRANNUAL REPORT 2009
82
STATEmENTS Of cASh flOwSFor the years ended December 31, 2008 and 2009
Korean Air Lines Co., Ltd.
Cash flows from financing activities:
Proceeds from short-term borrowings, net
Proceeds from issuance of bonds
Proceeds from long-term borrowings
Proceeds from obligations under capital leases, net
Repayment of current maturities of long-term liabilities
Repayment of long-term obligation under installment
purchases
Proceeds from asset-backed securitization loans
Payment of dividends
Decrease in deposits paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
US dollars in thousands (Note 2)
2009
US$ 187,285
1,103,137
680,791
35,779
(1,110,874)
(152,497)
428,229
-
-
1,171,850
189,678
423,508
US$ 613,186
2008
₩111,566
1,060,156
483,474
306,687
(1,414,743)
(18,183)
-
( 34,519)
254
494,692
(193,988)
688,476
₩ 494,488
2009
₩218,675
1,288,023
794,892
41,776
(1,297,057)
(178,056)
500,000
-
-
1,368,253
221,468
494,488
₩ 715,956
Korean won in millions
83
NOTES TO fINANcIAl STATEmENTS1. OrganizatiOn and businessKorean Air Lines Co., Ltd. (the Company) was incorporated on June 19, 1962 under the Commercial Code of the Republic of Korea to engage in domestic and international airline services, manufacture of aircraft parts, maintenance of aircraft, and catering of in-flight meals.
The Company has been a publicly traded company upon listing its common stock on the Korea Stock Exchange since 1966. The total capital stock of the Company as of December 31, 2009 amounted to ₩366,754 million.
The financial statements of the Company as of December 31, 2009 were authorized for issue by the Board of Directors on February 25, 2010 and are subject to the approval of the stockholders at the annual general stockholders’ meeting to be held on March 19, 2010.
2. summary Of significant accOunting pOlicies
basis Of financial statement preparatiOnThe Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea (Korean GAAP). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. In the event of any differences in interpreting the financial statements or the independent accountants’ report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements.
financial statement translatiOnThe accompanying statement of financial position as of December 31, 2009, and the related statements of operations, disposition of accumulated deficit, changes in equity and cash flows for the year then ended are expressed in Korean won and, solely for the convenience of the reader, have been translated into United States dollars (US$) at the rate of ₩1,167.6 to US$1, the exchange rate on December 31, 2009. Such translation should not be construed as a representation that the Korean won amounts can actually be converted into United States dollars at the exchange rate used for the purpose of such translation.
revenue recOgnitiOnRevenue from airline (passenger and cargo) services is recognized upon completion of the services. Revenue from maintaining aircraft and manufacturing aircraft parts in the aerospace business is recognized when the related services are rendered and goods are delivered upon transfer of risk and rewards to the customers.
allOwance fOr dOubtful accOuntsThe Company provides an allowance for doubtful accounts in consideration of the estimated losses that may arise from non-collection of its receivables. The estimate of losses, if any, is based on areview of the aging and current status of the outstanding receivables.
Financial SectionKOREAN AIRANNUAL REPORT 2009
84
2. summary Of significant accOunting pOlicies (cOnt’d)
cash equivalentsHighly liquid deposits and marketable securities with original maturities of three months or less, and which have no significant risk of loss in value by interest rate fluctuations, are considered as cash equivalents.
financial instrumentsFinancial instruments, such as time deposits and restricted bank deposits, which are traded by financial institutions and are held for short-term cash management purposes or which will mature within one year, are accounted for as short-term financial instruments. Financial instruments other than cash equivalents and short-term financial instruments are recorded as long-term financial instruments.
inventOriesInventories are valued at the lower of cost or market, with cost being determined using the movingaverage method for airline service supplies and aerospace raw materials, the specific identification method for materials-in-transit, and the first-in, first-out method for all other inventories.
The Company applies the lower of cost or market method (products, goods, work in-process at net realizable value, materials at current replacement cost) by the individual items of inventories. When the market value of an inventory falls below the carrying amount, a valuation loss on such inventory is recognized as part of operating expenses. In addition, losses from the differences in quantity of inventories between accounting records and physical inventory counts arising from the ordinary course of business are charged to operating expenses. Losses arising from outside the ordinary course of business are charged to non-operating expenses.
investment securitiesInvestments in securities within the scope of SKAS 8 Investments in Securities are classified as either trading, held-to-maturity and available-for-sale securities, as appropriate, and are initially measured at cost, including incidental expenses, with cost being determined using the moving average method. The Company determines the classification of its investments after initial recognition, and, where allowed and appropriate, re-evaluates this designation at each fiscal year end.
Securities that are acquired and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities which carry fixed or determinable payments and fixed maturity are classified as held-to-maturity if the Company has the positive intention and ability to hold to maturity. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale securities.
After initial measurement, available-for-sale securities are measured at fair value with unrealized holding gains or losses, net of applicable taxes, included as a component of other comprehensive income in equity. Likewise, trading securities are also measured at fair value after initial measurement, but with unrealized holding gains or losses reported as part of net income. Held-to-maturity securities are measured at amortized cost after initial measurement. The cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount and the maturity amount.
The fair value of available-for-sale securities that are traded actively in the open market (marketable securities) is measured at the closing price of those securities at the reporting date, except for nonmarketable equity securities which are measured at cost subsequent to initial measurement if their fair values cannot be reliably estimated.
85
Non-marketable debt securities are carried at a value using the present value of future cash flows discounted using an appropriate interest rate which reflects the issuer’s credit rating announced by a public independent credit rating agency.
Available-for-sale and held-to-maturity securities are classified as long-term investments, except if the maturity of the securities falls within one year or are certain to be disposed of within one year from the statement of financial position date are classified as short-term investments.
The Company recognizes an impairment loss on its investments in securities if there is objective evidence that the securities are impaired. The impairment loss is charged to statement of income.
equity methOd investmentsInvestments in entities over which the Company has control or significant influence are accounted for using the equity method.
Under the equity method of accounting, the Company’s initial investment in an investee is recorded at acquisition cost. Subsequently, the carrying amount of the investment is adjusted to reflect the Company’s share of income or loss of the investee in the statement of income and share of changes in equity that have been recognized directly in the equity of the investee in the related equity account of the Company on the statement of financial position. If the Company’s share of losses of the investee equals or exceeds its interest in the investee, it suspends recognizing its share of further losses. However, if the Company has other long-term interests in the investee, it continues recognizing its share of further losses to the extent of the carrying amount of such long-term interests.
At the date of acquisition, the excess of the cost of the investment over the Company’s share of the net fair value of the investee’s identifiable assets and liabilities is accounted for as goodwill which is amortized over its useful life of within 5 years using the straight-line method. Conversely, negative goodwill represents the excess of the Company’s share in the net fair value of the investee’s identifiable assets and liabilities over the cost of the investment. Negative goodwill is recorded to the extent of the fair value of acquired non-monetary assets and recognized as income using the straightline method over the remaining weighted-average useful life of those acquired non-monetary assets. The amount of negative goodwill in excess of the fair value of acquired non-monetary assets is recognized as income immediately.
The Company’s share in the investee’s unrealized profits and losses resulting from transactions between the Company and its investee are eliminated.
In translating the financial statements of foreign entities into Korean won, assets and liabilities are translated at the exchange rate on the statement of financial position date and income and expenses are translated at the weighted-average exchange rate for the period. All resulting exchange differences are recognized as foreign currency translation adjustments in other comprehensive income within equity.
prOperty, aircraft and equipment, and related depreciatiOn Property, aircraft and equipment are stated at cost less accumulated depreciation, except for certain assets which were revalued and are stated at revalued amount less accumulated depreciation.
Maintenance and repairs are expensed in the year in which they are incurred. Expenditures which enhance the value or extend the useful life of the related assets are capitalized.
Financial SectionKOREAN AIRANNUAL REPORT 2009
86
2. summary Of significant accOunting pOlicies (cOnt’d)Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful life of the assets as follows:
Land that is revalued in accordance with the revised SKAS 5 is measured at fair value and impairment losses recognized after the date of revaluation. Valuation is performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.
If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to other comprehensive income. However, the increase shall be recognized in the statement of income to the extent that it reverses a revaluation decrease of the same asset previously recognized in the statement of income.
If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in the statement of income. However, the decrease shall be debited directly to other comprehensive income to the extent of any credit balance existing in the revaluation surplus with respect to that asset.
intangible assetsIntangible assets of the Company consist of facility usage rights, development costs and other intangible assets, which are stated at cost less accumulated amortization. Amortization is recognized as an expense based on the straight-line method over the estimated useful life of 10 to 30 years for facility usage right, 5 to 16 years for development costs and 6 to 20 years for all other intangible assets.
discOunt On bOndsDiscount on bonds including bond issuance costs is presented as a direct deduction from the nominal value of the bonds and is amortized using the effective-interest-rate method over the life of the bonds.
severance and retirement benefitsIn accordance with the Employee Retirement Benefit Security Act (“ERBSA”) and the Company’s employee benefits policy, employees terminating their employment with at least one year of service are entitled to severance and retirement benefits based on the rates of pay in effect at the time of termination, years of service and certain other factors. The provision is determined based on the amount that would be payable assuming all employees were to terminate their employment as of the reporting date.The Company’s severance and retirement benefits are partly funded through an insurance plan. Up to March 1999, the Company had previously prepaid a portion of its severance and retirement benefits obligation to the National Pension Service (“NPS”). The insurance deposits and prepayments are presented as a deduction from the provision for severance and retirement benefits.
leasesThe Company accounts for leases that transfer substantially all the risks and rewards incidental to ownership of assets as capital leases and leases other than capital leases as operating leases.
BuildingsAircraft and engineLeased aircraft and engineOther aircraft partsVehiclesOthers
Years40202015
66 - 15
87
Rental expenses for operating leases, which are expensed on a straight-line basis over the lease term, are charged to current operations as they become payable. The Company recognizes a capital lease as an asset and a liability in the statement of financial position at an amount equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments at the inception of the lease. In calculating the present value of the minimum lease payments, any residual value guarantee is excluded and the interest rate implicit in the lease is used as the discount rate. Leased assets are depreciated in the same manner as other assets through purchases. Minimum lease payments are apportioned between the financecharges and the reduction of the lease liability. The finance charges are allocated to each period by the effective interest rate method and recognized as an interest expense.
incOme taxesCurrent income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. Deferred income taxes are provided using the liability method for the tax effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse, and are classified as current or non-current, respectively, based on the classification of the related asset or liability in the statement of financial position. In addition, current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity.
fOreign currency translatiOnTransactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the statement of financial position dates. Theresulting unrealized foreign currency translation gains or losses are credited or charged to current operations.
valuatiOn Of lOng-term receivables (payables) at present valueReceivables (payables) arising from long-term installment transactions are stated at present value. The difference between the carrying amount of these receivables (payables) and their present value is amortized using the effective-interest-rate method and the amortization is credited (charged) to current operations over the installment period. derivative financial instrumentsDerivative instruments are presented as assets or liabilities valued principally at the fair value of rights or obligations associated with the derivative contracts. The unrealized gain or loss from a derivative transaction with the purpose of hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment is recognized in current operations. Derivative instrument with the purpose of hedging the exposure to the variability of cash flows of a recognized asset, liability or a forecasted transaction, where the hedge-effective portion of the derivative’s gain or loss is deferred as other comprehensive income, a component of equity. The ineffective portion of the gain or loss is charged or credited to current operations. Derivative instrument that does not meet the criteria for hedge accounting is measured at fair value with unrealized gain or loss reported in current operations.
frequent-flyer prOgramThe Company operates a frequent-flyer program to award its members based on accumulated mileage credits. The estimated incremental costs of providing travel awards under the frequent-flyer program are accrued as unredeemed mileage liabilities.
Financial SectionKOREAN AIRANNUAL REPORT 2009
88
2. summary Of significant accOunting pOlicies (cOnt’d)
prOvisiOns and cOntingent liabilitiesProvisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The provision is used only for expenditures for which the provision was originally recognized. If the effect of the time value of money is material, provisions are stated at present value.
A contingent liability is disclosed, but not recognized when it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability.
per share amOuntsBasic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the year plus the weighted average number of common shares that would have been outstanding assuming the conversion of all dilutive potential common shares.
use Of estimatesThe preparation of financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
3. effect On adOptiOn Of KOrea internatiOnal financing repOrting standards [“K-ifrs”]
preparatiOn plan and implementatiOn status Of K-ifrsAs all listed companies are required to adopt K-IFRS for the financial period beginning on or after 1 January 2011, the Company is currently preparing for the implementation of K-IFRS. As part of the implementation plan, the Company organized a Task Force Team (TFT) to manage all matters concerning K-IFRS. The TFT had completed the analysis of key accounting principal differences between Korean GAAP and K-IFRS and is currently in the process of remapping its accounting information system to capture and generate information under K-IFRS. In addition, the TFT regularly conducts internal trainings and reports the status of K-IFRS implementation to management.
