Excellence Flying to New Heights of
Annual Report 2008
CONTENTS Profile _03 Financial Highlights _04 Highlights of 40 Years & Timeline _06 2008 Highlights _12 Message from the Chairman _14 Board of Directors _18 Corporate Governance _19
Excellence in Growth _20 Business at a Glance _22 Passenger Business _24 Cargo Business _28 Aerospace Business _32 Catering & In-Flight Sales Business _34 Hotel Business _36
Excellence in Service _38 ERP System _40 Maintenance & Engineering _41 Safety _42 Fuel Management _44 SkyTeam Alliance _45
Excellence in Responsiblity _46 Environmental Responsibility _48 Social Contribution _52 Human Resources _54
Finacial Section _56 Management’s Discussion & Analysis _58 Auditors’ Report _78 Financial Statements & Notes _79 Organization Chart _137 Executive Officers _138 Overseas Network _140 Domestic / China / Japan Network _142 Company Information _143
Beyond 40 Years In Pursuit of Higher Excellence Over the past 40 years, as one of the leading international airliners, Korean Air has flown a total of 5,871,520,000 kilometers. This is the equivalent of going around the Earth 146,700 times. In 2009, Korean Air is celebrating its 40th anniversary with a plan to cement its position as a leader in the global air transportation industry. Aiming to post KRW25 trillion in sales and rank 10th and 1st in the global passenger and cargo sectors, respectively, by the company’s 50th anniversary in 2019, Korean Air will soar into a new realm of excellence with a renewed outlook and a strong desire to succeed.
Annual Report 2008
FINANCIAL HIGHLIGHTS Financial Highlights In millions of USD*
In billions of KRW*
2008
2008
2007
2006
2005
2004
Operating revenues
8,121.3
10,212.6
8,812.0
8,077.9
7,584.2
7,210.9
Gross profit
1,106.3
1,391.2
2,022.7
1,773.4
1,692.3
1,668.9
Selling, general & administrative expenses
OPERATING RESULTS
1,185.3
1,490.5
1,385.8
1,276.0
1,259.8
1,284.9
Operating income
(79.0)
(99.3)
636.8
497.4
432.5
384.0
Income before tax
(1,949.0)
(2,450.8)
94.4
487.9
253.0
723.0
Net income
(1,544.7)
(1,942.4)
12.9
383.0
200.4
519.5
Total assets
12,618.4
15,867.6
15,143.7
13,584.7
13,568.6
13,739.0
Total liabilities
10,373.1
13,044.2
10,743.7
9,209.3
9,539.7
9,927.9
2,245.2
2,823.4
4,400.0
4,375.4
4,028.9
3,811.1
Return on average equity
Net Loss
0.2
8.8
5.0
13.4
Return on average assets
Net Loss
0.1
2.8
1.5
3.7
462.0
243.7
210.5
236.8
260.5
9.4
19.4
19.3
19.3
20.5
Fixed charge coverage ratio (times)
1.27
2.2
2
2
1.9
PBR
90.9
117.5
54.2
52.9
33.1
-28,762
180
5,725
2,989
7,765
FINANCIAL CONDITION
Total shareholders' equity
FINANCIAL RATIOS (%)
Debt-to-equity ratio EBITDAR margin
PER SHARE DATA Earnings Per Share (In KRW)
* Korean Won figures are translated, solely for the convenience of readers into U.S. dollars at KRW1,257.50 : USD 1.00, the rates prevailing as of December 31, 2008
Operational Results 2008
2007
2006
2005
2004
Change(%)
Revenue Passenger Carried
21,960,940
22,834,003
22,353,169
21,708,821
21,454,574
-3.8%
Available Seat-Kilometers ('000ASK)
77,139,923
76,181,620
71,894,436
68,658,976
64,651,689
1.3%
Revenue Passenger-Kilometers ('000RPK)
55,054,029
55,353,818
52,177,665
49,046,290
45,999,676
-0.5%
2,156,215
2,281,671
2,115,089
1,981,708
2,017,994
-5.5%
12,179,826
12,992,069
11,661,645
10,830,838
11,014,965
-6.3%
9,005,285
9,677,679
8,857,155
8,139,959
8,345,244
-6.9%
Revenue Freight Tons Carried Available Freight Ton-Kilometers ('000AFTK) Revenue Freight Ton-Kilometers ('000FTK)
4
Operating Revenues
10,213
(in billions of KRW)
7,211
2004
8,078
8,812
2006
2007
7,584
2005
Total Assets (in billions of KRW)
15,144 13,739
2004
13,569
13,585
2005
2006
Operating Income
2007
2008
15,868
2008
637
(in billions of KRW)
384
433
497
-99 2004
Net Income
2005
2006
2007
2008
520 200
(in billions of KRW)
383
13
-1,942 2004
2005
2006
2007
2008
5
Annual Report 2008
Highlights of 40 Years & Timeline
Korean Air, established as a small airline with eight aircraft in 1969, has long been one of Korea’s economic leaders. Adding routes to the Pacific, Europe and the Middle East in the ‘70s, it became the driving force for the nation’s industrial development; Since then, it has elevated Korea’s status as a nation by serving as an official airline for the
1969~2008 >>
Seoul Olympic Games in the ‘80s, opened previously blocked routes to Beijing and Moscow in the ‘90s and played a leading role in organizing the SkyTeam alliance in the 21st century.
6
Our
40 Years
of Everlasting Excellence
Over the past 40 years, Korean Air’s aircraft have flown over 5.87 billion kilometers, the equivalent of circling the earth over 146,000 times, or making 7,700 trips to the moon and back. The total number of passengers carried comes to 472.51 million, and the airline has shipped over 27.3 million tons of cargo. On its 40th anniversary, Korean Air is looking towards the future rather than looking back on the past, and has set a goal to accomplish when it reaches its 50th anniversary. By 2019, the carrier aims to have KRW25 trillion in operating revenue and KRW2.5 trillion in operating profit.
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Annual Report 2008
Mar 1 Korean Air founded
Sep 5 Completed construction of the original KAL Building (now the shipping center ) in Sogong-dong
Oct 2
Sep 10
Established routes from Seoul to Osaka (Japan), Taipei (Taiwan), Hong Kong, Saigon (Vietnam), and Bangkok (Thailand)
Placed a B747 on the transpacific route, making Korean Air the first airline in the world to do so
Oct 2 Entered a B720 airplane into service
Apr 19 Commenced a transpacific cargo service to the U.S. (Seoul-Tokyo-Honolulu-LA)
1972
1969
Mar 29 Opened direct Seoul-New York passenger service
1974
1973 1971
1979 1976 May 21 Launched Seoul-Bahrain passenger service to establish business in the Middle East
Oct 2 Apr 26
Shipped Korea’s first domestically produced 500MD helicopter
Opened a regular Seoul-Tokyo-LA route
Aug 10 Introduced a new B707-320C (HL7406)
Oct 6 Established a Seoul-Paris cargo service to enter the European market (passenger service launched on Mar. 14, 1975)
Sept 9 Manufactured using Korean Air technology the first F-5EF fighter for the ROK Air Force
Jan 1 Established the Frequent Traveler Bonus System (FTBS)
Mar 1 Changed the corporate image and logo
Aug 27 Designated as an official Olympic Torch carrier airline for the 1988 Seoul Olympic Games
May 25 Completed construction of the downtown Seosomun Building
1982 1984 1981 1983
1988 1986 Apr 30 Opened the Gimhae Maintenance Center
1990 Dec 3 Allocated an international air cargo terminal at Los Angeles International Airport
Dec 22
Mar 31
Began using a B747 simulator (at the training center)
Opened Seoul-Moscow-Amsterdam-Zurich passenger route
Mar 27 Shipped a mid-sized Korean helicopter (UH-60P)
Nov 25
Jun 22
Successfully held a test flight of Blue Sky 91, a light aircraft manufactured using Korean Air technology
The SkyTeam global alliance was announced
Jun 27 Introduced Korean Air’s 150th airplane (B777-300)
Oct 10 Opened a cargo facility at JFK Airport in New York
Feb 23 The Bibimbap in-flight meal won the Mercury Prize
Jul 18 Competed construction of a motor assembly factory in Bucheon
Dec 22
1991
Opened the Seoul-Beijing route
1993
1994
May 15 Opened a new passenger terminal at New York’s JFK International Airport with Air France, Lufthansa, and Japan Airlines
Aug 29 Completed the construction of Jeongseok Airport in Jeju Province
2000
1998 1997
1999
May 28 Unveiled the Korean Air Headquarters Building in Gimpo
Oct 6 Began regular passenger service to Cairo, giving Korean Air coverage of every continent except Antarctica
Apr 22 Cho Yang-Ho was appointed Chairman
8
9
10
Jan 23 Launched Jin Air
Feb 13 Sponsored the inclusion of Korean language services at the world’s top three museums
May 20
Aug 27
Started a global forestation project in Mongolia, China and the U.S.
Signed an agreement to jointly develop Navoi International Airport in Uzbekistan
Nov 21 Accelerated fleet renovations by purchasing 25 airplanes
Jul 22 Chairman Cho received the Legion of Honor Award from the French government
2008 2006
May 31
2004
Designated as an official airline for the 2002 FIFA World Cup Korea and Japan
2002
2007 Dec of
2001
2003
2005 Mar 24 Unveiled a new corporate image and uniforms
Apr 1 Mar 29
Announced an order for ten B787 Dreamliners
Marked the opening of Incheon International Airport (including new cargo terminal, catering center and maintenance facilities)
Jul 5 Introduced the Kosmo Sleeper and Prestige Plus seats
Aug 18 Ranked first in international cargo services for four consecutive years
Oct 20 Sep 15 Opened Hyatt Regency Incheon
Oct 23 Signed a contract to purchase 10 A380 airplanes
Announced plans to take part in the production of advanced next-generation airplanes such as the B787 and A350
Total number of passengers surpassed 450 million
11
Annual Report 2008
2008 Highlights
Sponsoring Famous Museums’ New Multimedia Guides
Frequent Flyers Praise Korean Air
Korean Air is partnering with Musee du Louvre to enhance art and cultural understanding for people all over the world. This powerful initiative, unveiled in Paris on February 12, involves an investment of over one million Euros. The exceptional collaboration is the first of its kind between a global airline and an international museum of such stature. As part of the agreement to co-sponsor the Louvre’s innovative new multimedia guide, commentary is translated into seven languages, including English, German and Korean; this is also the first time any guide has been available in their native tongue for the tens of thousands of Koreans who visit the museum.
In April, Korean Air took home two major honors at the 20th annual Freddie Awards, which celebrate the best frequent flyer/hotel guest loyalty programs from around the world. Korean Air was honored as having the best frequent flyer member communications in the Japan/Pacific/Asia/Australia region, "which offers the best member communications and best newsletter that provide helpful, up-to-date information."
In November, Korean Air began sponsoring the State Hermitage Museum in St. Petersburg, Russia, in an effort to add Korean to the museum’s audio tour guide service. Through this sponsorship, the language will be added to the museum’s audio guide program.
Korean Air placed second for Best Customer Service in the Japan/Pacific/Asia/Australia region, with its frequent flyer program that is "the easiest to reach, offers prompt answers to concerns and questions, and handles missing credit and award requests with accuracy and speed."
Donating Relief Goods for China Earthquake Victims In May, Korean Air announced that it would donate relief goods to the victims of the devastating earthquake in Sichuan Province, China.
Korean Air Adds Three More A380s to Its Fleet Order In February, Korean Air announced its decision to purchase three more A380 aircraft. This order is in addition to the five A380 aircraft ordered by Korean Air in 2003. Korean Air will receive the three additional A380s between 2012 and 2013. The first five are due to be delivered between 2010 and 2011. “Our decision to purchase the A380 aircraft is in line with our vision to become a leading global carrier that provides the highest quality of service to our passengers,” said Cho Yang Ho, Chairman and CEO of Korean Air. “The A380 is a comfortable, environmentally friendly aircraft for the 21st century that will enable Korean Air to provide Excellence in Flight to our customers.” The A380 is the largest commercial passenger aircraft in the world, a doubledecker with a 525-seat capacity in its standard configuration. The aircraft’s weight was reduced by using composite materials and enhancing engine efficiency, which lowered fuel consumption by 15% and CO2 emissions by 20%.