+details Of preparatiOn and develOpment Of K-ifrs implementatiOn are as fOllOws:Key action
Establishment of KIFRS
TFT and assessment of the
impact of K-IFRS adoption
Realignment of accounting
information system
K-IFRS training for
personnel
Preparation plans
Establishment of K-IFRS TFT to assess the overall
impact of K-IFRS adoption and to successfully
implement and complete the K-IFRS
conversion by the end of 2009
Accounting system to be realigned for K-IFRS
adoption by the end of 2009
Trainings and education courses for accounting
and finance personnel on K-IFRS technical
knowledge to be completed by the end of 2009
Implementation status as of Dec. 31, 2009
K-IFRS TFT was formed in August 2007 and
assessment of the impact of K-IFRS adoption
was commissioned to an accounting firm in
November 2007
Assessment of the scope of system changes has
been completed and development of new system is
still in progress
K-IFRS training for the accounting and finance
personnel has been implemented by the end of 2009
89
differences between KOrean gaap and K-ifrsThe table below summarizes the expected differences between Korean GAAP and K-IFRS. The summary does not include all differences and is subject to change as the Company’s implementation project progresses. At present, the Company is in the process of determining the final effects of the differences identified on the Company’s financial statements.
4. cash and cash equivalents and financial instrumentsCash and cash equivalents and financial instruments as of December 31, 2008 and 2009 consist of the following:
Cash on hand
Checking and passbook accounts
Money market funds
Other deposits
Foreign currency deposits
Guarantee deposits for the maintenance
of checking accounts
Less:
Short-term financial instruments
Long-term financial instruments
Cash and cash equivalents
2008₩ 723
10,940
179,144
12,368
307,384
14
510,573
(16,071)
(14)₩ 494,488
2009₩ 323
2,671
549,695
13,265
256,990
14
822,958
(106,055)
(947)₩ 715,956
US dollars in thousands (Note 2)
2009
US$ 277
2,288
470,790
11,361
220,101
12
704,829
(90,832)
(811)
US$ 613,186
Korean won in millions
Subject
Revenue recognition
for mileage credits
Valuation of
severance and
retirement benefits
Borrowing cost attributable
to acquisition
Component
accounting for aircraft
K-IFRS
Deferred revenue method
The liability for severance and retirement benefits
is estimated based on actuarial assumptions and
on a discounted basis
Capitalized
Aircraft is divided into parts where each part with
a significant unit cost is depreciated separately
according to the expected useful life, and the
expected useful life is reviewed at the end of
each reporting period
IKorean GAAP
Incremental cost method
The liability for severance and retirement benefits
is determined by assuming that all employees
will resign from an entity at each reporting period
Expensed
Aircraft is divided into fuselage and engine.
The useful life applied for depreciation does not
change overtime and is not reviewed at the end of
each reporting period
Financial SectionKOREAN AIRANNUAL REPORT 2009
90
5. shOrt-term investment securitiesShort-term investment securities as of December 31, 2008 and 2009 are entirely consisted of government and public bonds.
6. inventOriesInventories as of December 31, 2008 and 2009 consist of the following:
7. lOng-term investment securitiesLong-term investment securities as of December 31, 2008 and 2009 consist of the following:
Merchandise
Raw materials
Supplies
Materials-in-transit
2008₩ 20,526
56,776
160,872
12,801₩ 250,975
2009₩ 13,333
72,556
230,874
3,502₩ 320,265
US dollars in thousands (Note 2)
2009
US$ 11,419
62,141
197,733
3,000
US$ 274,293
Korean won in millions
Available-for-sale securities
Held-to-maturity securities
2008₩ 58,739
2,781₩ 61,520
2009₩ 77,124
11,984₩ 89,108
US dollars in thousands (Note 2)
2009
US$ 66,053
10,264
US$ 76,317
Korean won in millions
91
Available-for-sale securities as of December 31, 2008 and 2009 consist of the following:
Equityownership (%)
0.11
3.70
0.96
4.50
0.08
0.05
0.05
3.10
1.72
0.52
0.40
6.25
0.33
0.85
2.41
65.00
25.00
55.00
25.00
-
31.50
Acquisitioncost
₩1,602
10,229
3,283
20,226
399
148
35,887
145
6,967
500
700
81
1,000
100
406
500
10,399
650
250
394
32
-
64
1,390
3,000
1,884₩52,560
US$ 45,015
Bookvalue
₩7,682
22,440
3,186
25,343
919
171
59,741
145
7,677
500
700
81
1,000
100
406
500
11,109
650
250
394
32
-
64
1,390
3,000
1,884₩77,124
US$ 66,053
Fair valueor net-asset
value
₩7,682
22,440
3,186
25,343
919
171
59,741
59
7,677
645
583
78
1,696
14
1,927
406
13,085
1,938
250
1,965
(3)
-
296
4,446
3,000
1,884₩82,156
US$ 70,363
Equityownership (%)
0.11
3.70
0.96
4.50
0.08
0.05
0.05
3.10
1.72
0.52
0.40
6.25
0.33
0.85
2.84
65.00
-
55.00
25.00
33.33
31.50
Book value
₩ 4,552
18,281
2,305
14,134
1,150
176
40,598
145
7,678
500
700
81
1,000
100
406
500
11,110
650
-
394
32
1,092
64
2,232
3,000
1,799₩58,739
Marketable securities1:
Hana Financial Group Inc.
Hanil Cement Co., Ltd.
Meritz Securities Co., Ltd.
GS Home Shopping Inc.
Hanjin Heavy Industries Co., Ltd.
Hanjin Heavy Industries &
Construction Holdings Co., Ltd.
Non-marketable securities1:
The Korea Economic Daily Co., Ltd.
Daehan Oil Pipeline Corporation
Kihyup Finance Co., Ltd.
Cheju Convention Center, Ltd.
Korea Tourist Supply Center Inc.
Entob Co., Ltd.
Incheon United Football Club
Sita Inc.
Seoul Tourism Marketing Co., Ltd.
Investments in affiliated companies2:
Korea Global Logistics
System Co., Ltd.
Hanjin GT&S Co., Ltd.
Hanjin International Japan
Terminal One Management Inc.
US Cargo Sales Joint Venture, Inc.
Global Logistics System
Asia Pacific Co., Ltd.
Bond
Investments in other equity securities
Total
US dollars in thousands (Note 2)
Korean won in millions
2009 2008
Financial SectionKOREAN AIRANNUAL REPORT 2009
92
7. lOng-term investment securities (cOnt’d)
The details of changes in fair value adjustments of long-term investment securities recorded in accumulated other comprehensive income for the year ended December 31, 2009 are as follows:
Held-to-maturity securities are entirely comprised of government and public bonds whose annual maturities as of December 31, 2008 and 2009 are as follows:
Hana Financial Group Inc.
Hanil Cement Co., Ltd.
Meritz Securities Co., Ltd.
GS Home Shopping Inc.
Hanjin Heavy Industries Co., Ltd.
Hanjin Heavy Industries &
Construction Holdings Co., Ltd.
Daehan Oil Pipeline Corporation
Total
Tax effect
Net total
US dollars in thousands (Note 2)
January 1 2009₩ 2,951
8,052
(977)
(6,093)
751
28
710
5,422
(1,193)₩ 4,229
US$ 3,622
Net changes₩ 3,128
4,159
881
11,209
(230)
(5)
-
19,142
(4,211)₩ 14,931
US$ 12,788
December 31 2009
6,079
12,211
(96)
5,116
521
23
710
24,564
(5,404)₩ 19,160
US$ 16,410
Korean won in millions
More than 1 year to 5 years
More than 5 years to 10 years
2008₩ 2,770
10₩ 2,780
2009₩ 11,976
8₩ 11,984
US dollars in thousands (Note 2)
2009
US$ 10,257
7
US$ 10,264
Korean won in millions
Marketable equity securities were valued at quoted market value at the reporting date, while nonmarketable equity securities whose fair values could not be reliably measured due to the lack of reliable information on the future cash flows of the investees were stated at acquisition cost. The investment in non-marketable equity securities of Daehan Oil Pipeline Corporation, was recorded at fair value according to [2006-5] “Accounting for Valuation on Non-listed Equity Securities” and the difference between acquisition cost and fair value is accounted for as other comprehensive income.
The Company’s equity interests in these investees are 20% or more with significant influence orcontrol. However, the Company did not apply the equity method in accounting for these investees since the impact of using the equity method is not material to the Company on the valuation of the investments.
1
2
93
8. equity methOd investmentsEquity method investments as of December 31, 2008 and 2009 are as follows:
Equityownership (%)
2009
59.54
99.35
67.35
100.00
55.82
100.00
24.54
100.00
82.52
25.00
100.00
100.00
100.00
-
5.53
5.55
46.97
2009₩ 93,320
15,111
731
99,900
27,788
2,000
54,328
14,000
854,821
17,413
27,288
7,035
204,008
-
8,408
101,435
6,473₩1,534,059
US$1,313,857
Acquisition cost Book valueProportionate
Net asset value
2008₩ 93,320
15,111
731
99,900
27,788
2,000
54,328
14,000
854,821
10,923
20,288
7,035
189,078
891
60,468
-
-₩ 1,450,682
2009₩ 145,351
30,076
22,024
51,510
51,692
3,816
75,273
26,597
866,328
10,085
2,179
4,687
33,834
-
16,072
98,636
5,131₩1,443,291
US$1,236,118
2008₩ 154,874
26,054
19,806
49,188
42,195
3,465
77,738
26,547
869,500
9,207
7,852
6,792
23,026
6,462
172,108
-
-₩1,494,814
2009₩ 145,351
30,076
22,024
51,510
51,692
3,816
75,273
26,597
864,160
7,307
2,002
4,687
33,834
-
16,072
105,476
5,131₩1,445,008
US$1,237,588
2008₩ 154,874
26,054
19,806
49,188
42,195
3,465
76,349
26,547
866,367
6,100
7,617
6,792
23,026
2,638
178,684
-
-₩1,489,702
Korea Airport Service Co., Ltd.
Hanjin Information Systems &
Telecommunication Co., Ltd.
Topas Co., Ltd.
KAL Hotel Network Co., Ltd.
Hanjin Travel Service Co., Ltd.
Air Total Service Co., Ltd.
Jungseok Enterprise Co., Ltd.
Jedong Leisure Co., Ltd.
Hanjin Energy Co., Ltd.
Grandstar Cargo Int’l
Airlines Co., Ltd. (GCIA)
Jin Air Co., Ltd.
Homeo Therapy Co., Ltd.
Hanjin International Corporation
Korean Air Lease & Finance
Co., Ltd. (KALF)
Hanjin Shipping Holdings Co., Ltd.1
Hanjin Shipping Co., Ltd.1
Tianjin Hanjin-Sino Trans Air Cargo
Terminal Co., Ltd (Tianjin Cargo
Terminal)
US dollars in thousands (Note 2)
Korean won in millions
Although the Company’s equity ownerships on the investees are less than 20%, the investments are classified as equity method investments, given the Company’s significant influence on the investees.
1
Financial SectionKOREAN AIRANNUAL REPORT 2009
94
8. equity methOd investments (cOnt’d)The changes in carrying amount of equity method investments for the year ended December 31, 2009 are as follows:
Market values of marketable equity method investments as of December 31, 2008 and 2009 are as follows:
Jan. 1₩ 154,874
26,054
19,806
49,188
42,195
3,465
77,738
26,547
869,500
9,207
7,852
6,792
23,026
6,462
Ltd. 172,108
-
-₩ 1,494,814₩ 1,556,259
Increase(Decrease)₩ -
-
-
-
-
-
-
-
-
6,490
7,000
-
14,930
(14,632)
(101,435)
101,435
6,473₩ 20,261₩ (117,975)
Dividends₩ (943)
(487)
(5,388)
-
(142)
-
(244)
-
-
-
-
-
-
-
(2,445)
-
-₩ (9,649)₩ (16,617)
Equity inearnings
(loss)of investee₩ (17,854)
4,791
7,606
2,322
7,346
351
311
50
(40,045)
(4,574)
(12,572)
(2,135)
(7,109)
(2,638)
(72,923)
(4,553)
(649)₩ (142,275)₩ (5,878)
Otherchanges
₩ 720
180
-
-
1,957
-
(1,119)
(3)
(421)
(198)
-
30
(219)
-
359
-
-₩ 1,286₩ 7,888
Capital Surplus /comprehensiveincome
₩ 8,554
(462)
-
-
336
-
(1,413)
3
37,294
(840)
(101)
-
3,206
10,808
20,408
1,754
(693)₩ 78,854₩ 71,137
Dec. 31₩ 145,351
30,076
22,024
51,510
51,692
3,816
75,273
26,597
866,328
10,085
2,179
4,687
33,834
-
16,072
98,636
5,131₩ 1,443,291₩ 1,494,814
Korea Airport Service Co., Ltd.