Korean Air chartered a Boeing 747-400 freighter plane to transport 2,000 blankets and 3,000 boxes of drinking water (36,000 1.5-liter bottles) - two items that are badly needed by the earthquake victims. The flight carrying the relief goods departed Incheon International Airport on the morning of May 16 and arrived in Chengdu on the afternoon of the same day.
Expanding in China through Code Share In May, Korean Air and China Eastern Airlines agreed to expand their codeshare agreement starting June 1st, as the busier summer season begins. According to the agreement, the two airlines have agreed to codeshares on five major routes operated by both airlines. All flights on routes connecting Incheon with Beijing, Shanghai, Qingdao, Weihai and Changsha are on a free sale codeshare basis. The free sale agreement allows Korean Air to sell seats on China Eastern operated flights without restriction, as long as they are available, and vice versa.
12
13
CEO Re-elected to IATA Board of Governors
Jin Air Flies High
In June, Korean Air Chairman & CEO Cho Yang Ho was re-elected to the IATA (International Air Transport Association) Board of Governors for a two-year term at the 64th IATA Annual General Meeting held in Istanbul. This was Cho’s fifth time being elected to the board, following elections in 1995, 2001, 2004 and 2006. In total, this year’s service will make it Cho’s 10th year of membership on the Board of Governors. He joins the ranks of only three airline CEOs worldwide to have served more than 10 years on the IATA Board, and becomes the first and only Asian airline CEO to do so.
In July, Jin Air, Korea’s premium short-haul carrier, soared high on its maiden flight. A variety of events took place at Gimpo Airport to celebrate the inaugural flight of the new airline, which is pursuing a simple yet sophisticated approach to air travel. At the check-in counters, a DJ livened up the mood with lively music. A photo zone was installed in front of the counters, where the maiden flight passengers could get photos taken for souvenirs. In front of the gate, passengers could leave messages on a jean signboard congratulating the company on its first flight. Instead of the ordinary tape cutting ceremony at the gate, the Jin Air CEO and invited VIPs unraveled a huge ribbon, as if opening a big present for the passengers.
Grandstar Cargo Conducts Inaugural Flight In June, Grandstar Cargo International Airlines Co., Ltd., started official operation with an inauguration flight from Tianjin to Frankfurt using a Boeing 747-400 freighter. Grandstar Cargo International Airlines Co., Ltd. was established in December 2007 as a joint venture cargo airline between Sinotrans Air Transportation Development Co., Ltd. (51%), Korean Airlines Co., Ltd. (25%), Hana Capital Co., Ltd. (13%), and Shinhan Capital Co., Ltd. (11%). Its business scope covers domestic and international cargo and mail air transportation and relevant businesses, the leasing of aircraft for self-use, the repair and maintenance of selfused aircraft, the aircraft charter business, inter-airline agency services, and import and export services and related ground services.
Enhancing In-flight Meal Quality In July, Korean Air and Inha University held the opening ceremony for the Food Safety Research Center on July 1st, 2008. Established with the support of Korean Air, the center is located at Inha University. Opening the center allows Korean Air to further strengthen hygiene inspection and enhance the quality of ingredients used for in-flight meals and catering. The Food Safety Research Center is equipped with 45 state-of-the-art analytical instruments.
Korean Air Partners with Los Angeles to Plant and Care for Urban Trees In December, Korean Air announced that it is donating $160,000 to the Million Trees Los Angeles (MTLA) initiative developed by Los Angeles Mayor Antonio Villaraigosa to create and sustain urban forestry. Korean Air made this donation as part of its international commitment to reforestation and tree preservation throughout the world. The Korean Air partnership in Los Angeles will help plant, water and care for urban trees throughout the city.
Korean Air Starts Web Check-In Service Starting in December, passengers were able to embark on their travel hassle-free. From seat assignment to getting a boarding pass, the entire check-in process has gone online. The web check-in service is available between 4 and 24 hours before the scheduled departure time of the flight. Any member of www.koreanair.com holding a valid international flight e-ticket and traveling to a destination where a visa is not required is eligible to use the service. This service is expected to reduce lines at the airport and allow more passengers to select the seat of their preference.
Annual Report 2008
Message from the Chairman
14
Despite the global economic issues, Korean Air did not and will not back down. Instead, we are turning these challenges into opportunities by contributing to the development of markets offering growth potential.
Dear Shareholders,
A CHALLENGING BUSINESS ENVIRONMENT
Thank you for your support of Korean Air in 2008. While the worldwide recession continues, we sincerely appreciate your continued interest and attention and want to share with you some of last year’s highlights. Last year, Korean Air set a new record by posting KRW10.2 trillion in revenues, the highest-ever in our corporate history, and a nearly 16% revenue increase year-on-year. Also worth noting is the KRW22.6 billion in operating profits Korean Air recorded during our 2008 fourth quarter, despite a worldwide drop in air travel demand. Unfortunately, due to the tremendous increase in fuel costs, operating losses stood at KRW99.3 billion. Despite the global economic issues, Korean Air did not and will not back down. Instead, we are turning these challenges into opportunities by contributing to the development of markets offering growth potential. For example, two major projects took off last year. Korean Air launched our subsidiary Jin Air to compete with low-cost carriers and the airline made its maiden flight in July 2008. We believe that Jin Air will quickly become Asia’s top short-haul carrier. In addition, our Chinese joint venture cargo airline, Grandstar, launched service between Tianjin and Frankfurt in early 2008. We anticipate great achievements from this joint venture. Korean Air also launched new routes last year. In the passenger sector, we’re now serving Tashkent, the capital of Uzbekistan, Milan, Italy, Munich, Germany and Tel Aviv, Israel. Korean Air now has the largest air transportation network between Asia and Europe, serving 18 cities in 15 countries. We also launched new, non-stop service from Los Angeles to Sao Paulo, Brazil’s economic center and fly from more cities in the Americas to more cities in Asia than any other airline. In the cargo sector, Korean Air has been engaged in the Tianjin Cargo Terminal project in China that serves our Grandstar joint venture. In addition, we plan to turn Navoi Airport into a Central Asian logistics hub by taking an active role in Uzbekistans Navoi International Airport development. Our global experience in developing airports and aviation facilities is a real benefit for that region. Our activity in profitable new markets and investing in growing areas has built a stable foundation for Korean Air’s long-term success. And these efforts already are paying off. We topped the list for commercial airline cargo operations for the fourth consecutive year in 2007, according to the
15
Annual Report 2008
Our plans for 2009 are ambitious yet attainable and we look forward to this year with cautious optimism. We are laying the foundation for long-term growth by making this economic crisis work for us, not against us.
International Air Transport Association (IATA) and were ranked first for the fourth consecutive year in global customer satisfaction by the Japanese Management Association Consultants. In the catering sector, Korean Air was honored by the Korean Ministry for Food, Agriculture, Forestry and Fisheries, recognizing our contribution to the improvement of in-flight meals. Our catering division supplies meals for more than 30 customer airlines and is an impressive operation. Korean Air not only is devoted to being a top airline for people, products and ideas, but we are dedicated to promoting cultural programs and events to enrich our communities. Some of these include equipping three of the world’s top museums - the Louvre, the British Museum and the Hermitage Museum - with new audio tours that include the Korean language. Our award-winning Flying Art Ambassadors offer passengers tips on the must-see museums and hot spots at their chosen destinations. And we make Korean music and films available on all our flights so passengers may enjoy our native culture and customs. Our plans for 2009 are ambitious yet attainable and we look forward to this year with cautious optimism. We are laying the foundation for long-term growth by making this economic crisis work for us, not against us. We aim to post KRW10.3 trillion in revenues and KRW600 billion in operating profits in 2009, based on the assumption that oil prices and interest rates will continue to remain high. In other words, we can and will achieve our goal of KRW600 billion in operating profits even if the business environment continues to be unfavorable. That doesn’t mean that 2009 isn’t going to have its challenges. We do not expect the economy to recover quickly. The aviation industry will see a number of changes and consolidations. For us, the weak Korean won makes travel costly for Koreans and impacts overseas travel demand. Despite this, Korean Air can capitalize on such positive factors as Korea’s inclusion in the U.S. Visa Waiver Program and the continuing liberalization of air transport. We are reinforcing our profit-centered business by promoting demand for premium services and increasing our share of overseas sales. At the same time, we are managing our resources and streamlining our flight schedules to increase our competitive edge and optimize our equipment. We are dedicated to fostering a corporate culture that can react quickly to change and hiring the best and brightest to help guide us through this economic turbulence.
16
As a further part of our strategy to enhance competitiveness, we are taking possession of three new B777-300ERs and two new B737-800s in 2009. We also will convert a B747-400 passenger jet into a cargo plane, modernizing our fleet and increasing our supply of cargo aircraft. Korean Air is celebrating its 40th anniversary in 2009. However, more significant than our 40 th anniversary is our energized mindset towards our 80th and 100th anniversaries. Over the past 40 years, we have faced numerous hurdles to make Korean Air what it is today: a major global airline. Everyone at Korean Air takes pride in this fact. And while the business environment will continue to be challenging in 2009, I am confident that there is no obstacle that we cannot overcome. Every employee at Korean Air is committed to achieving our goal of being a leading global carrier by braving difficult times and recognizing opportunities. I hope that you, our shareholders, continue to show interest in and support of Korean Air as we grow into the future. Thank you.
Cho, Yang Ho Chairman & CEO
17
Annual Report 2008
Board of Directors
❶
❷
❸
❹
❺
❻
❼
❽
❾
❿
❶ Cho, Yang Ho Chairman & CEO
❷ Lee, Jong Hee President & COO
❸ Lee, Tae Hee General Counsel
❹ Cho, Hang Jin Executive Vice President Korean Air Aerospace Business Division
❺ Suh, Yong Won Executive Vice President Korean Air Human Resources Development
❻ Hong, Young Chul Director Chairman & CEO KISWIRE
❼ Park, Oh Soo Director Professor Seoul National University
❽ Kim, Jae Il Director Professor Seoul National University
❾ Lee, Sog Woo Director Lawyer Doo-re Law Firm
❿ Lee, Hee Beom Director Chairman STX Energy
Lee, Yun Woo Director Chairman, Board of Directors Daewoo Securities
18
Corporate Governance
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.
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.
19
40 years of Excellence in Flight Korean Air continues to grow as a leading international airliner with support from our customers and shareholders. We will turn the global economic crisis into an effective stepping stone for cementing our position in the global aviation industry. The employees at Korean Air will achieve this goal through hard work and the promotion of innovation. The more dedicated we are, the higher and faster we can fly.
E
X
C
E
L
L
E
N
C
E
Total Accumulated Flight Distance over 40 Years
5,871.52
million km
I
N
G
R
O
W
T
H
Annual Report 2008
Business at a Glance
Business Profile
PASSENGER BUSINESS
CARGO BUSINESS
Korean Air’s Passenger Business Division has paved the way for continued growth with a variety of sales activities, such as the development of new markets, the expansion of our global network, the enhancement of premium services, and the rearrangement of flight schedules to fully maximize aircraft usage. As a result, passenger revenue increased by 14% over last year to KRW5,953.3 billion.
Despite a global recession, Korean Air Cargo posted KRW 3.0 trillion in revenue for 2008, a 19.5% increase compared to 2007, with yield increasing by 29%. Since 2004, Korean Air’s cargo division has been ranked the world’s number one in FTKs by the International Air Transportation Association (IATA), and Korean Air Cargo expects to retain that top position again in 2008 considering the prospective performance of major competitors.
Operating Revenues (In billions of KRW)
4,757.0
2006
0
1,000
2,000
3,000
4,000
5,000
5,953.3
2,533.0
2007
5,953.3
2008
2,370.8
2006
5,217.1
2007
3,026.8
2008
6,000
0
1,000
2,000
3,000
3,026.8
4,000
22
23
Last year, Korean Air set a new record by posting KRW10.2 trillion in revenues, the highest-ever in our corporate history, and a nearly 16% revenue increase year-on-year. Also worth noting is the KRW22.6 billion in operating profits Korean Air recorded during our 2008 fourth quarter, despite a worldwide drop in air travel demand. CATERING & IN-FLIGHT SALES BUSINESS
HOTEL BUSINESS
Korean Air’s Aerospace Division has been extending its capabilities to commercial aircraft structure manufacturing, satellite development and other areas in the industry to optimize its business structure. The corporation has successfully managed all of its business sectors for over 30 years. Since 1978, the Aerospace Division has become the Asia-Pacific hub for aircraft maintenance, offering services to over 3,500 aircraft so far.
Korean Air Catering currently supplies an average of 44,359 meals per day to Korean Air as well as nearly 30 other flag carriers. Korean Air Catering accounted for approximately 70% of the domestic in-flight meal market. Korean Air’s catering business aims to please customers and fulfill its responsibilities. We will accomplish this by publicizing the excellence of traditional Korean cuisine, and by developing new menus.
Korean Air operates three hotels in Korea and one in the U.S. Through the hotel business, Korean Air not only maximizes customer satisfaction but also creates synergy between hotels and its core transportation operations. The KAL limousine bus service provides customers with the most convenient way to transfer to and from the airports. Revenue from the service posted an increase of 3.3% from 2007 to KRW 18 billion. In addition, Korean Air recorded $184 million in in-flight sales in 2008.
211.6
2006
367.7
2008
0
100
200
2006
36.5
2007
51.3 58.3
2007
35.2
2008
58.0
2008
2006
235.1
2007
300
367.7
400
0
20
40
60
80
58.0
90
100
0
EXCELLENCE IN GROWTH
AEROSPACE BUSINESS
39.7
20
40
60
80
39.7
90
100
Annual Report 2008
Passenger Business
Our Passenger Business Division continued to grow through a variety of tactics including increased overseas sales, developing new markets, expanding our global route network, premium service enhancements and rearranging our schedules for maximum aircraft usage.
Business Review in 2008 The world airline industry faced immense challenges in 2008 based largely on the worldwide economic recession and high oil prices. Concurrently, the weak Korean Won dropped the demand for passenger travel, decreasing the number of outbound Korean travelers by approximately 10%. Despite these hurdles, our Passenger Business Division continued to grow through a variety of tactics including increased overseas sales, developing new markets, expanding our global route network, premium service enhancements and rearranging our schedules for maximum aircraft usage. As a result, passenger revenue increased 14% to more than 5.9 trillion Won compared with the previous year.
Revenue Enhancement Activities Korean Air inaugurated round-trip flights to Munich, Sao Paulo, Tashkent, Tel Aviv and Milan from Incheon and started service between Gimpo and Osaka, Japan and Guam. These markets were tested and proven to have potential. We also made adjustments in our route structure to promote sales volumes in overseas markets in order to offset the depreciation of Korean Won. By these ongoing endeavors, revenue from overseas markets recorded a 38% jump from last year. The strong Japanese Yen produced a strong demand for transportation from Japan to and beyond Korea. But the demand from Korea to Japan decreased sharply, shrinking the total carriage between Korea and Japan by 2%.
24
25
Korean Air has added new routes to Munich, Tashkent, Tel Aviv and Milan during the 2008, resulting in a 2% increase in volume for this region from last year. Korean Air now has one of the strongest sales networks of any Asian airline connecting Asia and Europe.
Seat Class Composition by Revenue Terms EXCELLENCE IN GROWTH
The number of passengers flown to mainland China decreased by 15% due to the earthquake in Sichuan Province and strengthened security measures for the Bejing Olympic Games. Incoming passengers from China increased 13%. And on June 1, 2008, Korean Air signed a code-share agreement with China Eastern Airlines(MU), one of China’s major airlines, and added more convenience for our passengers.
Our Passenger Business Division reinforced sales from Southeast Asia to and beyond Seoul to other cities around the world.
The effect of the economy and the depreciation of the Korean Won have diminished tourist travel to Southeast Asia so our Passenger Business Division reinforced sales from Southeast Asia to and beyond Seoul to other cities around the world. This resulted in a 1% higher traffic volume on our Southeast Asia routes compared to last year. Korean Air also managed to maintain last year’s load factors to Oceania through increased and more aggressive sales. Even though air transportation demand from Korea to America diminished, we kept the same level of load factors compared to last year by adjusting capacity and increasing overseas sales. The relaunch of service to Sao Paulo opened up opportunities for sales expansion in Latin America. Meanwhile, the US has lifted Korean visa requirements and this should establish a foundation for steady growth of travelers from Korea to America. Demand between Korea and Europe has been increasing since 2005. Korean Air has been responding to this trend and added new routes to Munich, Tashkent, Tel Aviv and Milan during the 2008, resulting in a 2% increase in volume for this region from last year. Korean Air now has one of the strongest sales networks of any Asian airline connecting Asia and Europe.
Annual Report 2008
The Passenger Business Division carried out a variety of activities to reduce operating costs and enhance cost productivity.
Cost Saving Activities
International Passenger Market Share (Korea In/Outbound, No. of Passengers)
0
The Passenger Business Division carried out a variety of activities to reduce operating costs and enhance cost productivity. Primarily, we have increased aircraft utilization and created more efficient schedules, with the ability to adjust quickly to changing demand.
39%
2004 2005
39%
2006
38%
2007
37%
2008
37% 20
IT-Based Service
40
60
80
100
Korean Air has recognized the critical role IT plays in our business. By installation of Enterprise Resource Planning (ERP), our Passenger Business Division is managing resources more efficiently. The year 2008 also has seen passenger service improvements in relation IT. Web check-in, an online chat service, the introduction of SMS and our web-based reservations and ticketing streamline procedures for our customers.
Customer Services Korean Air has been strengthening customer service by introducing new products, providing premium care, offering City Guidebooks and launching the Flying Art Ambassadors who can give our passengers tips on local museums and must-see sites. Korean Air is promoting culture for its customers and the general public by supporting three major museums (Le Musee du Louvre, The British Museum, Hermitage Museum) by installing new museum guide systems that include the Korean language as well as several others.
26
Domestic Passenger Market Share (No. of Passengers)
65%
2004 2005
66%
2006
65% 58%
2008 0
20
40
60
The airline also takes a lead in publicizing Korean traditional music worldwide. Passengers of Korean Air can hear Korean traditional music inflight by using the channel reserved by The National Center for Korean Traditional Performing Arts.
Award
62%
2007
EXCELLENCE IN GROWTH
In June 2008, Korean Air was ranked as the number one air carrier in the Global Customer Satisfaction Competency Index(GCSI) for the 4th consecutive year by the Japan Management Association Consultants, Inc. (JMAC).
80
100
27
In June 2008, Korean Air was ranked as the number one air carrier in the Global Customer Satisfaction Competency Index(GCSI) for the 4th consecutive year by the Japan Management Association Consultants, Inc. (JMAC). It also was selected as “Best Airline in Asia” and “Best Business Class to Asia/Trans-Pacific” together with” Best Airline Advertising Campaign” for 2008 by Business Traveler magazine. The airline also was high ranked and honored by readers of Conde Nast Traveler and Travel & Leisure.
Going Forward It seems that the airline industry will have to weather the long term economic conditions and sustain itself until world recovery takes place. However, Korean Air has a profit-focused contingency plan. Our Passenger Business Division will achieve its goals by making use of increased opportunities such as the US visa waiver program, a more liberalized environment created by the proposed Canadian open skies agreement and aggressive overseas sales.
Annual Report 2008
Cargo Business
Since 2004, Korean Air’s Cargo business has been ranked the world’s number one in FTKs by the International Air Transportation Association (IATA) for four consecutive years.
Business Review in 2008 Category AFTK MIL TONKM FTK MIL TONKM Carried Ton TON ￠/TKM Yield KRW/TKM REV MIL WON
2008 12,180 9,005 2,156,215 29.53 313 3,026,849
2007 12,992 9,678 2,281,671 26.07 242 2,532,957
Vs Last Year -6% -7% -5% 13% 29% 20%
Despite a global recession, Korean Air Cargo posted KRW 3.0 trillion in revenue for 2008, a 20% increase compared to 2007, and its yield increased by 29%. Because of decreased cargo demand during the last half of 2008, Korean Air Cargo operated an adjustable schedule that achieved a 74% load factor similar to last year. By comparison, other Asia Pacific carriers’ load factors fell by an average of 6.6% and the average capacity rate fell by an average of 0.5%. Since 2004, Korean Air’s Cargo business has been ranked the world’s number one in FTKs by the International Air Transportation Association (IATA) for four consecutive years. It expects to retain that top position again in 2008. All of these achievements were made possible by Korean Air’s strengthening of its overseas sales capabilities and networks and increased cooperation with global partners.
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29
Korean Air Cargo plans to develop Navoi Airport as a logistics hub of central Asia by a combination of the airline’s advanced logistics know-how, the geographic advantages of central Asia and the support of the Uzbekistan government.
Market Developing Activities Total tons of freight carried
millions
In addition, Korean Air Cargo serves 20 cities in China, and operates dedicated freighters to seven destinations including Shanghai, Beijing and Hong Kong. Meanwhile, the airline is developing a cargo terminal in Tianjin. Korean Air has established a joint venture with China cargo giant, Sinotrans, to form Grandstar Cargo, based in Tianjin. Plans are underway to launch new routes and grow the business through common synergies. In August 2008, Korean Air inaugurated three flights per week to/from Navoi, to establish the airline’s strength and invest in the potential growth of Central Asia. Korean Air Cargo plans to develop Navoi airport as a logistics hub of central Asia by a combination of the airline’s advanced logistics know-how, the geographic advantages of central Asia and the support of the Uzbekistan government. Projects planned include both air and land transport capabilities.
Cost Saving Activities Increased fuel prices of up to $140 per barrel eroded profitability in the air cargo industry, and Korean Air Cargo’s variable costs reached an all-time high. To overcome this adverse situation, the airline reduced flight frequencies and suspended service to unprofitable routes. For instance, in 2004, the airline launched Hangzhou as an alternative for Shanghai. But service was suspended this year due to smart route management directives. Korean Air Cargo has made strides in reducing ground handling fees and has negotiated landing fee discounts and/or operation subsidies with local airports around the world including Toronto, Canada and Guangzhou, China. In addition, direct cost cutting continued this year, producing signficant results.
EXCELLENCE IN GROWTH
2.2
This year was an active year for Korean Air Cargo. Cargo service was launched to Navoi, Uzbekistan and frequencies were increased to Munich and Tel Aviv. Korean Air Cargo also made use of its passenger flights to supply Munich, Tashkent, Milan and Sao Paulo with cargo capacity.
Annual Report 2008
Outlook in 2009 Lower oil prices are helping airlines decrease operational costs and air cargo airlines are sustaining themselves by strengthening their competitiveness through mergers and acquisitions, restructuring and other tactics.
The global economic slump is not expected to improve in 2009, which means the air cargo industry will have to face continued unstable conditions. The IMF forecast shows that the world economy will grow up to 0.5%; however, the U.S, Japan and Euro zone will see minus growth. China, which has shown a rapid growth rate of over 10% per year, is also expected to slow only 6.7% in 2009. The economic contraction of the Asia/Pacific region, which had been responsible for 45% of the worldwide air cargo demand, will continue its decrease by approximately 5% over last year. But lower oil prices are helping airlines decrease operational costs and air cargo airlines are sustaining themselves by strengthening their competiveness through mergers and acquisitions, restructuring and other tactics. While some leading cargo carriers are restructuring capacity and routes, Korean Air Cargo believes that the passive strategies of other carriers will give it the rare opportunity to enlarge its market share.
Business Plan in 2009 2009 Cargo Business Plan Chart Category
2009 PLAN
AFTK
MIL TONKM
11,496
FTK
MIL TONKM
9,053
Yield
￠/TKM
26.5
Yield
KRW/TKM
318
REV
MIL WON
2,950,000
Amid challenging business conditions, the Cargo Business Division’s primary goal in 2009 is to maximize revenues. By strengthening relationships with global forwarders and exploring new markets, it seeks to expand regular demand. Paralleling those sales efforts, it will reinforce profitability through route optimization, efficient capacity management and cost savings in cargo handling. The 2009 revenue target has been set at KRW 2,950 billion, more than 3% over last year despite an uncertain environment. Costs are expected to be decreased by more than 10% over last year, mostly due to fuel expense savings following the recent oil price decline. To achieve this aggressive target, Cargo’s Business Division has set three core objectives.
30
EXCELLENCE IN GROWTH
The Cargo Division will continuously explore new opportunities in markets such as Sweden and South America.
KE's Share in Korean Market
2005
47%
2006
47%
2007
47% 48%
2008 0
Increase overseas regular demand The Cargo Division will continuously explore new opportunities in markets such as Sweden and South America. It also will grow and strengthen partnerships with global forwarders and expand tri-party contracts with multi-national companies. On the front lines, any barriers in promoting sales will be removed so that sales forces can be as effective as possible.