Hanjin Information Systems &
Telecommunication Co., Ltd.
Topas Co., Ltd.
KAL Hotel Network Co., Ltd.
Hanjin Travel Service Co., Ltd.
Air Total Service Co., Ltd.
Jungseok Enterprise Co., Ltd.
Jedong Leisure Co., Ltd.
Hanjin Energy Co., Ltd.
GCIA
Jin Air Co., Ltd.
Homeo Therapy Co., Ltd.
Hanjin International Corporation
KALF
Hanjin Shipping Holdings Co., Ltd.
Hanjin Shipping Co., Ltd.
Tianjin Cargo Terminal
2009
2008
Korean won in millions
2008
Korea Airport Service Co., Ltd.
Hanjin Shipping Co., Ltd.
Number of shares
1,885,134
4,890,802
Korean wonin units
Market value per share
₩ 26,750
18,100
Korean wonin millions
Marketcapitalization
₩ 50,427
88,524
2009
Korea Airport Service Co., Ltd.Hanjin Shipping Holdings Co., Ltd.Hanjin Shipping Co., Ltd.
Number of shares1,885,134
790,5294,100,271
Korean wonin units
Market value per share
₩ 32,50013,700
₩ 20,700
Korean wonin millions
Marketcapitalization
₩ 61,26710,830
₩ 84,876
95
Changes in the goodwill (negative goodwill) for the year ended December 31, 2008 and 2009 are as follows:
Unrealized loss arising from aircraft purchasing transactions with KALF amounting to ₩3,824 million as of December 31, 2008 has been realized as of December 31, 2009 and unrealized loss arising from aircraft selling transactions with GCIA amounted to ₩2,777 million as of December 31, 2009 (₩3,107 million as of December 31, 2008).
The details of changes in share of the accumulated other comprehensive income of investees arising from equity method of accounting for the years ended December 31, 2008 and 2009 are as follows:
Korean won in millions
Jungseok Enterprise Co., Ltd.
Hanjin Energy Co., Ltd.
Jin Air Co., Ltd.
Hanjin Shipping
Holdings Co., Ltd.
Hanjin Shipping Co., Ltd.1
2009
2008
Amortization₩1,389
964
57
247
19₩2,676₩2,675
Net changed₩-
-
-
6,822
(6,822)₩-₩288
January 1₩1,389
3,133
235
(6,575)
-₩(1,818)₩569
December 31₩ -
2,169
178
-
(6,841)₩ (4,494)₩ (1,818)
The balance as of December 31, 2009 is composed of goodwill and negative goodwill amounting to ₩2,689 million and ₩9,530 million, respectively.
1
January 1Net changesDecember 31
Korean won in millions
2008 2009 2009Gain
₩32,93949,280
₩82,219
Loss₩(40,331)
12,164₩ (28,167)
Gain₩82,219
34,410₩ 116,629
Loss₩ (28,167)
24,009₩ (4,158)
Gain₩70,417
29,471₩99,888
Loss₩ (24,124)
20,563₩ (3,561)
US dollars in thousands (Note 2)
Financial SectionKOREAN AIRANNUAL REPORT 2009
96
8. equity methOd investments (cOnt’d)The summary of financial position of the equity method investees as of December 31, 2009 and the results of their operations for the year then ended based on the investees’ latest available unaudited financial statements are as follows:
The summarized financial information of the above investees are not audited. T he Company obtained the financial statements signed by the investees’ management and internal auditors to assess the reliability of those unaudited financial statements.
In applying the equity method, the investees’ net assets were adjusted by using uniform accounting policies to those of the company. The details of such adjustments are as follows:
Korean won in millions
Korea Airport Service Co., Ltd.
Hanjin Information Systems &
Telecommunication Co., Ltd.
Topas Co., Ltd.
KAL Hotel Network Co., Ltd.
Hanjin Travel Service Co., Ltd.
Air Total Service Co., Ltd.
Jungseok Enterprise Co., Ltd.
Jedong Leisure Co., Ltd.
Hanjin Energy Co., Ltd.
GCIA
Jin Air Co., Ltd.
Homeo Therapy Co., Ltd.
Hanjin International Corp.
Hanjin Shipping Holdings Co., Ltd
Hanjin Shipping Co., Ltd
Tianjin Cargo Terminal
Assets₩349,975
55,663
41,488
149,668
124,293
7,390
360,014
14,274
2,073,646
119,103
39,535
4,750
92,793
377,584
7,908,267₩12,197
Liabilities₩118,507
24,593
8,788
95,072
31,041
3,573
63,329
6
1,026,488
89,875
37,533
64
65,495
87,199
6,007,130₩6
Equity₩231,468
31,070
32,700
54,596
93,252
3,817
296,685
14,268
1,047,158
29,228
2,002
4,686
27,298
290,385
1,901,137₩12,191
Sales₩316,002
100,751
47,999
46,298
22,130
26,478
33,080
-
(3,984)
63,836
60,888
-
42,563
6,457,216
668,257₩-
Net income (loss)₩(29,845)
4,996
11,294
2,230
13,160
351
6,966
50
(47,356)
(16,978)
(12,514)
(2,135)
(7,109)
(1,313,161)
(86,494)₩-
Korea Airport Service
Co., Ltd.
HIST1
KAL Hotel Network
Co., Ltd.
Hanjin Travel Service
Co., Ltd.
Jungseok Enterprise
Co., Ltd.
Jedong Leisure Co., Ltd.
Hanjin Int’l Corp
Tianjin Cargo Terminal
Adjustment accounts
Investments in equity
securities and other
Investments in equity
securities
Capitalization
borrowing costs
Investments in equity
securities and other
Investments in equity
securities and other
Revaluation for land
Revaluation for land
Intangible assets
Net asset beforeadjustment
₩231,468
31,070
54,596
93,252
296,685
14,268
27,298₩12,191
Adjustmentamounts
₩12,672
(1,297)
(3,086)
(11,254)
11,747
12,329
6,534₩(1,266)
Net asset afteradjustment
₩244,140
29,773
51,510
81,998
308,432
26,597
33,832₩10,925
Hanjin Information Systems & Telecommunication Co., Ltd.1
97
9. prOperty, aircraft and equipmentCost of property, aircraft and equipment and related accumulated depreciation as of December 31, 2008 and 2009 consist of the following:
Changes in net book value of property, aircraft and equipment for the years ended December 31, 2008 and 2009 are as follows:
LandBuildingsAircraftEnginesLeased aircraftLeased enginesConstruction in-progressOther
Less accumulated depreciation
2008₩ 1,410,447
863,9724,430,5291,271,7605,773,0491,328,806
502,704856,455
16,437,722(5,152,562)
₩ 11,285,160
Korean won in millions
2009₩1,714,745
871,5143,758,9961,208,7576,386,6061,542,642
986,560862,066
17,331,886(5,650,227)
₩11,681,659
US dollars in thousands (Note 2)2009
US$ 1,468,607746,415
3,219,4211,035,2495,469,8581,321,208
844,947738,322
14,844,027(4,839,180)
US$ 10,004,847
Korean won in millions2008
LandBuildingAircraftEnginesLeased aircraftLeased enginesConstruction-
In-progressOthers
January 1
₩ 593,574661,229
3,051,469791,960
3,894,962950,320
595,452330,720
₩ 10,869,686
Additions
₩ 42,00715,606
274,59567,911
319,53065,544
724,96485,188
₩ 1,595,345
Disposals/ transfers
₩ (471)(1,424)
(568,286)(116,795)
293,51414,826
(817,712)(42,123)
₩ (1,238,471)
Revaluation
₩ 814,791-----
--
₩ 814,791
Impairmentloss (reversal)
₩ (39,454)-
41,495---
--
₩ 2,041
Depreciation
₩ -(21,848)
(288,023)(81,303)
(260,740)(60,170)
-(46,147)
₩ (758,231)
December 31
₩ 1,410,447653,563
2,511,250661,773
4,247,266970,520
502,704327,638
₩ 11,285,161
Korean won in millions2009
LandBuildingAircraftEnginesLeased aircraftLeased enginesConstruction-
In-progressOthersUS dollars in thousands (Note 2)
January 1
₩ 1,410,447653,563
2,511,250661,773
4,247,266970,520502,704327,638
₩ 11,285,161
US$ 9,665,263
Additions
₩ 159,329630
48,58347,308
317,87543,360
1,221,136113,806
₩ 1,952,027
US$ 1,671,829
Disposals
₩ (126)(132)
(519,857)(72,181)
---
(85,699)₩ (677,995)
US$ (580,674)
Transfers
₩ 145,0957,069
18,02912,314
295,682165,729
(737,280)1,814
₩ (91,548)
US$ (78,407)
Depreciation
₩ -(22,038)
(264,178)(75,197)
(309,068)(70,691)
-(44,814)
₩ (785,986)
US$ (673,164)
December 31
₩ 1,714,745639,092
1,793,827574,017
4,551,7551,108,918
986,560312,745
₩ 11,681,659
US$(10,004,847)
Financial SectionKOREAN AIRANNUAL REPORT 2009
98
9. prOperty, aircraft and equipment (cOnt’d)As of December 31, 2009, the value of the Company’s land, determined by the Government of the Republic of Korea for tax administration purposes, amounted to ₩980,723 million (US$839,948 thousand).
The Company engaged Pacific Appraisal Co., Ltd., an accredited independent valuer, to determine the fair value of its land. Fair value is determined by reference to market-based evidence. This means that valuation performed by the valuer is based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. The date of the valuation was December 31, 2008.
If the land was measured using the cost model, the carrying amounts as of December 31, 2008 and 2009 would be amounted to ₩635,110 million (US$543,945 thousand) and ₩939,408 million (US$804,563 thousand) respectively.
As of December 31, 2008 and 2009, the Company’s insurance policies to cover losses from fire and other casualty losses are as follows:
10. intangible assetsChanges in net book value of intangible assets for the years ended December 31, 2008 and 2009 are as follows:
Research and development costs incurred in connection with the development of aircraft parts and new routes that were charged to selling and administrative expenses amounting to ₩3,236 million (₩8,961 million for the year ended December 31, 2008) and operating expenses amounting to ₩663 million (₩13,394 million for the year ended December 31, 2008) for the year ended December 31, 2009.
Aircraft and enginesBuildings and machineryCash and investmentsNational propertiesOthers
2008US$ 9,227,341₩ 1,452,273₩ 11,501₩ 475,991₩ 72,110
2009US$ 9,305,477₩ 1,904,419₩ 8,078₩ 541,960₩ 64,990
Korean won in millions and US dollars in thousands
Korean won in millions2009
Facility usage rightsDevelopment costsOthers
US dollars in thousands (Note 2)
Amortization₩ (11,020)
(4,041)(1,511)
₩(16,572)US$ (14,193)
Additions₩ -
3,65493,748
₩ 97,402US$ 83,421
January 1₩ 179,944
34,4241,541
₩ 215,909US$ 184,917
December 31₩ 168,924
34,03793,778
₩296,739US$ 254,144
2008
Facility usage rightsDevelopment costsOthers
Korean won in millions
Amortization₩(11,410)
(4,966)(1,402)
₩ (17,778)
Additions₩161
1,191222
₩ 1,574
January 1₩ 191,193
38,1992,721
₩232,113
December 31₩179,944
34,4241,541
₩215,909
99
11. fOreign currency denOminated mOnetary assets and liabilitiesForeign currency denominated monetary assets and liabilities as of December 31, 2008 and 2009 are as follows:
Assets
Liabilities
2008
Korean wonequivalent in
millions₩808,807
161,41926,419
2,6698,312
10,28251,52483,41169,600
₩ 1,222,443
₩ 7,191,021538,061
3,6715
1,3292,038
152,42510,37410,649
₩ 7,909,573
Foreign currencyin thousands
US$ 643,186JPY 11,580,443HKD 162,830TWD 69,538SGD 9,494GBP 5,657EUR 29,008CNY 453,097Other -
US$ 5,718,506JPY 38,601,408HKD 22,623TWD 123SGD 1,518GBP 1,122EUR 85,815CNY 56,351Other -
2009
Foreign currencyin thousands
US$ 469,636JPY 10,689,482HKD 282,553TWD 120,615SGD 8,506GBP 4,698EUR 27,265CNY 557,405Other -
US$ 5,526,366JPY 29,421,687HKD 19,682TWD 8,089SGD 896GBP 2,431EUR 76,677CNY 20,574Other -
Korean wonequivalent in
millions₩548,347
134,98942,541
4,3777,0708,822
45,65095,350
108,755₩995,901
₩6,452,585371,543
2,963294745
4,565128,378
3,5196,732
₩6,971,324
Financial SectionKOREAN AIRANNUAL REPORT 2009
100
12. shOrt-term bOrrOwingsShort-term borrowings as of December 31, 2008 and 2009 are as follows:
Korea Development BankThe Export-Import Bank of KoreaNational Agricultural Cooperative FederationKorea Exchange Bank
1234
Borrowings from:KDB1
-Singapore branch-KoreaEIBK2
Kookmin BankHana Bank
NACF3
Mirae Asset Life InsuranceCo., Ltd.