47%
2004
10
20
30
40
31
50
Sustain profit-based capacity management Capacity will be closely monitored and managed. Monthly schedules will be planned based on a weekly demand forecast and the profitability of each branch. Route optimization will be achieved by route simplification, adjustment of flights to demand and real time demand monitoring. Expand revenue shares of high yield products To supply stable capacity and promote sales of high yield products into South America, the airline’s Cargo Division will keep expanding its operation in Sao Paulo with other airlines. In addition, it will enhance its overall profitability through the development of high yield and charter sales worldwide.
Annual Report 2008
Aerospace Business
Since 1978, the Aerospace Division has become the Asia-Pacific hub for aircraft maintenance, delivering over 3,500 aircraft so far.
Introduction The history of Korea’s aerospace industry began with the production of the 500MD helicopter by Korean Air in 1976. Within a relatively short time, Korean Air had manufactured and delivered the F-5 “JeGongHo” Fighter - representing a milestone in the Korean aerospace industry. The company also produced the UH-60 BlackHawk, which possesses superior mobility and a longer service life. Korean Air’s Aerospace Division, established 30 years ago, has been extending its capabilities to commercial aircraft manufacturing, satellite development and other areas in the industry to optimize its business structure. The Aerospace Division’s main plant, the Tech Center, is located in Busan on a 170-acre site and features aircraft hangars, painting and electronic component overhaul facilities and more. Korean Air also owns and operates the Korea Institute of Aerospace Technology, located on a 40-acre site in Daeduk Science Town that promotes state-of-the-art technology in aerospace design and development. Since 1978, the Aerospace Division has become the Asia-Pacific hub for aircraft maintenance, delivering over 3,500 aircraft so far. With its vast array of experience, the division now provides logistics support for F4 fighters, P-3C anti-submarine patrol aircraft, 500MDs, UH-60s, CH-47s, Lynxes, and ALT-III helicopters for the Korean government, and A-10 Attackers, F-15 and F-16 fighters, and CH-53 helicopters for the U.S. government.
32
33
By teaming up with leading global aircraft manufacturers such as Boeing and Airbus, Korean Air’s Aerospace business has marked a turning point and has become a contender in the aerospace industry.
2008 Business Review
Revenue(Commercial)
The division has been working with Boeing for several years to develop the next generation Boeing 787 Dreamliner aircraft, and is playing a leading role in the joint manufacturing of that airplane. Korean Air is one of Boeing’s seven international partners. The Aerospace Division has invested equipment and facilities to manufacture the 787’s advanced composite materials, and developed new equipment to design and manufacture 787 parts. Participating in these programs and teaming up with major companies around the world is a stepping stone in Korean Air’s pursuit to become respected as a global leader and to share others’ best practices. In 2008, Korean Air’s Aerospace Division signed a contract with Airbus to supply A330/340 Section 15 segments and develop an A350 cargo door package. Using this as a platform, the department is now in talks with Airbus about participating in the development of the A350 wide-body. For providing excellent quality and on-time deliveries, Boeing selected Korean Air’s Aerospace Division as a “Supplier of the Year.” Having won this award once before in 2001, the department is now recognized as one of Boeing’s best partners. The Aerospace Division has experienced continued growth in the space industry. Major ongoing space projects include integration of the KSLV-I (Korea Space Launch Vehicle) system and development of the main buses and solar array systems for Arirang satellites 3-5. The COMSAT (Communication, Ocean and Meteorological Satellite) antenna development project also was successfully completed and preliminary research activities on liquid rocket engine systems integration and test facilities were begun.
(In billions of KRW)
In 2007, the Aerospace Division successfully completed development of a close-range UAV (Unmanned Aerial Vehicle) named KUS-7 and high-precision GPS navigation system projects. Based on this success, the latest model, KUS-9, intended for both civilian and military use, is under development with a test flight set for 2009. Additionally, the division began to develop MUAVs (Medium-altitude UAVs) in 2009 and is pushing ahead to be a UAV market leader.
116
2004
109
2005
126
2006
158
2007
245
2008
Going Forward 100
50
0
150
200
250
Revenue(Military) (In billions of KRW)
85
2004
79
2005
86
2006
77
2007
122
2008 0
Based on the results of Korean Air’s on-time, high-quality deliveries, Korean Air’s Aerospace Division has started developing 787 derivatives. In 2009, the department will continue to increase its active participation in the development of new aircraft such as Boeing’s 787-9s, 747-8s and the Airbus A350 XWB, and will obtain the necessary resources and manufacturing capacity to meet production needs for the anticipated increase in 787 programs.
40
80
120
160
200
Korean Air’s aerospace sector is planning to branch out into commercial aircraft heavy maintenance and component overhauls of military aircraft. It also will continue conducting research on liquid rocket engine system integration and testing in an effort to bolster Korea’s space industry presence, with a focus on UAS (Unmanned Aerial Systems) for both the defense and civilian markets. With a revenue target for 2009 of $300 million, Korean Air’s Aerospace Division is planning to increase synergy and efficiency, and adapt it operations to meet changes in a changing world.
EXCELLENCE IN GROWTH
Korean Air’s Aerospace Division is participating in the Korea Helicopter Program (KHP) and developed the vehicle’s aft fuselage and tail rotor system. It also performed a structure and aviation performance upgrade on US Air Force F-16 fighters and successfully recovered ROKAF’s C-130 transport plane that was damaged in an accident. The division recently commenced its Boeing 747 cargo conversion program and successfully delivered four aircraft by the end of 2008.
Annual Report 2008
Catering & In-flight Sales Business Korean Air Catering currently supplies an average of 44,359 meals per day to Korean Air as well as nearly 30 other major airlines, including Singapore Airlines, Air France, United Airlines, and Cathay Pacific.
Catering Korean Air’s airline catering business produces and serves meals that satisfy air travelers’ wide array of tastes. Airlines create menus based on customer preferences and prepare them at production centers according to flight plans. In the air, flight attendants re-cook them in the airplane’s kitchens and serve them to the passengers. When Incheon International Airport opened in 2001, Korean Air built a catering center there with advanced automation facilities. Korean Air Catering currently supplies an average of 44,359 meals per day to Korean Air as well as nearly 30 other major airlines, including Singapore Airlines, Air France, United Airlines, and Cathay Pacific. Korean Air Catering accounted for approximately 70% of the domestic in-flight meal market. In 2008, the average daily production of in-flight meals by Korean Air Catering fell from 2007 by 4.5%, but our Incheon Catering Center produced a record 57,963 meals in one day. The Busan Catering Center also has a maximum production record of 6,450 meals, the highest number for the center in a single day. These records were established based on an increase in departure demand from regional airports. In addition, Korean Air installed sophisticated equipment and developed a variety of menus in line with the launch of our new corporate identity. Backed by this activity, we won accolades from the PAX International magazine readers for the fourth year in a row from since 2005, acknowledging the excellence of our in-flight meals. Korean Air’s catering business aims to please customers and fulfill its responsibilities. We will accomplish this by publicizing the excellence of traditional Korean cuisine, and by developing new menus that are sensitive to regional and route-based preferences and the unique needs of our customers.
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35
In 2009, Korean Air expects revenues 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.
EXCELLENCE IN GROWTH
This outstanding performance in in-flight sales was possible thanks to our cabin crews' endeavors as well as continuous support from the management.
In-flight Sales Korean Air recorded $184 million in in-flight sales in 2008. While passenger transport decreased by 2.1% in 2008, in-flight sales increased about 12% during the same period. This outstanding performance was possible thanks to our cabin crews' endeavors as well as continuous support from the management. Another contributing factor for this sales record was Korean Air’s unique pre-order system that offers our passengers the benefits of advance ordering. Also, the number of passengers who purchased through our on-line channel has constantly increased. Korean Air introduced 85 new items and 101 upgraded items in 2008 to adapt to our passenger's rapidly changing taste. In 2009, Korean Air expects revenues 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.
Annual Report 2008
Hotel Business
Through the company’s hotel business, Korean Air not only maximizes customer satisfaction by providing high-quality services, but also creates synergy between the hotel’s and the airline’s core competencies.
Korean Air Hotels 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 synergy between the hotel’s and the airline’s core competencies. Combining a contemporary design and state-of-the-art technology 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 7.9% and 9.0% respectively, as they promoted their specialized strengths. Currently, large long-term investments are being made on the Wilshire Grand Hotel’s facilities, including the guest rooms. These investments will make the hotel more profitable and provide customers with a more hospitable experience.
36
37
Despite fierce competition in the hotel business, the Hyatt Regency Incheon and KAL Hotels recorded an increase in revenue of 7.9% and 9.0% respectively, as they promoted their specialized strengths.
EXCELLENCE IN GROWTH
KAL Limousine Bus 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. Revenue from the service posted an increase of 3.3% from 2007 to KRW 18 billion. 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 old vehicles with new ones and offering better schedules and routes.
A Commitment to Excellence in Flight Customers want better service first and foremost, and competition within the airline industry is getting fiercer every day. From departure to arrival, Korean Air is putting the utmost effort into making our passengers feel as safe and comfortable as if they were in their own homes. Flying with Korean Air is a special experience that our passengers cherish wherever and whenever they fly, and we believe that they deserve the finest service an airline can offer.
E
X
C
E
L
L
E
N
C
Total Accumulated Number of Passengers for 40 Years
472.51
million
E
I
N
S
E
R
V
I
C
E
Annual Report 2008
ERP System Opens the Door to “System-based Management” at Korean Air In January 2009, Korean Air successfully opened the first phase of its ERP (Enterprise Resource Planning) system after a year of working with Oracle
Korean Air’s ERP systems will enhance the transparency of its accounting process through the emphasis of international finance standards.
In January 2009, Korean Air successfully opened the first phase of its ERP (Enterprise Resource Planning) system after a year of working with Oracle, the world’s largest enterprise software company. (ERP is an enterprise-wide information system designed to coordinate all the resources, information, and activities needed to complete business processes.) Oracle and Korean Air reached a strategic global partnership agreement to build a next generation integrated information system for the airline. Korean Air has been focusing on laying the foundation to become a leading global carrier based on its competitiveness in passenger & cargo transportation, and ERP systems will enable the company to succeed in such efforts. In addition to increased competitiveness, Korean Air’s ERP systems will enhance the transparency of its accounting process through the emphasis of international finance standards. To reduce costs Korean Air also is enhancing its procurement process and systems that support identifying and fostering strategic suppliers. ERP implementation in the aerospace & defense (ASD) business unit will dramatically increase productivity and global revenue generation, thereby helping the business unit to become a model in Korean Air’s future. Following the success of the first phase, Korean Air plans to open ERP systems for its catering and aircraft maintenance (MRO) divisions by 2010, giving the airline fully integrated decision-making capabilities. In summary, ERP systems will drive the momentum for Korean Air to focus on continuous innovation in internal capabilities and to build its competitiveness in the global market, contributing to customer and shareholder value creation as a leading global carrier.
40
41
Maintenance & Engineering 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’.
In May 2008, Korean Air was nominated for Airbus’ A330 Operational Excellence Award. Since introducing Airbus aircraft to its fleet in 1974, Korean Air has won awards almost every year for reliable operations of the A300, A300-600 and A330 aircraft. According to the Boeing Company’s and Airbus’ operation reliability reports, Korean Air is well above the global airline reliability average. In 2004, Korean Air started heavy maintenance and engine MRO work for foreign customers to enhance our resource effectiveness and our technical excellence has boosted Korean Air’s maintenance operations with global customers. For instance, United Airlines selected Korean Air to perform cabin upgrade modifications and fuselage painting because of its satisfaction with the division’s aircraft heavy maintenance program. In 2008, Korean Air signed new contracts with Thai Airways for engine heavy maintenance, expanding its presence in the global MRO market. We are continuously devoting efforts to ensure customer satisfaction with shorter turnaround time and quality service. In the past five years, Korean Air has achieved a reputation as one the most reliable MRO service providers in Northeast Asia. Korean Air is committed to expanding and modernizing its maintenance operation in order to be a respected leader in Maintenance & Engineering. Our new ERP will replace our current Maintenance & Engineering system with state-of-the-art information and technology systems, increasing Korean Air’s competitiveness.
EXCELLENCE IN SERVICE
Korean Air’s Maintenance & Engineering Division, with state-of-the-art facilities and 3,600 highly skilled staff members, has performed airframe, engine and component maintenance services for the airline’s own fleet and as well as international customers at four maintenance bases in Gimpo, Incheon, Bucheon, and Gimhae.
Annual Report 2008
Safety
In September 2008, Korean Air underwent a second renewal safety audit and passed without a single finding out of 914 items checked, as with our first renewal audit.
Operational Excellence Korean Air strives to be known and acknowledged as one of the world’s safest airlines. In support of this core value, we are cultivating our accident prevention system. Korean Air has established an integrated Safety Management IT System, called “SafeNet” that was unveiled this year. This system enables us to incorporate a company-wide standardization of safety data management by: 1) encouraging active safety reports from all employees; 2) identifying, analyzing and correcting safety hazards before they become an issue; and 3) gathering and utilizing safety data. We are already realizing results. In September 2008, Korean Air underwent a second renewal safety audit and passed without a single finding out of 914 items checked, as with our first renewal audit. This audit was conducted using the 2nd edition of the IOSA Standards manual, so it was more comprehensive and indepth than the previous audit. The fact that Korean Air passed the audit with flying colors three consecutive times indicates that Korean Air’s safety standards exceed global specifications and rank among the world’s leading airlines. To further strengthen flight safety, Korean Air’s FOQA (Flight Operational Quality Assurance) animation program has been updated, and FOQA irregularities have been resolved. This program offers realistic displays by using revolutionary satellite photographs and topographical maps of airports.
42
43
Korean Air will achieve excellence in these areas by implementing a structured approach to our Safety Management System (SMS), Quality Management System (QMS), Occupational Health & Ground Safety Management System (OH&GSMS), Security Management System (SeMS) and Supplier Management System (SUMS).
We will continue to optimize safety at Korean Air by bolstering safety reporting, investing in the training of employees and identifying new partnership opportunities between divisions and departments.
Under this directive, Korean Air will achieve excellence in these areas by implementing a structured approach to our Safety Management System (SMS), Quality Management System (QMS), Occupational Health & Ground Safety Management System (OH&GSMS), Security Management System (SeMS) and Supplier Management System (SUMS), using standards and guidance from internationally renowned organizations such as ICAO, IATA, KCASA, SkyTeam and the Department of Defense (DoD). All of these management systems will be regulated and monitored through a variety of metrics - both qualitative and quantitative - and key performance indicators (KPIs). We will continue to optimize safety at Korean Air by bolstering safety reporting, investing in the training of employees and identifying new partnership opportunities between divisions and departments. We will also continue to focus on building trust and improving interactions with government agencies such as the KCASA, the FAA, the EASA and the DoD. Korean Air has been accident-free for nine years and all of our management and employees continue each day to dedicate themselves to Operational Excellence.
EXCELLENCE IN SERVICE
The theme for 2009 is “Leadership, Communication and Coordination - Implementing SMS and Planning Integrated AMS Together.” This theme supports Korean Air’s vision, “To Be a Respected Leader in the World Airline Community,” and our mission, “Excellence in Flight.”
Annual Report 2008
Fuel Management
From 2009, we aim to maintain our existing initiatives to improve fuel efficiency and upgrade our fuel management to the level of a leading global carrier. To achieve that, we are planning to introduce a method to analyze actual flight data for the purpose of fuel management and implement more advanced processes.
High oil prices made their peak in 2008, recording $147 per barrel. Meanwhile, the won-dollar exchange rate inclined rapidly, resulting in even more of an increase in fuel expenses. With this in mind, Korean Air continued its effort to improve its fuel efficiency. In 2008, we achieved a fuel cost savings of 89 billion won attributable to the dozens of initiatives that have been performed since 2007. Fuel efficiency indexes such as fuel burn per ATK and fuel burn per block time show a 1.5% to 2.4% improvement compared to those of year 2007. Meanwhile, there was a remarkable improvement in our fuel management system. The newly launched FODIS (Flight Operations Data Input System), where airport staff input passenger and cargo weight, increased the efficiency of flight plans. In flight operations, fuel planning has become more sophisticated, taking into account weather conditions and fuel burn statistics for each aircraft and route. In addition, a number of economic operating procedures have been established and crew training has been reinforced, resulting in significant progress. From 2009, we aim to maintain our existing initiatives to improve fuel efficiency and upgrade our fuel management to the level of a leading global carrier. To achieve that, we are planning to introduce a method to analyze actual flight data for the purpose of fuel management and implement more advanced processes. Every effort will be made to support a fuel management system that contributes to our profitability and sustainability.
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45
SkyTeam
For the last eight years, SkyTeam has accomplished remarkable growth. Today, SkyTeam flies to more than 169 countries, with 16,786 daily flights available on extensive global network of hubs and destinations.
Korean Air founded SkyTeam with Delta Airlines, Air France and Aero Mexico in June 2000, setting its goal as an alliance dedicated to customer service. Since then, SkyTeam has grown into a leading global alliance with 11 member airlines. CSA Czech Airlines and Alitalia joined in 2001 and Continental Airlines, KLM Royal Dutch Airlines and Northwest Airlines became members in 2004. Aeroflot joined in 2006 and the number of member airlines increased to 11 with the addition of China Southern Airlines in November 2007. China Southern is the first Chinese air carrier to join any global alliance. Recently, SkyTeam recruited three associate airlines: Air Europa, Copa Airlines and Kenya Airways. For the last eight years, SkyTeam has accomplished remarkable growth. Today, SkyTeam flies to more than 169 countries, with 16,786 daily flights available on extensive global network of hubs and destinations. Its market share was only 11% at the time of foundation but increased to 24% in 2008. The number of FFP members increased from 40 million to 150 million members and destinations increased from 451 cities to 905 cities.
As expressed in its slogan, “Caring more about you,” SkyTeam has been continuing its effort to develop new benefits, consistent services, and products that give value to the customer experience. For example, in November 2008 SkyTeam introduced a Mileage Upgrade Program to reinforce its goal to be an alliance dedicated to customer service. In addition, SkyTeam adopted a “Corporate Social Responsibility Statement” in June 2008 with the awareness of potential environmental and social consequences of its activities. SkyTeam has devoted itself to setting the industry standard for protecting the environment, promoting social responsibility and realizing sustainable economic prosperity. SkyTeam’s efforts to meet the needs of customers and communities will continue throughout 2009.
EXCELLENCE IN SERVICE
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 worldwide lounges, reward programs for loyalty and continuity of quality service at any member airlines’ counters.
Reaching out with Responsibility While the ultimate goal of a corporation is to maximize profits, at the same time, the company is also a part of society. This can often be a struggle for a company to handle. Korean Air strives to achieve both goals while harmonizing our business activities and social responsibilities.
E X C E L L E N C E
Total Accumulated Volume of Cargo for 40 Years
27.30
million tons
I N
R E S P O N S I B L I T Y
Annual Report 2008
Environmental Responsibility With the growth of the global economy and improved living standards, the demand for air travel and transportation of goods and services is constantly rising. However, such a high rate of growth is inevitably having a negative impact on the environment. Korean Air looks to achieve the right balance between social, economic, and environmental responsibilities in order to lay a strong foundation for sustainable development. By actively pursuing diverse methods of environmental protection through fuel efficiency improvements and noise abatement, Korean Air seeks to contribute to enhancing the global standard of living.
ENVIRONMENTAL IMPACT An airline’s daily business activities generate environmental impact, in particular, during flight operation and ground support activities. The main offenders are CO2 and NOx emitted from the combustion of fossil fuels, and the noise generated from take-offs and landings that affect the environment and quality of life for those living nearby. Other environmental impacts such as waste, wastewater and chemicals are generated in the course of ground support activities.
GREEN MANAGEMENT PRACTICES By gaining ISO 14001 certification, the international standard for environment management systems, Korean Air has introduced an enterprise-wide environment management system focused on five sectors: the Headquarters & General Division, the Aerospace Division, the Maintenance & Engineering Division, the Catering Center and the Hotel Division. To prevent further deterioration of the environment, Korean Air is promoting the use of environmentally-friendly resources, recycling of waste and compliance with environmental protection regulations. Korean Air also is establishing environmental management policies and procedures for flight operations, cabin services, and ground operations.
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49
By gaining ISO 14001 certification, the international standard for environment management systems, Korean Air has introduced an enterprise-wide environment management system.
Korean Air’s fuel management focuses on flight operations procedures, flight planning, weight management and aircraft performance improvement.
KOREAN AIR'S INITIATIVES TO MITIGATE CO2 EMISSIONS Korean Air has been working towards reducing fuel consumption and gas emissions through various measures including fleet modernization, increased load factors, improved maintenance and flight procedures, and reduced load weight. However, the demand for air travel may outstrip gains from these measures in terms of emissions reduction. Also, it could take some time for aircraft manufacturers to develop new technology to dramatically reduce gas emissions while maintaining the current level of safety.
Classification
Unit
Fuel Consumption
kl
CO2 Emission
ton
Ratio
kg-CO2/100RTK
2008
2007
2006
4,682,485,000
4,825,734,000
4,455,322,000
11,799,862
12,271,071
11,201,027
83.76
83.01
81.98
EXCEELENCE IN RESPONSIBLITY
kg-CO2 /100RTK IN LINE WITH FUEL CONSUMPTION GROWTH
Annual Report 2008
EFFICIENT FUEL MANAGEMENT TO TACKLE CLIMATE CHANGE Korean Air is streamlining its fuel management process. Notable achievements include establishing the Fuel Management Team in July 2004 and integrating and realigning cross-divisional fuel management processes. These measures - aimed at not only saving fuel, but also preventing climate change - enabled us to reduce our greenhouse gas emissions by 223,000tons in 2008. Korean Air’s fuel management focuses on flight operations procedures, flight planning, weight management and aircraft performance improvement. Company-wide endeavors to refine existing fuel operating procedures led to a significant improvement in fuel management from flight operations and operations control to maintenance, passenger and cargo sectors.
KOREAN AIR MEASURES TO REDUCE CO2 EMISSIONS 1. Reducing flight hours by selecting optimal routes •Using optimal airports for fuel reloading and leveraging efficient routes •Periodically reviewing routes to improve fuel-saving •Selecting an optimal altitude for domestic flights •Applying an optimal altitude according to load weight and weather data 2. Improving aircraft and engine performance •Remodeling long-haul aircraft engines for performance improvement •Periodically washing engines •Enhancing aircraft fuel-efficiency by installing B737 Winglets 3. Reducing load weight •Loading in-flight potable water based on reservation rates and flight hours •Sharing spare parts for maintenance at overseas airports •Using light ULDs (unit load devices) to reduce load weight 4. Using optimal speed and flight conditions to save fuel •Requiring 4-engine aircraft to use only 3 engines while taxiing to reduce fuel consumption and noise levels •Optimizing the center of gravity of aircraft to improve efficiency •Tailoring fuel requirements to passenger reservation rates and load factors •Leveraging highly efficient ground equipment for fuel saving and noise abatement
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For the past 4 years, Korean Air has been working with local community groups to plant trees in the Baganuur area, and there is now a 50,000m2 forest where once was sand.
PREVENTING DESERTIFICATION IN MONGOLIA AND CHINA Korean Air’s environmental program includes planting a large forest in Mongolia and the Kubuchi Desert of Inner Mongolia, the origin of the yellow dust storms that blow across Korea every spring.
Approximately 60 Korean Air employees held a tree planting event to form the Korean Air Botanical Garden in the Kubuchi Desert in October 2008. The Kubuchi Desert plantation is an aggressive project: to plant about 1.8 million trees in a 6,000,000m2 desert area through 2011. This project is expected to decrease the amount of damage caused by yellow-dust storms in Northeast Asia including Korea and China. This green initiative will also play a major role in promoting an amicable relationship between Korea and China.
EXCEELENCE IN RESPONSIBLITY
Since 2004, Korean Air has been planting trees in what is now called the Korean Air Forest in Baganuur near Ulaanbaatar. Baganuur was suffering from rapid desertification and now has a 50,000m2 windbreak of forests thanks to reforestation efforts by Korean Air and local community groups. About 90% of the trees have survived and are now flourishing in a unique case of private reforestation. In addition, newly recruited Korean Air employees - as part of their orientation - plant trees and receive environmental training courses in the Mongolian region. This hands on approach has proven to be very effective in broadening our employees’ environmental consciousness.