KEB4
Bank ofCommunications
Kwangju BankWoori Bank
Annual interest rate in 2009
3M Libor+4.50%3M Libor+4.30%,3M Libor+3.80%3M Libor+4.50%3M CD Rate+2.80%3M Libor+6.20%3M CD Rate+3.60%Base rates+1.26%3M CD Rate+3.14%
5.90%3M Libor+4.55%
3M Libor+2.80%3M CD Rate +2.80%3M Libor+6.40%
US dollars in thousands (Note 2)
2009
US$ 15,000100,000
100,00059,952
124,786
114,258
25,69450,000
50,00025,69430,000
US$ 695,384
2008
₩ 22,635136,882
-192,997
151,143
118,695
30,00062,875
35,210-
37,725₩ 788,162
2009
₩ 17,514116,760
116,76070,000
145,700
133,408
30,00058,380
58,38030,00035,028
₩ 811,930
Korean won in millions
101
13. lOng-term liabilities
bOndsThe non-guaranteed bonds issued and outstanding as of December 31, 2008 and 2009 are as follows:
Series
19-2nd
23-1st
23-2nd
24-1st
24-2nd
25-1st
25-2nd
26-1st
26-2nd
27-1st
27-2nd
28th
29-1st
29-2nd
30-1st
30-2nd
31-1st
31-2nd
31-3rd
32th
33th
34-1st
34-2nd
34-3st
35th
36-1st
36-2nd
36-3rd
37-1st
37-2nd
Issuing date
04.11.12
06.04.17
06.04.17
06.09.25
06.09.25
07.02.08
07.02.08
07.05.25
07.05.25
07.09.17
07.09.17
07.10.31
07.11.12
07.11.12
08.03.06
08.03.06
08.05.14
08.05.14
08.05.14
08.09.01
08.11.14
09.02.12
09.02.12
09.02.12
09.04.09
09.08.06
09.08.06
09.08.06
09.10.29
09.10.29
Maturity
09.11.12
09.04.17
11.04.17
09.09.25
11.09.25
10.02.08
12.02.08
10.05.25
12.05.25
10.09.17
12.09.17
10.10.31
10.11.12
12.11.12
11.03.06
13.03.06
11.05.14
13.05.14
11.05.14
11.09.01
11.11.14
10.02.12
10.08.12
12.02.12
12.04.09
12.08.06
14.08.06
12.08.06
12.10.29
14.10.29
2008₩120,000
150,000
150,000
150,000
250,000
200,000
100,000
100,000
100,000
150,000
50,000
200,000
140,000
40,000
200,000
100,000
220,000
80,000
113,176
300,000
100,000
-
-
-
-
-
-
-
-
-
3,013,176
(51,597)
2,961,579
(416,840)₩2,544,739
Annual interest ratein 2008
-
-
5.00%
-
4.00%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
6.01%
5.00%
5.00%
5.00%
5.00%
5.00%
5.00%
3M Libor+1.90%
7.00%
8.00%
5.80%
6.60%
7.40%
6.63%
6.50%
7.20%
6M Libor+6.80%
6.10%
7.10%
2009₩-
-
150,000
-
250,000
200,000
100,000
100,000
100,000
150,000
50,000
200,000
140,000
40,000
200,000
100,000
220,000
80,000
105,084
300,000
100,000
150,000
100,000
250,000
200,000
230,000
70,000
87,570
100,000
100,000
3,872,654
(33,924)
3,838,730
(1,037,307)₩2,801,423
US dollars in thousands (Note 2)
2009
US$ -
-
128,468
-
214,114
171,292
85,646
85,646
85,646
128,468
42,823
171,292
119,904
34,258
171,292
85,646
188,421
68,516
90,000
256,937
85,646
128,468
85,646
214,114
171,292
196,985
59,952
75,000
85,646
85,646
3,316,764
(29,054)
3,287,710
(888,410)
US$ 2,399,300
Korean won in millions
Less discount on bonds
Less current portion of bonds, net of discount on bonds
Financial SectionKOREAN AIRANNUAL REPORT 2009
102
13. lOng-term liabilities (cOnt’d)
lOng-term bOrrOwingsLong-term borrowings as of December 31, 2008 and 2009 are as follows:
KDB
IBK1
Hana Bank
Kookmin Bank
Shinhan BankKyobo Life Insurance
Co., Ltd.NACF
Korea Life InsuranceCo., Ltd.
Samsung Life InsuranceCo., Ltd.
SCFBK2
Longboat QuayAviation Ltd.
EIBKKEBNHIS3
Washington MutualUT Finance Corp.Bank of Communication
Less current portion
Annual interest rate in 20094.15%~4.69%,3M CD Rate+1.06%3M Libor+0.57~2.90%KDB Bond+0.77~2.84%4.35%3M Libor+0.60%CD Rate+1.53%3M Libor+0.48~0.58%3.00%6M Libor+5.75%
6.90%3M Libor+0.39~2.00%3M CD Rate+2.00~4.00%
5.40%, 6.90%
5.50%3M JPY Libor+3.00%
3M Libor+1.30%3M Libor+1.65~7.20%3M Libor+2.80%6M JPY Libor+5.30%6M Libor+5.45%Federal Housing Int.6M Libor+5.75%3M Libor+3.95%
2008
₩ 1,448,1514,000
88,142
14,444-
30,000
648,038
40,000
40,00054,362
35,747170,422
12,575
-69
--
2,585,950(709,461)
₩ 1,876,489
2009
₩ 1,139,0104,000
69,222
91,68229,116
30,000
601,722
40,000
40,00045,556
6,763273,439
11,676
243,04252
78,58540,866
2,744,731(668,996)
₩ 2,075,735
US dollars in thousands (Note 2)
2009
US$ 975,5143,426
59,286
78,52224,937
25,694
515,349
34,258
34,25839,017
5,792234,189
10,000
208,15545
67,30435,000
2,350,746(572,967)
US$ 1,777,779
Korean won in millions
Industrial Bank of Korea Standard Chartered First Bank Korea LimitedNH Investment and Securities Co., Ltd.
123
103
lOng-term ObligatiOns under installment purchasesLong-term obligations under installment purchases related to aircraft and engines as of December 31, 2008 and 2009 are as follows:
The Company received payment guarantees amounting to US$36 million from KDB related to the above long-term obligations under installment purchases as of December 31, 2009.
The amounts as of December 31, 2008 and 2009 represent the cumulative losses on valuation of interest rate swap for the purpose of hedging the exposure to changes in the fair value of the longterm obligations under installment purchases.
1
Installment purchasesfrom:Wilmington
KE Apollo
Accumulated losses onvaluation of fixed liabilities1
Less present value discounts
Less current portion,net of present value discounts
Annual interest rate in 2009
1Y Libor+0.75%4.37%-
2008
₩ 325,00513,286
338,291
9,452347,743(24,388)323,355
(166,301)₩ 157,054
2009
₩ 147,467-
147,467
1,415148,882(12,689)136,193
(136,193)₩ -
US dollars in thousands (Note 2)
2009
US$ 126,299-
126,299
1,212127,511(10,868)116,643
(116,643)US$ -
Korean won in millions
Financial SectionKOREAN AIRANNUAL REPORT 2009
104
13. lOng-term liabilities (cOnt’d)
ObligatiOns under capital leasesLong-term borrowings as of December 31, 2008 and 2009 are as follows:
Aircraft/Engines:KE Cayman
Leasing Ltd.Kaleca03
Aviation Ltd.KE Export Leasing
2009 Ltd.KE August Ltd.KE Octavius Ltd.KE Jumbos V Ltd.Arirang Ltd.KE U Simjo Ltd.Constitution Aircraft
Leasing 3 Ltd.Sumisho Aircraft Asset
Management B. V.KE Atomos Ltd.KE Celtics Ltd.KE Evergreen Ltd.Mugungwha Ltd.Brooklyn Leasing Ltd.Sejong Aviation Ltd.Andros Aviation Ltd.Millenium KAL Ltd.KALeidos
Aviation Ltd.KALeidos Two
Aviation Ltd.KALeidos Three
Aviation Ltd.KAL-ECA 2001
Aviation Ltd.Duria Aviation Ltd.KE innisfree Ltd.KE Harmony Ltd.Peninsula
Aviation Ltd.
Less current portion
Annual interest rate in 2009
3M JPY Libor+1.39~2.20%
3M JPY Libor+0.15%4.55%~8.45%3M Libor+1.80~5.00%3M Libor+0.44%~0.54%3M Libor+0.44%~0.70%3M Libor+1.10%~2.00%3M Libor+1.05%~1.75%3M Libor+0.90%
9.57%
5.73%3M Libor+1.50%3M Libor+4.75%3M Libor+4.41%6M Libor+3.60%6.84%~7.29%-3M Libor+0.60%4.97%~6.93%
6M Libor+1.60%, 6.68%
6M Libor+1.60%, 6.68%
6M Libor+1.75%, 6.68%
3M Libor+0.77%3M Libor+0.99%~2.60%3M Libor+1.64%~2.80%3M Euribor+1.35%
3M Libor+3.60%
2008
₩ 129,988
79,317
1,427,222175,692355,199193,648196,631
68,555
30,175
30,001147,756
---
247,82118,700
109,553159,004
31,611
38,119
40,677
73,53355,68969,919
145,792
-3,824,602(676,153)
₩ 3,148,449
2009
₩ 88,462
62,084
1,508,357142,836290,095157,940161,694
50,465
26,477
24,696119,679
64,51084,06777,872
143,634-
68,375112,335
18,059
24,233
25,458
46,93644,32452,458
114,985
70,0563,580,087(772,392)
₩ 2,807,695
US dollars in thousands (Note 2)
2009
US$ 75,764
53,172
1,291,844122,333248,454135,269138,484
43,221
22,676
21,151102,500
55,25072,00066,694
123,016-
58,56096,210
15,467
20,755
21,804
40,19937,96244,92898,480
60,0003,066,193(661,521)
US$ 2,404,672
Korean won in millions
105
The Company has guaranteed the amounts of US$59 million to Kookmin Bank on behalf of Andros Aviation Ltd. in connection with capital lease agreements as of December 31, 2009.
The Company received payment guarantees amounting to US$1,595 million from Export-Import Bank of the United States and others related to the obligation under capital lease as of December 31, 2009.
Minimum lease payments and present value of long-term obligations under installment purchases and capital leases as of December 31, 2009 are as follows:
guaranteed lOansPursuant to the Government Guidelines for the Rationalization of the Marine Industry, the Company has agreed to assume certain guaranteed loans of Hanjin Shipping Co., Ltd. with KEB and other financial institutions. The guaranteed loans assumed are allocated to the Company by a series of 20 equal installments over the period of 20 years commencing in 1988. The guaranteed loans accrue no interest, and are payable in equal installments over 15 years with a grace period of 15 years. In accordance with the repayment schedule, the Company made its first installment payment in 2003 and final installment will be due in 2017. The outstanding balance of guaranteed loans as of December 31, 2008 and 2009 are as follows:
Guaranteed loans from:
KDB
Woori Bank
Korea Asset Management Corp.
Hanshin Federation of Savings Bank
Kookmin Bank
Shinhan Bank
Daegu Bank
KEB
TongYang Life Insurance Co., Ltd.
Lotte Insurance Co., Ltd
2009₩ 20,928
13,711
882
1,057
789
3,521
2,590
34,079
7,017
725₩ 85,299
2008₩ 23,545
15,424
992
1,188
887
3,961
2,913
38,341
7,894
816₩ 95,961
US dollars in thousands (Note 2)
2009
US$ 17,924
11,743
755
905
676
3,016
2,218
29,187
6,010
621₩ 73,055
Korean won in millions
Korean won in millions
Less than 1 year
More than 1 year to 5 years
More than 5 years
Present value
Total₩ 1,332,170
2,525,609
813,414₩ 4,671,193₩ 3,716,281
Obligationsunder
capital leases₩ 1,183,288
2,525,609
813,414₩ 4,522,311₩ 3,580,087
Long-termobligations
under installmentpurchases
₩ 148,882
-
-₩ 148,882₩ 136,193
US dollars in thousands (Note 2)
Total
US$ 1,140,948
2,163,077
696,655
US$ 4,000,680
US$ 3,182,837
Financial SectionKOREAN AIRANNUAL REPORT 2009
106
13. lOng-term liabilities (cOnt’d)
guaranteed lOans (cOnt’d)Long-term borrowings as of December 31, 2008 and 2009 are as follows:
asset-bacKed securitizatiOn lOansThe asset-backed securitization (ABS) loans of the Company are obtained from various special purpose entities, which entailed the sales of the beneficial rights of receiving a certain amount of cash flows from the future receivables of the Company to several financial institutions. Details of the ABS loans as of December 31, 2008 and 2009 are as follows:
the maturity Of lOng-term liabilitiesThe maturity of long-term liabilities as of December 31, 2009 is as follows:
Less present value discounts
Less current portion,net of present value discounts
2008₩ (33,186)
62,775
(9,930)₩ 52,845
Korean won in millions
2009₩ (27,133)
58,166
(9,930)₩ 48,236
US dollars in thousands (Note 2)2009
₩ (23,238)49,817
(8,505)US$ 41,312
KAL- 3rd ABSKAL- 4th ABS
Less current portion
Annual interest rate in 20091.20%4.75%, 4.98%, 5.20%
2008₩ 219,236
-219,236
(187,737)₩ 31,499
2009₩ 28,537
500,000528,537(48,537)
₩ 480,000
US dollars in thousands (Note 2)
2009US$ 24,441
428,229452,670(41,570)
US$ 411,100
Korean won in millions
Maturity year
Dec 31, 2010
Dec 31, 2011
Dec 31, 2012
Dec 31, 2013
Dec 31, 2014
Jan 1, 2015
and thereafter
Bonds₩ 1,040,000
1,325,084
1,157,570
180,000
170,000
-₩ 3,872,654
Long-termborrowings₩ 668,996
1,190,519
371,931
154,065
219,996
139,224₩ 2,744,731
Long-termobligations
underinstallmentpurchases¹₩ 147,467
-
-
-
-
-₩ 147,467
Obligationsunder capital
leases₩ 772,392
626,248
587,091
513,546
326,304
754,506₩ 3,580,087
Guaranteedloans
₩ 10,662
10,662
10,662
10,662
10,662
31,989₩85,299
Asset-backedsecuritization
loans₩48,537
120,000
120,000
120,000
120,000
-₩ 528,537
Total₩ 2,688,054
3,272,513
2,247,254
978,273
846,962
925,719₩10,958,775
Korean won in millions
Accumulated losses on valuation of fixed liabilities related to the interest rate swap contracts amounting to ₩1,416 million were excluded.1
107
14. cOmmitments and cOntingencies
guarantees receivedAs of December 31, 2009, Seoul Guarantee Insurance Company has provided guarantees of ₩16,447 million on the behalf the Company for compliance with various contracts, bidding and warranties.
agreements fOr banK Overdraft, letters Of credit and credit lines As of December 31, 2009, the Company has a bank overdraft agreement with Woori Bank for up to ₩5,000 million, and opening of letters of credit for up to US$5 million. The Company has also other credit line agreements for up to ₩240,000 million with Kookmin Bank and others and US$130 million with Woori Bank and others as of December 31, 2009.
As of December 31, 2009, the Company has two outstanding promissory notes pledged as collateral to creditors and guarantors. In addition, the Company has B2B marketplace agreements for up to ₩30,000 million with Woori Bank as of December 31, 2008 has closed in 2009.
pending litigatiOnsAs of December 31, 2009, various claims, lawsuits and complaints, arising from airline services operations are pending against the Company. Management believes that the Company has adequate insurance coverage against these claims and that the ultimate outcome of these cases will not have a material adverse effect on the financial performance and position of the Company.
For an anti-trust violation relating to the Company and other parties colluding on the price fixing of air-cargo services, the Company was investigated by the United States Department of Justice. As a result, the Company made a plea to the United States Department of Justice on August 2007 for the payment of fines totaling US$300,000 thousand. In accordance with the agreed payment schedule, the Company paid one-sixth of the fines on September 21, 2007 and the remaining balance of the fines are payable in equal installments over 5 years from 2007 with interest rate of 4.30% per annum. In July 2009, the U.S. court of relevant jurisdiction approved a one year extension for each of the remaining four-sixths of the fines in consideration of the economic situation. Therefore, as of December 31, 2009, the outstanding balance of fines of ₩233,520 million (US$200,000 thousand) was accounted for as a current liability (other account payable) amounting to ₩58,380 million (US$50,000 thousand) and non-current liability (other accounts payable) amounting to ₩175,140 million (US$150,000 thousand).
In connection with the above anti-trust violation, various other parties also filed lawsuits against the Company claiming damages at the United States District Court for the Eastern District of New York which are still pending. In addition, the Company is currently under investigation by the European Commission, Australian Competition and Consumer Commission, New Zealand Commerce Commission, Korea Fair Trade Commission and others for allegedly colluding on price fixing. As of December 31, 2009, the ultimate outcome of this investigation cannot be presently determined.
new aircraft purchase cOmmitmentsThe Company has entered into various aircraft purchase contracts with aircraft manufacturers, including the Boeing Company. The amount of such contracts is approximately US$8,647 million as of December 31, 2009.
Financial SectionKOREAN AIRANNUAL REPORT 2009
108
14. cOmmitments and cOntingencies (cOnt’d)
interest rate swap cOntractsThe Company has entered into interest rate swap contracts with Woori Bank in order to hedge against interest rate fluctuation related to long-term obligations under installment purchases of B747-400 aircraft. The details of the contracts outstanding as of December 31, 2009 are as follows:
Notional amount : US$97,234 thousandTerms : Pay floating interest rate of Libor+0.75% and receive fixed interest rate of 8.00% Swap contract period : October 10, 1996 to January 15, 2010
Interest expense from the long-term obligations amounting to ₩9,058 million for the year ended December 31, 2009 has been offset against the gain on settlement of interest rate swap contracts. Gain on valuation of interest rate swap contracts and loss on valuation of long-term obligations under installment purchases, each amounting to ₩226 million, were recognized as non-operating income and non-operating expense, respectively, for the year ended December 31, 2009.
fOreign currency OptiOn cOntractsThere is no unsettled currency option contract as of December 31, 2009. And in accordance with the foreign currency option contracts settled during the year, the Company has recognized a gain and a loss from settlement of foreign currency option contracts amounting to ₩12,489 million (US$10,696 thousand) and ₩3,877 million (US$3,320 thousand), respectively, for the year ended December 31, 2009.
crOss currency interest rate swap cOntractsIn order to hedge against interest rate fluctuation and changes in exchange rate related to foreign currency denominated bonds, the Company has entered into cross currency interest rate swap contracts with Hong Kong & Shanghai Banking Corp. (HSBC). The details of the contracts outstanding as of December 31, 2009 are as follows:
Notional amount : US$90,000 thousandTerms : Pay fixed interest rate of 5.60 % on a quarterly basis and notional amount at the date of maturity in KRW at the rate of ₩1,045 to US$1 Receive floating interest rate of 3M Libor + 1.90 % on a quarterly basis and notional amount in US$ at the date of maturitySwap contract period : May 2008 to May 2011
The Company recognized unrealized valuation loss amounting to ₩5,115 million for the year ended December 31, 2009.
Oil-price OptiOnIn order to hedge the exposure to changes in oil prices related to purchase of aircraft fuel, the Company has entered into oil price zero-cost collar option contracts, which consist of call-options in long positions and put-options in short positions and oil price swap contracts that are based on West Texas Intermediate.
The unsettled quantity of the oil price option contracts as of December 31, 2009 is 2,200,000 BBL which will be last settled in September 2010. The unsettled quantity of the oil price swap contracts as of December 31, 2009 is 2,260,000 BBL which will be last settled in December 2010.
The Company accounts for its fuel derivative instruments as cash flow hedges in cases where the derivative instruments meet the requirements of Korea Accounting Standards 53-70 Accounting for Derivative Instruments.
109
The unsettled oil price option and oil price swap contracts as of December 31, 2009 all qualified for cash flow hedge accounting treatment and the unrealized amount of fair value adjustment on the unsettled oil price option and oil price swap contracts were recorded in other comprehensive income. The hedge ineffectiveness portion amounting to ₩31,792 million were recognized as non-operating income for the year ended December 31, 2009.
In relation to oil price option and oil price swap contracts that qualified for cash flow hedge accounting treatment, unrealized other comprehensive income amounting to ₩7,089 million as of December 31, 2009 is expected to be realized and transferred to cost of sales within one year from the reporting date. The Company recorded a loss of ₩7,628 million from the settlement of the oil price option contracts which has been added to operating expense and a loss of ₩230,131 million from the settlement of the oil price swap contracts which has been added to operating expense for the year ended December 31, 2009. The hedge ineffectiveness portion amounting to ₩33,496 million resulting from settlement of oil price option were recognized as gain on settlement of derivative instruments and ₩1,917 million resulting from settlement of oil price option were recognize as loss on settlement of derivative instruments.
Operating lease cOntractsThe Company has entered into operating lease agreements to lease 27 aircrafts and certain aircraft parts from BCC Bolongo, Gecas Technical Services Ltd. and other lessors. The Company has also entered into an operating lease agreement for using the cargo terminal at JFK international airport in the United States with New York City Industrial Development Agency (IDA). As of December 31, 2009, the schedule lease payments on these agreements are summarized as follows:
KDB has provided a guarantee of US$25 million on behalf of the Company for the aircraft operating lease agreements as of December 31, 2009. In addition, the Company has opened letters of credit at HSBC in the aggregate amount of US$76 million in connection with the operating lease agreement for using the cargo terminal at JFK international airport in the United States with IDA as of December 31, 2009, and KDB has provide a guarantee of US$76 million to HSBC on behalf of the Company.
The Company has entered into an operating lease agreement with Jin Air Co., Ltd and leased 3 aircrafts and relevant components to Jin Air Co., Ltd. As of December 31, 2009, the schedule of collection on this agreement is summarized as follows:
January 1, 2010 ~ December 31, 2010January 1, 2011 ~ December 31, 2011January 1, 2012 ~ December 31, 2012January 1, 2013 ~ December 31, 2013January 1, 2014 ~ December 31, 2014January 1, 2015 and thereafter
US dollars in thousandsUS$ 152,574 133,882 96,676 75,682 69,843
253,773US$ 782,430
Korean won equivalentin millions
₩ 178,145 156,321 112,879 88,366 81,549
296,305₩ 913,565
January 1, 2010 ~ December 31, 2010January 1, 2011 ~ December 31, 2011January 1, 2012 ~ December 31, 2012January 1, 2013 ~ December 31, 2013January 1, 2014 ~ December 31, 2014January 1, 2015 and thereafter
US dollars in thousandsUS$ 11,172 11,172 11,172 11,172 8,276 13,430 US$ 66,394
Korean won equivalentin millions
₩ 13,045 13,045 13,045 13,044 9,663 15,680₩ 77,522
Financial SectionKOREAN AIRANNUAL REPORT 2009
110
Operating lease cOntracts (cOnt’d)The Company, including Air France KLM and other users of the JFK Airport in New York (collectively the JFK Users), has provided a joint guarantee of US$345 million to IDA for the industrial revenue bonds (IR Bonds) issued by the IDA. The IR Bonds were issued for the purpose of financing the construction of the new terminal one of JFK Airport (Terminal One). In return, IDA will redeem its IR Bonds through the collection of lease payments from the JFK Users. Terminal One Group Association (TOGA) was established by the JFK Users to operate and administer the Terminal One, including collection of the above mentioned lease payments and making schedule repayment to IDA in respect of the IR Bonds. In accordance to an Association Agreement entered into between TOGA and the JFK Users, TOGA has been granted the right to collect additional lease payments from the JFK Users, in the event of a shortage of funds after making such schedule repayment to IDA, to cover its operating expenses.
On November 5, 2009, the Company has entered into a Memorandum of Understanding with its creditors, including KDB, to improve the Company’s financial structure mainly by sale and leaseback of the Company’s aircraft.