Annual Report 2008
Social Contributions
With corporate social responsibility becoming even more important in today’s business world, Korean Air is participating in community services that link to distinctive company qualities.
Korean Air's "Sharing" Management “Wings of Love, Wings of Hope” is the slogan for Korean Air’s system of sharing: We work with local communities in active volunteering and contribute to community services around the world. Cho Joong Hoon, the late founding chairman of Korean Air, believed that “a company’s profits should be given back to society.” Adhering to this belief, Korean Air participates in volunteer work for the underprivileged, the environment, culture, education, sports, medical aid and disaster relief. With corporate social responsibility becoming even more important in today’s business world, Korean Air is participating in community services that link to distinctive company qualities. The company has formed networks and partnerships to create an organized community service program that was honored with the Korea Ethical Management Grand Prix (KEMG) by the New Industry Management Academy. Korean Air focuses its social responsibility in five areas: local community services, the underprivileged, volunteer programs, global community services and disaster relief. These activities not only address community welfare needs, but also extend to various other areas, such as the environment, education and medical care.
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53
Korean Air also leads the way in providing disaster relief. When an oil spill occurred along the Taean coastline in South Chungcheong Province, some 530 Korean Air employees went there to help with the cleanup and the company donated oil-absorbent sheets.
There are 22 in-house service groups in the airline’s community service team. Each month, these groups assist the families of boys/girls who are heads of their families, sponsor scholarships, care for the disabled and senior citizens who live alone, visit welfare facilities and perform other volunteer services. In addition, they utilize their staff benefits to travel overseas to regions suffering from poverty and offer support. Furthermore, as part of our company-wide global community service initiatives, new Korean Air employees have been participating in a mandatory tree-planting program in Mongolia since 2004 as part of their training. They also have been planting trees in the Kubuchi Desert as part of Korean Air’s Green EcoForestation Project. A local community service program, “Sky Love Bazaar,” is organized each year by members of Korean Air’s cabin crews with all proceeds donated to charity. We routinely donate rice and conduct kimchi-making events for people in need. In addition, we established an affiliate relationship with Myeongdong-Ri in Hongcheon-Gun, Gangwon Province for volunteer and medical service programs. Korean Air also is directly involved in building homes for the homeless, and staff members help the “WeAJa” flea market, where donated goods are sold and proceeds go to charity. Korean Air also leads the way in providing disaster relief. When an oil spill occurred along the Taean coastline in South Chungcheong Province, some 530 Korean Air employees went there to help with the cleanup and the company donated oil-absorbent sheets. In addition, we shipped 2,000 blankets and 3,000 boxes of water to Sichuan Provence in China on a special cargo flight after the earthquake in 2008. We at Korean Air will continue to strive to help build a society where people can enjoy better lives through the results of these community services. As a company that cares, Korean Air is taking great strides to help create a brighter and healthier society.
EXCEELENCE IN RESPONSIBLITY
Annual Report 2008
Human Resources
Korean Air respects and supports those who have a proactive mindset, possess a high sense of globality, are highly serviceoriented, and have good discipline. This KALMANSHIP is based on the HR philosophy, “Company is the People” and is reflected in the HR policies.
Outline of the HR Policy The “Company is the People” is a philosophy that has guided Korean Air’s human resource (HR) strategies and management philosophies since its inception. The philosophy is based on the late Chairman and founder, Joong Hoon Cho’s corporate principle that “People create the company and the company evolves upon the people’s endeavors.” Since its founding, Korean Air has placed a significant focus on creating effective human resource policies and strategies. Although many companies highlight human resources, Korean Air has consistently been at the forefront in effectively practicing human resource management. Korean Air’s HR philosophy encompasses three basic principles: 1. People are the company’s most valuable resource. 2. Corporate development is achieved through people. 3. Co-development of company and people is essential. This is called KALMANSHIP and it is the term to describe the ideal type of employee Korean Air needs to hire and retain to succeed. Korean Air respects and supports those who have a proactive mindset, possess a high sense of globality, are highly service-oriented, and have good discipline. This KALMANSHIP is based on the HR philosophy, “Company is the People” and is reflected in the HR policies.
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Service and safety are the crucial employees’ integrity and teamwork. appointment and evaluation.
During the recruitment process, Korean Air carefully monitors the servicemindedness of candidates to determine how they fit the standard of the company.
1. Proactive Mindset •Always think innovatively •Future-oriented mindset to break stereotypes An active and creative mindset is a significant factor and criteria in recruiting new employees to Korean Air and the company offers various programs to encourage a proactive mindset. We also include the traits of innovative thinking in our employee appraisal system. 2. Sense of Globality •Employees must be able to understand and embrace different cultures from around the world •And they must be open-minded with cultural knowledge as well as language proficiencies. Korean Air implements a number of policies to enhance this sense of globality among its employees. The airline holds an international volunteer service program every year to share in the various cultures we serve. The airline dispatches assistant manager level employees to foreign stations for one year, providing them with the opportunity to acquire knowledge of different cultures and lifestyles. Meanwhile, several employees are sent each year to the world’s most renowned MBA schools to gain highly advanced academic knowledge. 3. Service-mindedness and Politeness •Neat appearance, warm-hearted, good manners •Professionalism and polite actions in all situations involving customers
4. Good discipline •Be fully responsible for the job assigned •Maintain good interpersonal relationships with other employees in the organization Service and safety are the crucial factors of any airline business and Korean Air highly values our employees’ integrity and teamwork. Such values are strongly reflected in personnel employment, education, appointment and evaluation.
EXCEELENCE IN RESPONSIBLITY
During the recruitment process, Korean Air carefully monitors the service-mindedness of candidates to determine how they fit the standard of the company. Service-mindedness is one of the key evaluation factors for all Korean Air employees. To this end, the airline has its own service institute to train and educate service mindedness in all of our employees.
Taking Off to a stronger future
FINANCIAL SECTION
Despite the economic slowdown, high oil prices, and challenging business environment, Korean Air was able to achieve KRW10,212.6 billion in operating revenue, a 15.9% increase over the previous year. Even with the minor increase of 2.7% in the domestic passenger sector, international passenger and cargo sector revenues were more than enough to positively increase overall operating revenue.
Annual Report 2008
MANAGEMENT’S DISCUSSION & ANALYSIS
Selected Financial Data In millions of US$ (Years ended December 31)
OPERATING RESULTS Operating Revenues Domestic Passenger International Passenger Cargo Others Operating Expenses Gross Profit Selling, General & Administrative Expenses Operating Income Non-operating income Non-operating expenses Income Before Tax Income Tax Expense Net Income Current Assets Cash & Cash Equivalents Trade Receivables Inventories Others Non-Current Assets Investment Assets Property, Aircraft and Equipment, net Intangible Assets, net Others Total Assets Current Liabilities Trade Payables Short-term Borrowings Accrued Expenses Advance Receipts Current Maturities of Long-term Liabilities Others
In billions of KRW
2008
2008
2007
2006
2005
2004
8,121.3 478.3 4,255.9 2,407.0 980.1 7,015.0 1,106.3 1,185.3
10,212.6 601.5 5,351.8 3,026.8 1,232.5 8,821.4 1,391.2 1,490.5
8,812.0 585.5 4,631.6 2,533.0 1,061.9 6,789.3 2,022.7 1,385.8
8,077.9 612.2 4,144.8 2,370.9 950.0 6,304.5 1,773.4 1,276.0
7,584.2 618.5 3,732.5 2,321.7 911.5 5,892.0 1,692.3 1,259.8
7,210.9 634.2 3,372.7 2,327.4 876.6 5,541.9 1,668.9 1,284.9
(79.0) 713.6 2,583.6 (1,949.0) (404.3) (1,544.7)
(99.3) 897.3 3,248.9 (2,450.8) (508.4) (1,942.4)
636.8 340.1 882.5 94.4 81.5 12.9
497.4 676.9 686.4 487.9 104.9 383.0
432.5 431.7 611.2 253.0 54.3 200.4
384.0 1,145.7 806.8 723.0 203.5 519.5
1,571.0 393.2 537.0 199.6 441.2
1,975.6 494.5 675.3 251.0 554.8
1,982.0 688.5 694.6 279.2 319.7
1,474.1 453.7 602.6 220.8 197.0
1,673.3 577.4 585.6 196.2 314.1
1,757.4 703.1 584.3 226.3 243.7
11,047.4 1,256.6 8,974.3 171.7 644.8 12,618.4
13,892.1 1,580.2 11,285.2 215.9 810.8 15,867.6
13,161.8 1,655.9 10,869.7 232.1 404.1 15,143.7
12,110.6 705.4 10,749.8 196.8 458.7 13,584.7
11,895.4 659.5 10,522.7 193.7 519.5 13,568.6
11,981.6 532.3 10,619.4 198.9 631.0 13,739.0
3,410.3 76.4 626.8 334.9 216.5 1,185.1 970.6
4,288.5 96.1 788.2 421.1 272.2 1,490.3 1,220.6
3,647.7 195.7 529.9 473.9 485.4 1,368.5 594.3
2,994.9 229.0 369.5 462.4 375.7 1,031.4 526.9
2,849.4 207.1 295.1 435.4 329.7 1,021.3 560.8
3,079.0 133.4 218.4 472.3 303.3 1,468.1 483.5
58
In millions of US$
In billions of KRW
2008
2008
2007
2006
2005
2004
Non-Current Liabilities Bonds, net Long-term Debt, net Asset-Backed Debt Long-term Loan (Foreign Currency) Guaranteed Loans, net Long-term Obligation under Installment Purchase, net Obligation under Capital Leases Severance & Retirement Benefits Others Total Liabilities
6,962.8 2,023.6 559.6 25.0 932.6 42.0
8,755.7 2,544.7 703.7 31.5 1,172.8 52.8
7,095.9 1,860.1 640.1 131.1 1,051.8 57.0
6,214.3 1,470.6 131.5 13.2 969.0 60.8
6,690.4 1,477.2 175.2 72.1 780.1 64.3
6,848.9 1,171.4 138.7 244.8 690.1 67.4
124.9 2,503.7 373.7 377.7 10,373.1
157.1 3,148.4 470.0 474.7 13,044.2
256.3 2,207.1 465.1 427.3 10,743.7
546.4 2,144.3 661.5 217.0 9,209.3
655.0 2,590.1 682.6 193.8 9,539.7
854.1 2,879.4 651.8 151.3 9,927.9
Capital Stock Capital Surplus Retained Earnings Capital Adjustments Total Stockholders' Equity Total Liabilities and Stockholders' Equity
291.7 2,392.7 (728.4) (52.0) 2,245.2 12,618.4
366.8 3,008.8 (915.9) (65.4) 2,823.4 15,867.6
366.8 3,008.6 1,061.0 (65.4) 4,400.0 15,143.7
363.3 3,007.0 1,053.8 (48.7) 4,375.4 13,584.7
363.3 3,007.0 694.7 (36.2) 4,028.9 13,568.6
363.3 3,007.0 511.3 (70.6) 3,811.1 13,739.0
Net Loss Net Loss 462.0 9.40 1.27
1.59 0.29 0.09 243.7 19.4 2.24
1.22 9.11 2.82 210.5 19.3 2.03
1.11 5.11 1.47 236.8 19.3 2.03
0.96 5.83 3.74 260.5 20.5 1.86
-28,762
180
5,725
2,989
7,765
(Years ended December 31)
Financial Ratios (%) Interest Coverage Ratio (Times) Return on Average Equity Return on Average Assets Debt-to-Equity Ratio EBITDAR Margin Fixed Charge Coverage Ratio (Times) PER SHARE DATA (KRW) Earnings Per Share
Korean Won figures are translated, solely for the convenience of readers into U.S.dollars at KRW1,257.5: US$1.00, the prevailing rate as of December 31, 2008
59
Annual Report 2008
25
Management's Discussion & Analysis
20
10,000
8,000
20.5
19.3
19.4
19.3
7,58
15
6,000
7,210.9
The following management’s discussion and analysis is based on the financial information and data that have been 9.1 classified in accordance with accounting principles generally accepted in Korea (Korean GAAP). Amounts are presented 10 4,000 in billions of Korean5.8 Won (KRW) except where stated otherwise. The term “the Company” used hereinafter without any other qualifying 5.1 description will refer to “Korean Air Lines.” The following sections also contain forward-looking statements with respect to the 5 2,000 2.8 of the Company and plans and objectives of the management financial condition, results of operations, and business of the 1.5 384.0 Company.3.7 Statements that are not historical facts, including statements0.2 about the Company’s beliefs and expectations, are 0.1 0 forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties, and0other factors
2005 2006 2007 different from any future results or performance2004 that may2004 cause the actual results or performance of the Company to be materially expressed or implied by such forward-looking statements. Return on average equity Return on average assets Operating revenue The Company EBITDAR margin 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 or the future. Such forward-looking statements were based on current plans, estimates, and projections of the Company and the political and economic environment in which the Company will operate in the future, and therefore undue reliance should not be placed on such statements. Forward-looking statements only represent conditions as of the date they are made, and the Company undertakes no obligation to update publicly any of them in light of new information or future events.