15. pledged assetsA substantial portion of the property, aircraft and equipment as of December 31, 2009, has been pledged as collateral for certain borrowings from banks and other financial institutions as follows:
As of December 31, 2009, the following investment securities and equity method investments are pledged as collateral (Korean won in millions):
Held-to maturity securities:National housing bonds
National housing bonds
Equity method investments:Hanjin Shipping Co., Ltd.Hanjin Shipping Holdings Co., Ltd.Hanjin Energy Co., Ltd.
Number of shares
-
-
263,20450,74534,000
Book value
₩ 450
1,184
6,3321,031
866,329₩ 875,326
Financial institution
Defense Procurement Agency
Incheon AirportCustoms
KEBKEB
Woori bank and Others
Purpo
Contract guarantee
Import customsclearance guarantee
Guaranteed loansGuaranteed loans
Borrowing guarantee
KDB
KEBKookmin BankEIBKNACF
Hana Bank SCFBK
Aircraft and engines
AmountUS$ 1,767,085NLG 1,143₩ 1,080,900₩ 73,000₩ 20,544US$ 354,559₩ 576,401US$ 185,280US$ 96,850₩ 45,500JPY 5,070,000Bank of Communication
CollateralLand, building, aircraft and enginesLand and buildingLand, building and facility usage rightLand and buildingLand and buildingAircraft and enginesLand, aircraft and enginesAircraft and enginesAircraft and enginesFacility usage rightsAircraft and enginesUS$ 53,500
Korean won in millions, US$, JPY and NLG in thousands
111
16. severance and retirement benefitsChanges in severance and retirement benefits for the years ended December 31, 2008 and 2009 are summarized as follows:
17. equity
cOmmOn stOcKThere is no change in common stock of the Company during the year ended December 31, 2009. The Company is authorized to issue 250,000,000 shares at par value of ₩5,000 per share and , 71,971,631 shares were issued as of December 31, 2009.
preferred stOcKThere is no change in preferred stock of the Company during the year ended December 31, 2009. As of December 31, 2009, the Company has 1,379,177 shares of preferred stock issued at par value ₩5,000 per share. The preferred stock is non-participating, non-cumulative and non-voting shares, which is entitled to receive cash dividend equal to that declared for common stock plus an additional one percent.
treasury stOcKAs of December 31, 2009, the Company has 4,437,327 shares of common stock and 11,869 shares of preferred stock that were repurchased and held as treasury stock with carrying value of ₩65,264 million and ₩135 million, respectively.
accumulated deficitAccumulated deficit as of December 31, 2008 and 2009 consist of the following:
Beginning balanceProvisionsTransfer from(to) affiliatesPayments
Deposits for severance and retirements benefitsAccumulated prepayment to KNPCNet balance
2008₩ 777,337
96,7931,047
(126,175)749,002
(267,501)(11,531)
₩ 469,970
2009₩ 749,002
104,749(831)
(42,354)810,566
(264,289)(10,853)
₩ 535,424
US dollars in thousands (Note 2)
2009US$ 641,488
89,713(712)
(36,274)694,215
(226,352)(9,295)
US$ 458,568
Korean won in millions
Appropriated retained earnings:Legal reserveReserve for foreign currency fluctuationReserve for research and manpower developmentReserve for facility usage
Unappropriated retained earnings (deficit)
2008
₩ 10,500170,000130,000620,000930,500
(1,846,427)₩ (915,927)
2009
₩ - ----
(114,823)₩ (114,823)
US dollars in thousands (Note 2)
2009
US$ -----
(98,341)US$ (98,341)
Korean won in millions
Financial SectionKOREAN AIRANNUAL REPORT 2009
112
18. incOme taxesFor the year ended December 31, 2009, the Company is subject to corporate income taxes, including resident surtax, at the aggregate rates of 12.1% (11% from 2010 and thereafter) on taxable income of up to ₩200,000 thousand and 24.2.% (22% from 2012 and thereafter) on taxable income in excess of ₩200,000 thousand.
A reconciliation of benefit from income taxes applicable to loss before income taxes at the Korea statutory tax rate to benefit from income taxes at the effective income tax rate of the Company is as follows:
Loss before income taxesIncome tax at income tax rate of 24.2% (2009) and 27.5% (2008)Adjustments:
Expenses not deductible for tax purposeDeferred tax assets not recognizedChanges in temporary differences resulting from the prior year tax reconciliationEffects of changes in tax rate, etc.Additional payment of income taxes (income tax refunds)
Tax creditBenefit from income taxes
2008₩ (2,450,832)
(673,979)
14,0583,1723,172
154,7231,067
(4,285)₩ (508,402)
2009₩ (125,381)
(30,342 )
8,4865,301
631(6,292)(1,593)(2,676)
₩ (26,485)
Korean won in millions
113
Significant changes in cumulative temporary differences and deferred income tax assets and liabilities for the year ended December 31, 2009 are as follows:
Increase
₩46,68247,500
--
44,566--
11,416
-
-140,545290,709
--
-
(19,142)--
-(15)
(19,157)
₩
Ending balance
₩ 326,948161,101
3,736-
279,84154,322
896,46251,316
39,454
7,089155,765
1,976,034
(4)(27,020)
-
(24,564)(26,678)
(814,790)
-(102,115)(995,171)
980,863206,900)
1,232,5002,006,463
24.2%6,961
₩ 469,073
Beginning balance
₩ 280,266113,601
14,159198,131235,27554,322
1,551,17139,900
39,454
355,90615,220
2,897,405
(21)(33,186)
(45,700)
(5,422)(101,990)(814,790)
(6,617)(102,100)
(1,109,826)1,787,579(184,996)
797,4052,399,988
27.5%4,285
₩ 551,821
Decrease
₩ --
(10,423)(198,131)
--
(654,709)-
-
(348,817)-
(1,212,080)
176,166
45,700
-75,312
-
6,617-
133,812
₩
Korean won in millions
Deductible temporary differences:Accrued severance and retirement benefitsDepreciationForeign currency translation
adjustment debitDiscount in aircraft purchasedUnredeemed mileage liabilitiesGain from assets contributedLoss on foreign currency translation, netEquity method investmentsImpairment loss on property
aircraft and equipment, netLoss on valuation of derivatives
(other comprehensive income)Others
Taxable temporary differences:Provision for temporary depreciationPresent value discount on guaranteed loanReserve for research and
human developmentGain on valuation of long-term
investment securitiesGain on valuation of derivativesRevaluation surplusGain on valuation of other
non-current assetsOthers
TotalTemporary difference unrecognized 1
Tax loss carry forwardTemporary difference recognizedTax rateTax creditDeferred income tax asset, net
Financial SectionKOREAN AIRANNUAL REPORT 2009
114
18. incOme taxes (cOnt’d)
Details of gross deferred income tax assets and liabilities as of December 31, 2009 are as follows:
The major components of benefit from income taxes December 31, 2008 and 2009 are as follows:
Temporary difference:Accrued severance and retirement benefitsDepreciationForeign currency translation adjustment debitUnredeemed mileage liabilitiesLoss on foreign currency translation, netProvision for temporary depreciationPresent value discount on guaranteed loanGain on valuation of long-term investment
securitiesEquity method investmentsGain on valuation of derivativesLoss on valuation of derivatives
(other comprehensive income)Revaluation surplusImpairment loss on property, aircraft
and equipment, netOthersTax loss carry forwardTax credit
Deferred income tax assetsDeferred income tax liabilitiesDeferred income tax assets, netUS dollars in thousands (Note 2)
Temporary differences
₩ 326,948161,100
3,736279,841896,462(3,785)
(27,020)
(24,564)(203,378)(26,677)
7,089(814,791)
39,454155,765
1,232,500
Current
₩ -------
--
(6,456)
1,716-
-(17)
115,222-
116,938(6,473)
₩ 110,465US$ 94,609
Non-current
₩ 71,92935,442
82261,565
197,222(1)
(5,944)
(5,404)(44,743)
-
-(179,254)
8,67934,284
177,0506,961
593,954(235,346)
₩ 358,608US$ 307,133
Korean won in millionsDeferred income tax assets(liabilities)
The Company did not recognize deferred income tax assets for deductible temporary differences, arising from equity method
investments amounting to ₩254,694 million and gain from assets contributed amounting to ₩54,322 million, in consideration of the
uncertainty in realizing those deductible temporary differences in the future. In addition, the Company did not recognize deferred
income tax liabilities for taxable temporary differences arising from the revaluation of land amounting to ₩102,116 million, in
consideration that the Company has no firm commitment to dispose of the land in the foreseeable future.
1
Current income taxesChanges in deferred income tax
arising from temporary differencesAdditional payment of income taxes (Income tax refunds)Deferred income tax which is charged directly to equityBenefit from income taxes
US dollars in thousands (Note 2)
2009US$ -
70,870(1,364)
(92,189)US$ (22,683)
2008₩7,231
(424,998)1,066
(91,701)₩ (508,402)
2009₩-
82,748(1,593)
(107,640)₩ (26,485)
Korean won in millions
115
Deferred income tax which is charged (credited) directly to equity December 31, 2008 and 2009 are as follows:
19. cOmprehensive incOme (lOss)The Company’s comprehensive income (loss) December 31, 2008 and 2009 are computed as follows:
20. per share amOuntsThe Company’s per share amounts December 31, 2008 and 2009 are computed as follows:
The weighted-average number of shares of common stock outstanding December 31, 2008 and 2009 has been calculated by deducting treasury stock. There are no outstanding convertible bonds or other dilutive securities as of December 31, 2008 and 2009 that have a dilutive effect on the Company’s per share amounts.
Net lossOther comprehensive income (loss), net of taxes:
Gain (loss) on valuation of long-term investment securities (Note 7)
Gain (loss) on valuation of derivative instrumentsEquity adjustment arising from
equity method investments (Note 8)Revaluation surplusGain (loss) on valuation of other non-current assets
Comprehensive income (loss)
US dollars in thousands (Note 2)
2009US$ (84,702)
12,788226,450
50,033-
(4,420)284,851
US$ 200,151
2008₩(1,942,430)
(26,937)(271,098)
61,444635,537
1,186400,132
₩ (1,542,298)
2009₩ (98,896)
14,931264,403
58,419-
(5,161)332,592
₩ 233,696
Korean won in millions
Gain (loss) on valuation of long-term investment securitiesEquity adjustment arising from equity method investmentsGain (loss) on valuation of derivative instrumentsRevaluation surplusGain on valuation of other non-current assetsTotalIncome tax rateCharged directly to equity
US dollars in thousands (Note 2)
2009US$ 16,394
78,768298,747
-(5,667)
388,24222% (24.2%)
US$ (92,189)
2008₩(37,565)
47,387(357,728)
814,7911,134
468,60322% (24.2%)
₩ (91,701)
2009₩ 19,142
91,970348,817
-(6,617)
453,31222% (24.2%)
₩ (107,640)
Korean won in millions
Net lossPreferred stock dividendsNet loss attributable to common stockWeighted-average number of shares of
common stock outstanding (in units)Basic loss per share (Korean won and US$ in units)
US dollars in thousands (Note 2)
2009US$ (84,702)
-(84,700)
67,534,304US$ (1.25)
2008₩(1,942,430)
-(1,942,430)
67,534,304₩ (28,762)
2009₩(98,896)
-(98,896)
67,534,304₩ (1,464)
Korean won in millions
Financial SectionKOREAN AIRANNUAL REPORT 2009
116
21. related party disclOsuresThe Company is the ultimate holding company for the following list of subsidiaries as of December 31, 2009.1. Korea Airport Service Co., Ltd.2. Hanjin Travel Service Co., Ltd.3. Jungseok Enterprise Co., Ltd.4. Hanjin Information Systems & Telecommunication Co., Ltd.5. Topas Co., Ltd.6. In-cheon International Airport Oiling Facility7. KAL Hotel Network Co., Ltd.8. Air Total Service Co., Ltd.9. Tianjin Hanjin-Sino Trans Air Cargo Terminal Co., Ltd.10. Hanjin Int’l Corp.11. Waikiki Resort Hotel, Inc.12. Jedong Leisure Co., Ltd.13. Hanjin Energy Co., Ltd.14. Jin Air Co., Ltd.15. Homeo Therapy Co., Ltd.
Significant transactions which occurred in the ordinary course of business with related companies December 31, 2008 and 2009 are summarized as follows:
The expense amount related to Korea Airport Service Co., Ltd. and S-Oil Corporation consists of mainly charges incurred from aircraft refueling services. The revenue and other income related to Jin Air Co., Ltd consist of mainly revenues incurred from leasing of aircraft and building. The revenue and other income related to GCIA arose from aircraft maintenance. Related party incomes and expenses from/to other than Korean Airport Service Co., Ltd., S-Oil Corporation, GCIA and Jin Air Co., Ltd. mainly incurred in operations.
Expense₩12,512
252,73915,854
983
32,62423,25926,721
-90,423
393,64513,19939,255
₩901,214
Revenue /other income
₩1,670467210
-
24022,022
17,2783,715
27-
877₩36,507
2008
Expense₩14,729
243,38217,374
909
37,29223,54326,478
5-
273,170-
44,879₩681,761
Revenue /other income
₩1,883570186
-
43921,999
-29,865
--
4,6505,859
₩65,451
2009
Hanjin Transportation Co., Ltd.Korean Airport Service Co., Ltd.Hanjin Travel Service Co., Ltd.Jungseok Enterprise Co., Ltd.Hanjin Information Systems
& Telecommunication Co., Ltd.Topas Co., Ltd.Air Total Service Co., Ltd.Jin Air Co., LtdKALFS-Oil CorporationGCIAOthersTotal
117
The related account balances outstanding with related parties as of December 31, 2008 and 2009 are summarized as follows:
Payables to Korean Airport Service Co., Ltd. and S-Oil Corporation are trade in nature. Receivables from Jin Air Co., Ltd. mainly arose from aircraft lease and payables to Jin Air Co., Ltd. mainly consist of unearned revenues generated from aircraft maintenance. Related party receivables and payables from/to other than Korean Airport Service Co., Ltd., S-Oil Corporation and Jin Air Co., Ltd. are mainly trade in nature.
The Company has guaranteed the repayment of various obligations of the following affiliated companies of the Hanjin Group as of December 31, 2009 as follows:
Payable₩ 2,896
49,7792,423
-
5,5704,1504,2075,976
16,519-
2,712₩ 94,232
Payable₩ 2,588
56,3863,464
6
6,9144,5395,916
12,18112,629
-3,677
₩ 108,300
Receivable₩ 53
452185421
754,505
-25,096
--
136₩30,923
Receivable₩ 231
52733
428
653,696
-22,846
-4,8681,496
₩ 34,190
2008 2009
Hanjin Transportation Co., Ltd.Korean Airport Service Co., Ltd.Hanjin Travel Service Co., Ltd.Jungseok Enterprise Co., Ltd.Hanjin Information Systems
& Telecommunication Co., Ltd.Topas Co., Ltd.Air Total Service Co., Ltd.Jin Air Co., LtdS-Oil CorporationGCIAOthersTotal
Korea Airport Service Co., Ltd.
Hanjin Transportation Co., Ltd.
Jungseok Enterprise Co., Ltd.
Hanjin Shipping Co., Ltd.
GrandStar
Others
Total
Guaranteed amounts
₩ 22,156₩ 13,608₩ 16,687₩ 16,613₩ 10,206₩ 13,482₩ 27,031
US$ 347,647
US$ 32,943
US$ 50,000₩ 119,783
Financial institutions
KEB
KDB
Woori Bank and others
KEB
KDB
Woori Bank and others
KEB and others
KSH INTL S.A. and others
Bank of China
Hana Bank
Korean won in millions and US$ in thousands
US$ 430,590
Financial SectionKOREAN AIRANNUAL REPORT 2009
118
21. related party disclOsures (cOnt’d)In addition to the above guarantees provided on the behalf of related companies, the Company has provided guarantees to KDB and other financial institutions to the extent of ₩17,255 million on behalf of Hanjin Heavy Industries & Construction Holdings Co., Ltd. The Company made a commitment to 10 institutional creditors (the Creditors) of Hanjin Energy Co., Ltd. (HJE) including Hana Bank, to secure the repayment for the principals and interests of HJE’s borrowings from the Creditors by means of participation in paid-in capital increases of HJE, lending subordinated loans to HJE, or other means in case HJE has insufficient funds to repay its debt.
The Company made a commitment to GoodNest LLC to secure the repayment for the principals and interests of KAL Hotel Network Co., Ltd. (KHN)’s borrowings from GoodNest LLC by lending loans to KHN in case KHN has insufficient funds to repay its debt.
The outstanding repayment guarantees provided by affiliated companies to other third parties for the Company’s obligations as of December 31, 2009 are as follows:
In addition to the above guarantees received from affiliated companies, the Company has received a guarantee from Hanjin Heavy Industries & Construction Holdings Co., Ltd. related to guaranteed loans from KEB and other financial institutions to the extent of ₩107,417 million.
Payroll and severance and retirement benefits paid to major executives who have the authority and responsibility on the Company’s business decision making for the year ended December 31, 2009, amounted to ₩2,583 million and ₩742 million, respectively.
22. value added infOrmatiOnThe accounts and amounts which are required to be disclosed in connection with the calculation of the added value of the Company’s operations December 31, 2008 and 2009 are as follows:
Hanjin Transportation Co., Ltd.
Korea Airport Service Co., Ltd.
Hanjin Shipping Co., Ltd.
Jungseok Enterprise Co., Ltd.
Total
Guaranteed amounts
₩ 44,30427,20635,90744,30427,20635,90744,304 27,206 36,632 44,303
27,206 35,907
₩ 430,392
Financial institutionsKEBKDBWoori Bank and othersKEBKDBWoori Bank and othersKEBKDBWoori Bank and othersKEBKDBWoori Bank and others
Korean won in millions
Operatingexpenses
₩851,11989,043
774,136309,359150,979
19,049₩2,193,685
US$ 1,878,798
Total₩1,051,400
104,749785,986329,306199,590
33,690₩2,504,721
US$ 2,145,187
Total₩1,036,056
96,793758 ,231335,009186,767
33,920₩2,446,776
US$ 2,095,560
Selling andadministrative
expenses₩200,281
15,70611,85019,94748,61114,641
₩311,036US$ 266,389
Salaries and wagesSeverance and retirement benefitsDepreciationRentEmployee fringe benefitsTaxes and dues
USD in thousands (Note 2)
2008 2009
Korean won in millions
119
23. Operating result fOr the fOrth quarter (unaudited)The Company’s operating result (unaudited) for the three-month periods ended December 31, 2008 and 2009 are summarized as follows:
24. segment infOrmatiOnThe Company defines its business segments by the nature of services and products as follows:
The following tables present the segment information of business segments and geographical segments as of December 31, 2008 and 2009:
+business segments
2008₩2,711,797
2,295,75022,623
(644,003)
₩ (9,536)
2009₩ 2,578,255
2,101,494154,028
84,887
₩ 1,257
US dollars in thousands (Note 2)
2009US$ 2,208,165
1,799,841131,918
72,702
US$ 1.08
Korean won in millions
Unaudited
Operating revenuesOperating expensesOperating incomeEarnings (loss)Income (loss) per share
(Korean won and US dollars in units)
Airline customersAerospace
In-flight mealsHotel and limousine
Products or servicesTransporting passengers and cargosMaintaining aircraft and manufacturing aircraft parts
Catering for in-flight mealsLand transport, accommodations and others
Major customersIndividual & corporate, GovernmentBoeing Commercial, defenseprocurement agency, and othersSingapore Airlines Ltd. and 27 other foreign airlinesIndividual customers
Operating revenues:External revenuesInter-segment revenuesDecember 31, 2009External revenuesInter-segment revenuesDecember 31, 2008
Operating income (loss):December 31, 2009December 31, 2008
Property, aircraft and equipment, andintangible assets:
December 31, 2009December 31, 2008
Depreciation and amortization:December 31, 2009December 31, 2008
Aerospace
₩ 251,66075,278326,938367,712
9,894377,606
10,20828,377
548,754532,603
17,861₩ 13,816
Airline
₩ 9,054,8187,5789,062,3969,747,1037,3199,754,422
37,400(136,365)
11,250,10310,784,331
775,579₩753,233
In-flightmeals
₩45,457109,372
154,82958,030
103,269161,299
87,89013,925
49,83654,515
6,035₩6,088
Hotel andlimousine
₩41,7686,725
48,49339,733
4,98744,720
(2,122)(5,234)
129,705129,621
3,082₩2,871
Total
₩9,393,703198,953
9,592,65610,212,578
125,46910,338,047
133,376(99,297)
11,978,39811,501,070
802,557₩776,008
Korean won in millions
Financial SectionKOREAN AIRANNUAL REPORT 2009
120
24. segment infOrmatiOn (cOnt’d)
+geOgraphical segments
25. supplementary cash flOw infOrmatiOnSignificant non-cash investing and financing activities December 31, 2008 and 2009 are as follows:
Domestic
₩1,272,525
107,71145,45741,768
₩1,467,461₩1,489,915
Asia
₩2,795,92112,325
--
₩2,808,246₩3,037,608
America
₩2,974,36196,212
--
₩3,070,573₩3,222,616
Middle east/ Europe
₩2,974,36196,212
--
₩3,070,573₩3,222,616
Oceania
₩ 404,296---
₩404,296₩452,773
Total
₩ 9,054,819251,659
45,45741,768
₩9,393,703₩10,212,578
Operating revenues:AirlineAerospaceIn-flight mealsHotel and limousine
December 31, 2009December 31, 2008
Korean won in millions
Transfer of construction-in-progress to property, aircraft, equipment and intangible assets
Transfer of leased aircraft to receivable under capital leaseReclassification of current portion of bondsReclassification of current portion of Korean Won
denominated long-term loansReclassification of current portion of foreign currency
enominated long-term loansReclassification of current portion of obligations under
installment purchasesReclassification of current portion of obligations
under capital leasesReclassification of guaranteed loansReclassification of current portion of ABS loans
2008
₩484,40922,184
420,000
87,467
682,133
149,493
648,38310,662
₩150,211
2009
₩737,280-
1,040,000
321,524
346,329
147,467
772,39210,662
₩48,537
US dollars in thousands (Note 2)
2009
US$ 631,449-
890,716
275,372
296,616
126,299
661,5219,132
US$ 41,570
Korean won in millions
121
INTERNAl cONTROl OvER fINANcIAl REPORTINg REvIEw REPORT
Representative Director Korean Air Lines Co., Ltd.
We have reviewed the accompanying management’s report on the operations of the internal control over financial reporting (ICFR) of Korean Air Lines Co., Ltd. (the Company) as of December 31, 2009. The Company’s management is responsible for the design and operation of its ICFR, including the reporting of its operation. Our responsibility is to review management’s ICFR report and issue a report based on our review. Management’s report on the operations of the ICFR of the Company states that “Based on the assessment of the operations of the ICFR as of December 31, 2009, the Company’s ICFR has been effectively designed and has operated as of December 31, 2009, in all material respects, in accordance with the ICFR standard.”
We conducted our review in accordance with the ICFR review standards established by the Korean Institute of Certified Public Accountants. These standards require that we plan and perform our review to obtain less assurance than an audit as to management’s report on the operations of the ICFR. A review includes the procedures of obtaining an understanding of the ICFR, inquiring as to management’s report on the operations of the ICFR and performing a review of related documentation within limited scope, if necessary.
A company’s ICFR consists of an establishment of related policies and organization to ensure that it is designed to provide reasonable assurance on the reliability of financial reporting and the preparation of financial statements for external financial reporting purposes in accordance with accounting principles generally accepted in the Republic of Korea. However, because of its inherent limitations, the ICFR may not prevent or detect material misstatements of the financial statements. Also, projections of any assessment of the ICFR on future periods are subject to the risk that ICFR may become inadequate due to the changes in conditions, or that the degree of compliance with the policies or procedures may be significantly reduced.
Based on our review of management’s report on the operations of the ICFR, nothing has come to our attention that causes us to believe that management’s report referred to above is not presented fairly, in all material respects, in accordance with the ICFR standards.
We conducted our review of the ICFR in existence as of December 31, 2009, and we did not review the ICFR subsequent to December 31, 2009. This report has been prepared for Korean regulatory purposes pursuant to the Act on External Audit for Stock Companies, and may not be appropriate for other purposes or for other users.
March 5, 2010
This audit report is effective as of March 5, 2010, the independent auditors’ report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors’ report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report.
Financial SectionKOREAN AIRANNUAL REPORT 2009
122Financial SectionKOREAN AIR
ANNUAL REPORT 2009
REPORT ON THE OPERATIONS OF THE INTERNAL ACCOUNTING CONTROL SYSTEM
123
ORGANIZATION CHART
Passenger Business Planning & Administration Flight Operations Planning
Maintenance Planning
Passenger Network Management
Flight OperationsTechnical Support
Engineering
Passenger Revenue Management Line Operations
Material Supply
Flight Standards
Maintenance QualityAssurance
Flight OperationsQuality Assurance
Maintenance TrainingCenter
Planning & Administration
Marketing & Contract
Quality Management
R&D Center
Cargo Business Planning &Administration
Cargo Network & RevenueManagement
Cargo Strategy &Development
Cargo Logistics & Service
Defense & AircraftModification Plant
Commercial AircraftManufacturing Plant
Commercial Aircraft Heavy Maintenance Operations
Avionics & Component Maintenance Operation
MUAVDevelopment Center
Passenger Business IT
Airport Customer Service
Passenger Marketing
Passenger Service Center, Korea
Flight Crew Training Center
Line & Base MaintenanceCenter
Powerplant Maintenance CenterCabin Crew Operations
PASSENGER BUSINESS DIV.