I. EXECUTIVE SUMMARY 1. ECONOMIC ENVIRONMENT The Korean economy in 2008 showed clear signs of having entered a downturn, as exports slowed greatly from October onwards and domestic demand decreased. While consumption and facilities investment grew at a very limited rate, the slowdown in construction investment continued unabated amidst negative growth. The increase in prices caused by the rise in the price of imported goods resulted in a drop in purchasingGDP power and the deterioration of consumer sentiment. Generally speaking, Growth Rate the reduction in facility investment can be regarded as having been caused by the current financial crisis. GDP Growth Rate 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0%
4.7%
5.0%
5.0%
4.2% 2.5%
2004 (Source : National Statistical Office)
2005
2006
2007
2008
432
20
60
For 2008 as a whole, Korea’s economy grew 2.5%, exactly half that of 2007 and the lowest figure since the economy posted a 6.9% shrinkage in 1998. In terms of output, the manufacturing industry contracted 3.2%p to 3.3% from the previous year. The worst performance was in major industries like semiconductors, steel and automobiles, which were compelled to scale back production. The construction industry witnessed a 2.9% decline in output as the sluggish building construction market more than offset the increase in the public works sector. The service industry also suffered, recording a 2.3% year-on-year drop on the back of declining output in financial services, wholesale/retail/restaurant/lodging services and transportation/warehouse/telecom services. In terms of expenditures, private consumption plummeted 4.8% from the third quarter, marking the lowest drop since the 0.2% decline in the second quarter of 2008. It also slid 4.4% compared to a year ago. Facilities investment declined 2.0% year-on-year, and construction investment diminished by 2.7%, putting them both at their worst levels since the currency crisis. Goods exports, the cornerstone of the Korean economy, plunged 4.6% compared to the previous year, the sharpest decline since 1970, when the central bank began compiling such data. The nosedive was due to shrinking import demand from Korea’s major export markets, Japan, the US and the EU, which were all hit by the global financial crisis. Despite the unfavorable external conditions, exports were relatively strong in 2008. The reason for this was that newly industrializing countries, Korea's main export destination, had not yet been seriously affected by the economic slump that has plagued industrialized countries. Furthermore, Korea's exports benefited from the higher foreign exchange rate and high international prices for raw materials. According to the Ministry of Knowledge Economy, the trade balance for 2008 recorded a deficit of US$13.0 billion. Exports rose to US$422.4 billion, an increase of 13.7% from 2007. Exports of eight key products-including oil products, ships, steel and general machinery-showed double-digit growth. Notably, ship exports for the year reached more than US$40 billion, the highest amount ever recorded. Furthermore, exports to the Middle East, Oceania, Latin America and the ASEAN countries increased 35%, 34%, 29% and 27%, respectively. By contrast, exports to Japan, the European Union and the United States respectively rose by a mere 8%, 5% and 1%. Imports grew 22% year-on-year to US$435.4 billion. Imports of raw materials surged 36%, the highest increase, while imports of capital and consumer goods dropped compared with levels seen in 2007. This was attributable to reduced demand and the stagnation of facilities investment.
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Annual Report 2008
Management's Discussion & Analysis
2. AIRLINE INDUSTRY OVERVIEW Industry Net Profits (In billons of US$)
Operating Profits
Net Profits
2009
2008
2007
2006
2009
2008
2007
2006
3.9
1.1
19.7
15.0
-2.5
-5.0
12.9
-0.1
North America
3.6
-0.3
9.3
7.3
0.3
-3.9
5.3
-2.6
Europe
0.7
1.5
6.4
5.2
-1.0
-0.1
5.4
1.8
Asia-Pacific
-0.6
-0.1
3.5
1.8
-1.1
-0.5
2.1
0.9
Middle East
0.0
-0.1
0.0
0.0
-0.2
-0.1
-0.1
-0.1
Global Regions
Latin America
0.1
0.1
0.4
0.5
-0.2
-0.1
0.1
0.1
Africa
0.0
0.0
0.1
0.1
-0.3
-0.3
0.1
-0.2
Source : ICAO data to 2007. IATA 2008-2009 forecasts. Exclude 'fresh-start' items
International Air Traffic Volume YTD 2008 vs. YTD 2007
RPK Growth
ASK Growth
PLF
FTK Growth
ATK Growth
Africa
-4.0%
-4.2%
70.2
-2.5%
-7.4%
Asia/Pacific
-1.5%
1.2%
73.9
-6.6%
-2.5%
Europe
1.8%
3.8%
76.6
-2.8%
2.9%
Latin America
10.2%
9.2%
74.0
-13.5%
5.7%
7.0%
8.6%
74.9
6.3%
8.5%
Middle East North America
2.9%
4.3%
79.8
-1.9%
3.4%
Industry
1.6%
3.5%
75.9
-4.0%
1.5%
As a result of the recession, we saw a sharp drop in traffic in 2008, with passenger sector RPKs up 1.6% and cargo FTKs down 4.0%. Passenger demand volume shrank dramatically, mainly due to the late 2007 collapse of the US housing market and the resulting credit crunch, which lowered consumer confidence and travel demand. According to IATA, international air passenger traffic fell 5.8%p to 1.6% compared to the previous year. Both the passenger and air freight markets were growing at reasonably robust rates during the first half of 2008. However, once the recession hit, the fall in both markets has been precipitous. Air freight in particular suffered early losses as global trade contracted, and was down almost 8% at the end of 2008. The deterioration in the passenger market struck later, as is usually the case, when jobs started to be lost.
62
Air cargo demand continued its rapid descent as manufacturing activity and trade flows turned sluggish. Middle Eastern airlines showed the highest growth rate in air freight, at 6.3%, while Asian airlines continued to suffer from the difficult market conditions, recording -6.6%. Profitability dropped very sharply in 2008, as the price of jet fuel rose from $90 a barrel in January to the peak of $180 a barrel in July, raising the industry’s fuel bill for the year by $38 billion as a whole. North America saw robust airline profits turn into losses due to the spike in the price of fuel, and airlines in other regions have also not avoided the high fuel price or the onset of recession.
3. KOREAN AIR’S SUMMARY OF OPERATIONS 2008 Air Transportation Growth Rate Passenger
Cargo
Available Seat Revenue Passenger Industry Average* Korean Air (Total)
Available Ton
Freight Ton
Kilometer (ASK)
Kilometer (RPK)
Kilometer (ATK)
Kilometer (FTK)
3.5%
1.6%
1.5%
-4.0%
1.3%
-0.5%
-6.3%
-6.9%
Korean Air (Domestic)
-1.6%
-5.6%
-0.4%
-4.5%
Korean Air (International)
1.5%
-0.2%
-6.3%
-7.0%
*Source: IATA International Traffic Statistics, December 31, 2008
In 2008, the unprecedented high price for oil continued throughout the year due to speculative funds flowing into the oil market and unstable supply and demand caused by political instability in the Middle East. In addition, the air transportation sector had to bear the adverse business conditions due to the drop in demand caused by the worldwide economic slowdown, and a rise in costs due to the sharp climb of the US dollar against the Korean won. In the passenger sector, the number of Korean passengers taking flights abroad dropped 10% from the previous year in 2008. Despite such an unfavorable business environment, Korean Air laid the foundation for sustainable growth. As a result, passenger revenue jumped by 14% to KRW5,953.3 billion from the previous year.
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Annual Report 2008
Management's Discussion & Analysis
At the same time, our passenger business division has been making ongoing adjustments to the structure of our flight routes to boost sales volume in the international market, as the strong currencies present abroad enable us to cope with the depreciation of the Korean Won. These efforts paid off handsomely. Korean Air’s overseas revenue was 38% higher than in the previous year. With an eye on securing a long-term growth engine, Korean Air actively developed new routes in 2008, adding routes to Munich, Tel Aviv and Milan. Among the Asian airlines, Korean Air now has the most diverse sales network connecting Asia and Europe. Services to Sao Paulo, a major city in South America, were also resumed. In addition, the Company secured a foothold in the Central Asian market by making inroads into Tashkent, the capital of Uzbekistan. We are offering differentiated services for VIPs and high-class customers for this region. The cargo business division optimized its route structure through supply adjustments and secured highly profitable cargo orders to counter diluted demand. In this way, the division concentrated all of its capabilities on enhancing profit. Since 2004, Korean Air’s cargo division has been consistently ranked number one in the world in FTKs by the International Air Transportation Association (IATA). Korean Air’s 2008 total of 9,005 million ton-kilometers was over 1.1 billion ton-kilometers above Lufthansa, which was ranked second. This result is attributed to the combination of three elements: steady network expansion, an advanced air cargo fleet and investments on cargo terminals and IT systems. In August of 2008, Korean Air launched a cargo service to Navoi, Uzbekistan to penetrate the Central Asian market. The launch of this cargo service will give Korean Air a competitive edge as the pioneer in the Central Asian cargo market, which has excellent future potential. This is quite meaningful, as Korean Air is actively developing new markets by creating demand for cargo services in the Central Asian region and making a foray in the market ahead of our competitors. The operating environment remained very harsh for Korean Air throughout the year. In the first half of 2008, the price of jet fuel remained at a considerably high level, leading to a substantial rise in fuel costs.
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Despite the economic slowdown, high oil prices, and challenging business environment, Korean Air was able to achieve KRW10,212.6 billion in operating revenue, a 15.9% increase over the previous year. Even with the minor increase of 2.7% in the domestic passenger sector, international passenger and cargo sector revenues were more than enough to positively increase overall operating revenue. Operating income, however, fell to negative KRW99.3 billion from KRW636.8 billion due to an increase in operating expenses. Net income decreased to negative KRW1,942.4 billion due to the significant drop in foreign exchange translation gains compared to 2007. Total assets and total liabilities increased by 4.8% and 21.4%, respectively, to KRW15,867.6 billion and KRW15,143.7 billion, while total shareholders’ equity declined by 35.8% to KRW2,823.4 billion due to reduced retained earnings. Korean Air had a total of 124 airplanes as of the end of 2008. The Korean flag carrier conducted regular flights to 13 cities domestically and to 103 cities in 38 countries abroad, transporting 22 million passengers and 2.2 million tons of cargo annually. By effectively and systematically managing expenses, enhancing efficiency and creating revenue-generating drivers, Korean Air was able to overcome the challenges of 2008 and is fully prepared to achieve notable results in 2009. By identifying new markets with high growth potential, expanding our global network, providing enhanced customer service, implementing costcutting measures, streamlining our flight schedules and making use of our high-tech facilities, Korean Air will be able to meet the growing needs of our customers and offer higher-quality services based on profitability. We will lead the way to greater effectiveness and efficiency, while placing further focus on fostering talented human resources. Korean Air is committed to achieving success through our people, our advanced systems and our dedication to safety.
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Annual Report 2008
Management's Discussion & Analysis
II. RESULTS OF OPERATION 1. OVERVIEW Despite an increasingly difficult environment marked by the economic crunch, Korean Air posted a record-high operating revenue of over KRW10 trillion in 2008. Between January and December, the Airline earned KRW10,212.6 billion and had an operating loss for the year of KRW99.3 billion. This is the first time the Korean flag carrier has earned over KRW10 trillion for the year. Especially notable is the fourth quarter earnings from October to December of 2008. Even amidst the global economic crunch and decline in international travel demand, the Airline managed to make an operating profit of KRW22.6 billion. Net income for the year ended December 31, 2008 was a loss of KRW1,942.4 billion, largely caused by foreign exchange conversion losses resulting from the weaker Won. In this environment, however, it has been impossible to fully offset the drastic decline in foreign exchange gains, resulting in our inability to replicate last year’s excellent results. Considering these unfavorable circumstances, Korean Air took aggressive steps to secure a sound growth base and competitiveness on a global level. We shifted our capacity to focus on profitable businesses, making efficient use of resources and enhancing the Company’s management structure with an unremitting focus on safety. Furthermore, all of Korean Air’s employees made a concerted effort to achieve profitable growth, which allowed us to record sustainable gains in operating revenue. In 2009, we aim to achieve KRW10,300 billion in revenue and plan to invest KRW 870 billion.