Cabin Crew OperationsPlanning
Cabin Crew Training Center
CATERING & IN-FLIGHT SALES BUSINESS DIV.
HOTEL BUSINESS DIV.
CABIN SERVICE DIV.
AEROSPACE BUSINESS DIV.
REGIONAL H/QINCHEON INT’L AIRPORT
MAINTENANCE &ENGINEERING DIV.
CARGO BUSINESS DIV. FLIGHT OPERATIONS DIV.
Internal Auditing
International Affairs
Legal Affairs
Facilities & Environment
Corporate Safety, Security & Compliance
Procurement
Information Technology
Corporate Communications
Employee Relations
Human ResourcesDevelopment Center
Human Resources
General Affairs
Finance Affairs
CORPORATE STRATEGY &PLANNING DIV.
HUMAN RESOURCES DIV.
CORPORATE FINANCE DIV.
Revenue Accounting
Finance
Accounting
Scheduling
Operations Control
OPERATIONS CONTROL DIV.
Customer Relations
PRESIDENT & COO
CHAIRMAN & CEO
KOREAN AIRANNUAL REPORT 2009
124
EXECUTIVE OFFICERS
Cho,YangHoChairman & CEO
Chi,ChangHoonPresident & COO
COMPANY HEADQUARTERS
Chang,KyungHwanExecutive Vice President
Hwang,SooYoungManaging Vice President
Shin,HyunOhManaging Vice President
CORPORATE STRATEGY &PLANNING DIVISION
Kim,YunHwiVice President
Bang,SunOhManaging Vice President
CUSTOMER RELATIONS
Jeon,SangKiVice President
INTERNAL AUDITING
Kim,SeTaiManaging Vice President
LEGAL AFFAIRS
BlakePeterJohnSenior Vice President
Ban,SeungEumVice President
CORPORATE SAFETY, SECURITY & COMPLIANCE
Park,YongSoonSenior Vice President
Han,KiDooManaging Vice President
INTERNATIONAL AFFAIRS
Yoo,JongSeokManaging Vice President
PROCUREMENT
Lee,SangManManaging Vice President
Kim,ChulWooManaging Vice President
INFORMATION TECHNOLOGY
FACILITIES & ENVIRONMENT
Lee,SooKeunManaging Vice President
ERP PROJECT
Lee,SangManManaging Vice President
Kang,SungMinVice President
Kim,NamSunManaging Vice President
HOTEL BUSINESS DIVISION
Kim,RealVice President
HANJIN GROUP CORPORATE MANAGEMENT
Lee,HwaSeokManaging Vice President
Suh,KangYoonManaging Vice President
Shin,MuCholVice President
Lee,KiKwangVice President
CORPORATE COMMUNICATIONS
Lee,SangKyoonExecutive Vice President
Hur,YoungJinManaging Vice President
Kim,JoonSukManaging Vice President
CORPORATE FINANCE DIVISION
Kim,DaeWon Vice President
Kim,HyunSeokVice President
Kim,HeungSikSenior Vice President
Moon,KapSuckManaging Vice President
OPERATIONS CONTROL DIVISION
Suh,YongWonExecutive Vice President
Kim,YongSoonManaging Vice President
Lee,YouSungManaging Vice President
Lee,KwangSooManaging Vice President
Kim,TaiWonManaging Vice President
Jung,JiYoungManaging Vice President
HUMAN RESOURCES DIVISION
Cho,WonTaeSenior Vice President
LeeJinKulManaging Vice President
Park,HakJinManaging Vice President
Lee,JongSukVice President
PASSENGER BUSINESS DIVISION
Cho,HyunAhSenior Vice President
Cho,ByungTaekManaging Vice President
Chung,JinHongManaging Vice President
CATERING & IN-FLIGHT SALESBUSINESS DIVISION
Yang,JuneYongVice President
Jung,YoonDongVice President
Rhee,SongJongVice President
Kwon,ByungChanVice President
Park,InChaiVice President
Kim,SukWanVice President
Choi,EunJooVice President
Han,DaiHangManaging Vice President
Lee,WooPyungManaging Vice President
Choung,DoKunManaging Vice President
CARGO BUSINESS DIVISION
125
REGIONAL HEADQUARTERS
Lee,NaeKyuManaging Vice President
JAPAN
Woo,KeeHongManaging Vice President
Kim,JongCheolVice President
Park,ByungRyoolVice President
Ma,WonVice President
AMERICAS
Kim,JongHaVice President
Kim,InHwaVice President
Kim,JongNamManaging Vice President
Jung,WooJinManaging Vice President
Kim,KieSickManaging Vice President
Nam,SukWoo Vice President
Kim,WonKyu Vice President
Kwon,HyukMinManaging Vice President
Yeo,WoonJinVice President
CABIN SERVICE DIVISION
Lee,SeungBumManaging Vice President
CHINA
Lee,SoonYoungManaging Vice President
SOUTHEAST ASIA
Kim,JaeHoManaging Vice President
EUROPE & MIDDLE EAST
Kang,KyooWonManaging Vice President
UZBEKISTAN
Hwang,MyungSunManaging Vice President
Kang,KyungBooManaging Vice President
Park,WoonHoVice President
Lee,HyungHoManaging Vice President
Kim,JongDaeManaging Vice President
Lee,HyungKeunVice President
Park,HyungSoonVice President
Kim,EuiHoVice President
Kim,YongChulVice President
KOREA
Lee,YoungDuckSenior Vice President
Kim,KyuHwanManaging Vice President
Ahn,SangHoonManaging Vice President
Lee,SangChelManaging Vice President
FLIGHT OPERATIONS DIVISION
Kang,YoungSikExecutive Vice President
Kim,MaengGonManaging Vice President
Jang,WanSooManaging Vice President
Cho,KyooBinManaging Vice President
Kwon,YoungHwanManaging Vice President
Kim,SungGabVice President
Lee,HakJaeVice President
MAINTENANCE & ENGINEERING DIVISION
Cho,HangJinExecutive Vice President
Kim,SeHanSenior Vice President
Choi,JuneChulManaging Vice President
Yoon,ShinManaging Vice President
Lee,ChangHyoManaging Vice President
Jang,KwangSooManaging Vice President
Do,HyunJunManaging Vice President
Ham,MyungRaeManaging Vice President
Choi,TaiJungVice President
AEROSPACE BUSINESS DIVISION
KOREAN AIRANNUAL REPORT 2009
126
ROUTE NETWORKPASSENGER & CARGO
PASSENGER
CARGO
127
KOREAN AIRANNUAL REPORT 2009
128
DOMESTIC / CHINA / JAPAN NETWORK
PASSENGER & CARGO
PASSENGER
CARGO
DOMESTIC / CHINA / JAPAN NETWORK
DIRECTORY OF REGIONAL / DISTRICT OFFICES
COMPANY INFORMATION
KOREAReservation Center_ 1588-2001Seoul Passenger Sales_ 1588-2001Busan Passenger Sales_ (051) 461-7113Cheongwon Sales_ (055) 296-2006Gangwon Sales_ (033) 253-5561Suwon Sales_ (031) 239-3539Incheon Sales_ (032) 882-5627Gwangju Sales_ (062) 384-9660Daegu Sales_ (053) 606-2055Daejeon Sales_ (042) 862-2001Jeju Sales_ (064) 750-8333Seoul Cargo Sales_ (02) 751-7200Busan Cargo Sales_ (051) 461-7113Gwangju Passenger Service_ (062) 942-0111Gunsan Passenger Service_ (063) 471-5001Gimpo Passenger Service_ (02) 2656-5005Daegu Passenger Service_ (053) 984-0111Busan Passenger Service_ (051) 970-3312Yeosu Passenger Service_ (061) 683-7502Wonju Passenger Service_ (033) 344-2000Ulsan Passenger Service_ (052) 288-0111Incheon Passenger Service_ (032) 742-5152Jeju Passenger Service_ (064) 713-9104Jinju Passenger Service_ (055) 852-3374Chongju Passenger Service_ (043) 213-2107Pohang Passenger Service_ (054) 284-0111Incheon Cargo Service_ (032) 742-5790
JAPANReservation Center_ 0088-21-2001Tokyo Passenger Sales_ (813) 5443-3311Tokyo Airport_ (81476) 32-7561Tokyo Cargo Sales_ (813) 5443-3388Kagoshima Airport_ (8199) 558-3768Komatsu Sales_ (8176) 261-3311Nagasaki Airport_ (8195) 824-3188Nagoya Airport_ (8156) 938-0750Nagoya Sales_ (8152) 586-3311Nagata Airport_ (8125) 271-5541Nagata Sales_ (8166) 264-3311Sapporo Sales_ (8111) 210-3311Shizuoka Sales_ (8154) 829-2650Aomori Airport_ (8117) 729-0511Akita Airport_ (8118) 886-8188Osaka Airport_ (8172) 456-5111Osaka Passenger Sales_ (8166) 264-3311Osaka Cargo Sales_ (8166) 263-8896Oita Airport_ (8197) 537-3316Okayama Sales_ (8186) 294-4951Haneda Airport_ (8135) 756-4808Hakodate Airport_ (8113) 859-3323Fukuoka Airport_ (8192) 477-7561Fukuoka Sales_ (8166) 264-3311
AMERICARReservation Center_ (1) 800-438-5000Los Angeles Passenger Sales_ (1213) 484-5700Los Angeles Airport_ (1310) 646-3033Los Angeles Cargo Sales_ (1310) 410-2000New York Airport_ (1718) 751-2000New York Passenger Sales_ (1213) 484-1900New York Cargo Sales_ (1718) 632-5555Dallas Airport_ (1972) 973-7051Dallas Sales_ (1972) 973-4134Las Vegas Airport_ (1702) 261-6071Vancouver Airport_ (1604) 276-9535Vancouver Sales_ (1604) 248-1146Sao Paulo Airport_ (15511) 2445-4805Sao Paulo Sales_ (15511) 3525-6700San Francisco Airport_ (1650) 821-0600San Francisco Sales_ (1650) 821-0603Seattle Airport_ (1206) 241-1576Seattle Sales_ (1206) 241-1576Chicago Airport_ (1773) 686-2730Chicago Sales_ (1773) 686 2730Atlanta Airport_ (1404) 761-7691Atlanta Sales_ (1404) 761-7691Anchorage Sales_ (1907) 243-3329Washington Airport_ (1703) 572-2420Washington Sales_ (1703) 572-2430Toronto Airport_ (1905) 676-8440Toronto Sales_ (1905) 676-8440Honolulu Aiport_ (1808) 836-1711Honolulu Sales_ (1808) 926-8000Miami Sales_ (1305) 357-5395
EUROPEParis Sales_ (331) 4297 - 3080Paris Airport_ (331) 4862 - 6161Dubai Sales_ (9714) 3377 - 003London Airport_ (020) 8897 - 0030London Sales_ (4420) 7495 - 8641Rome Sales_ (3906) 6595 - 5952Madrid Sales_ (3491) 542 - 5700Milano Sales_ (3902) 7209 - 5654Brussels Sales_ (353) 1799 - 7990Vienna Sales_ (431) 7007 - 32515Stockholm Sales_ (468) 593 - 78861Amsterdam Sales_ (3120) 655 - 6333Oslo Sales_ (47) 6482 - 1932Istanbul Sales_ (90212) 465 - 2650Zurich Sales_ (4143) 443 - 6061Cairo Sales_ (202) 2576 - 8255Copenhagen Sales_ (45) 3251 - 2095Praha Sales_ (420) 22011 - 6827Frankfurt Airport_ (4969) 697 - 64610Frankfurt Sales_ (49180) 500 - 9800Tel Aviv Sales _ (9987) 9770 - 3811
Date of Establishment _June 19, 1962 | Privatized on March 1, 1969
Head Office _1370 Gonghang-dong, Gangseo-gu, Seoul, Korea
Website _ www.koreanair.com
Listing _ The stock was listed on Korean Stock Exchange in March 1966
Paid-in Capital _ KRW 360 billion
Common Stock _ 71,971,631 shares
Preferred Stock _ 1,379,177 shares
General Shareholders’ Meeting _ March 19, 2010
For More Information _e-mail : [email protected]