Revenue Breakdown by Business (In billions of KRW)
Domestic Passenger
2008
2007
2006
2005
2004
601.5
585.5
612.2
618.5
634.2
Composition 5.9%
International Passenger
5,351.8
4,631.6
4,144.8
3,732.5
3,372.7
52.4%
Cargo
3,026.8
2,533.0
2,370.8
2,321.7
2,327.4
29.6%
367.7
235.1
211.6
187.9
201.3
3.6%
58.0
58.4
51.3
49.4
41.7
0.6%
Aerospace Catering Hotel/Limousine Others Total
39.7
35.2
36.5
34.6
36.6
0.4%
767.1
733.2
650.6
639.6
597.0
7.5%
10,212.6
8,812.0
8,077.8
7,584.2
7,210.9
100.0%
Our operating revenue increased by 15.9% to KRW10.2 trillion from KRW8.8 trillion the previous year. The main factor behind this increase was the significant growth in the international passenger sector, which rose by KRW720.2 billion, and our robust cargo business income of KRW3,026.8 billion, up by KRW493.9 billion. Our gross profit was KRW1,391.2 billion, a 31.2% decline from 2007’s KRW2,022.7 billion. Ordinary income decreased to negative KRW2,450.8 billion in 2008 from KRW94.4 billion in 2007. This decrease was caused by a significant drop in foreign exchange translation gains due to the depreciation of the Korean Won.
66
As our strong operating performance was offset by a sharp increase in fuel expenses and decrease in foreign exchange gains, non-operating factors witnessed a decline in net income to negative KRW1,942.4 billion from KRW12.9 billion in the previous year. Korean Air’s fleet, as of December 31, 2008, was comprised of 100 passenger aircraft and 24 cargo aircraft. The Company conducted regular flights to 13 domestic cities and 103 cities in 38 countries. Korean Air transported a total of 21,960,940 passengers and 2,156,215 tons of freight in 2008. The number of domestic passengers decreased by 6.1%, and that of international passengers declined by 2.1%. As a result, total passenger load factor (L/F) decreased 1.3%p and posted 71.4%, while passenger yield decreased by 1.4% and posted 9.55 cents/Km for the year. As of the end of 2008, the operating revenue breakdown was as follows: Domestic Passengers - 5.9%, International Passengers - 51.3%, Cargo - 28.5%, Other (incl. Aerospace, Catering, Limousine, In-Flight Sales and Ground Handling) - 14.3%.
Revenue Breakdown by Route (%)
2008
2007
2006
2005
2004
Domestic
10.5
11.2
12.9
15.1
17.0
Japan
13.0
12.9
13.4
14.1
14.6
China*
10.0
10.1
9.3
9.6
6.8
Southeast Asia
12.9
13.0
12.5
10.7
12.6
Oceania North America Europe / Middle East / Asia Total
6.2
6.4
6.4
6.5
6.6
30.2
29.7
29.3
29.1
28.4
17.2
16.7
16.2
14.8
14.0
100.0
100.0
100.0
100.0
100.0
* 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.
2008
2007
2006
2005
2004
0.9
1.0
1.2
1.4
1.5
Japan
4.0
4.1
4.7
5.6
5.3
China*
10.2
8.3
7.5
11.8
4.9
Southeast Asia
13.3
14.0
16.7
12.0
17.9
1.4
2.4
1.3
1.1
1.3
Domestic
Oceania North America
40.7
41.8
42.7
38.1
41.6
Europe / Middle East / Asia
29.5
28.4
25.8
30.0
27.6
100.0
100.0
100.0
100.0
100.0
Total * Hong Kong is classified as China
67
Annual Report 2008
Management's Discussion & Analysis
2. OPERATING RESULTS BY SEGMENT Domestic Passenger Operating revenue in the domestic passenger sector amounted to KRW601.5 billion, an increase of 2.7% from KRW585.5 billion in 2007. Despite a drop in the number of domestic passengers, this sector played a positive role in enhancing the overall profitability of Korean Air. Based on this potential for profitability, we continued making efforts to restructure our domestic routes.
International Passenger The international passenger division continued to see significant growth, strongly contributing to the positive increase in overall operating revenue. Operating revenue for the international passenger sector increased to KRW5,351.8 billion from KRW4,631.6 billion, a notable 15.5% increase. This division comprised 52.4% of the total corporate operating revenue, similar to last year. In 2008, Korean Air continued to focus on enhancing profitability by increasing sales in the premium passenger sector, expanding into the international market, and opening routes to new destinations, such as Sao Paulo and Munich.
Cargo Despite the global recession caused by the U.S. financial crisis, Korean Air Cargo posted KRW3,026.8 billion in operating revenue in 2008, a 19.5% increase compared to 2007, and its yield increased by 29%. This substantial growth can be ascribed to improved yield stemming from optimized route restructuring and a focus on cargo with a high profit margin. Korean Air Cargo recorded a 74% load factor, similar to the previous year’s figure. Decreased demand for air cargo services was alleviated by utilizing a flexible supply schedule during the latter half of 2008. In comparison, the average supply rate for other carriers in the Asia-Pacific region decreased by between 2.5% and 6.6%. Since 2004, Korean Air’s Cargo division has been ranked number one in the world in FTKs by the International Air Transportation Association (IATA) for four years in a row, and Korean Air Cargo expects to retain that position again in 2008, considering the prospective performance of our major competitors. All of these achievements were made possible by strengthening our overseas sales capability, networking and acquiring new global partners, responding to changes in route structures and continuing our efforts to develop new markets.
Other Businesses Revenue from other segments, including Aerospace, Catering, In-Flight Sales, and Hotel and Limousine comprised 12.1% of total revenue. Aerospace revenue increased by 56.4% to KRW367.7 billion, mainly due to continued advancements in new aircraft design and manufacturing. In 2008, Korean Air’s aerospace division commenced a 747 cargo conversion program, successfully delivering 4 aircraft by the end of 2008, and signed a contract with Airbus to supply them with new equipment.
68
Although the average daily production of in-flight meals by Korean Air Catering fell approximately 4.5% from 2007, the catering sector maintained a revenue of KRW58 billion, similar to last year. Due to our consideration of the specific characteristics and customer needs on our various regions and routes, our catering division holds a leading position in Korean catering market, with a market share of 70%. Despite fierce competition in the hotel industry, our hotel and limousine division saw an increase in revenue of 12.8%, reaching KRW39.7 billion. This sector allows Korean Air to not only maximize customer satisfaction by providing high-quality service, but also creates synergistic benefits between our hotels and our core market, air transportation.
3. OPERATING INCOME In 2008, operating revenue rose 15.9% to KRW10,212.6 billion compared to the previous year. However, due to the unprecedentedly high price of oil, fuel costs rose sharply, leading to an increase in operating costs of 26.1%. Because of this, our 2008 operating profits went into the red, standing at negative KRW99.3 billion.
4. OPERATING EXPENSES Operating Expenses (In billions of KRW)
Jet Fuel Maintenance Labor Ground handling
2008
2007
2006
2005
2004
Composition
4,195.1
2,606.4
2,371.0
2,022.3
1,588.2
47.56%
433.9
313.2
230.4
289.3
247.0
4.92%
1,041.3
1,079.4
1,010.1
949.8
792.3
11.82%
334.3
293.8
278.1
262.5
265.8
3.79%
Landing Fee
242.4
229.0
213.2
202.3
201.0
2.75%
Rental
317.0
366.6
389.8
357.6
433.0
3.59%
Depreciation
731.9
696.7
675.5
676.5
654,9
8.30%
27.3
31.4
45.7
61.5
86.7
0.3%
Insurance Others Total
1,497.2
1,162.6
1,090.7
1,070.1
1,273.0
16.97%
8,821.4
6,789.3
6,304.5
5,891.9
5,541.9
100.00%
Operating expenses were impacted by the tremendous hike in fuel prices. In 2008, our operating expenses were KRW8,821.4 billion, an increase of KRW2,032.0 billion or 29.9% over the previous year. The main driver of this sharp increase was the cost of materials, which rose by 50.9% to KRW1,734.8 billion. Jet fuel costs alone, up by 61.0% or KRW1,588.7 billion, accounted for 47.6% of our total operating expenses. As for other expenses, labor and rental costs respectively decreased by 3.5% and 13.5%, while depreciation expense increased by 5.1% to KRW731.5 billion.
69
ating income Annual Report 2008
Management's Discussion & Analysis
Jet Fuel The high price of oil, an ongoing issue for several years now, peaked in 2008, reaching U$147 per barrel compared to the 2007 figure of U$90.8, and the won-dollar exchange rate has also rapidly risen, resulting in a marked increase in fuel expenses. Faced with these harsh conditions, we strove to improve Jet fuelFuel efficiency and enhance relevant processes. Jet fuel costs ultimately Consumption rose by KRW1,588.7 billion over the previous year’s amount of KRW2,606.4 billion while consumption decreased by 3.1% to 1,261 million gallons, down from 1,302 million gallons in 2007. (milions gallons)
1,350 1,300
12.0%
1,302
9.5% 1,211
1,250
10.0% 8.0%
7.6%
6.0%
6.3%
1,200 1,150
1,118
1,261
1,139
2.0%
1.9%
1,100
0.0%
1,050
-3.1%
1,000
2004
2005
4.0%
2006
2007
-2.0% -4.0%
2008
Maintenance Factors contributing to the year-on-year change in maintenance expenses included increased cyclical engine maintenance service and the weakened Korean won, which led to a rise in maintenance expenses of 38.5% to KRW433.9 billion from 2007’s KRW313.2 billion. This increase in maintenance expenses was attributed to Korean Air’s mission of quality maintenance and excellence in safety. Korean Air’s dependable maintenance operations were designed to ensure enhanced profitability and maximize cost effectiveness.
Labor Labor costs decreased to KRW1,041.3 billion from KRW1,079.4 billion, accounting for 11.8% of our total operating expenses. By freezing wages and salaries and reducing employee fringe benefits, Korean Air was able to reduce overall labor costs by 3.5%. However, wage and salary expenses increased by 8.0% year-on-year, primarily due to a 1.8% increase in the average number of full-time equivalent employees necessary to support our growth.
Employees (Persons)
General Administration
2008
2007
2006
2005
2004
4,499
4,315
4,190
4,203
3,963
Pilots / Flight Attendants
6,114
5,034
5,005
5,143
5,281
Technicians
5,202
5,174
5,193
5,386
5,386
Others Total
610
367
367
364
364
16,425
14,890
14,755
15,096
14,994
70
Ground Handling/Landing Fees Ground handling costs and landing fees saw respective increases of 13.8% and 5.8% in 2008, to KRW334.3 billion and KRW242.4 billion. Landing fees rose due to the increase in the number of flights.
Rental Rental costs declined by 13.5% to KRW317.0 billion from KRW366.6 billion in 2007 due to a decrease in the number of leased aircraft.
Depreciation Depreciation expense increased by 5.1% to KRW731.9 billion in 2008 from KRW696.7 billion.
Fleet by Type
Passenger
Cargo
Type B747-200/300 B747-400 B777-200/300 A330-200/300 A300-600 B737-800/900 Sub-total B747-400F B747-200/300F A300-600RSF MD-11F Sub-total Total
2008 0 22 22 19 8 29 100 22 0 2 0 24 124
2007 0 24 20 19 8 32 103 21 0 2 0 23 126
2006 0 26 16 19 9 31 101 19 0 1 0 20 121
2005 0 24 15 19 10 29 97 16 3 0 0 19 116
2004 1 24 13 19 10 29 96 15 3 0 3 21 117
Insurance Insurance maintained its declining trend, mainly due to our accident-free safety record, which has and will continue to be the basis of Korean Air’s overall business strategy. Insurance expenses decreased by 13.1% to KRW27.3 billion in 2008 from KRW31.4 billion in 2007.
5. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses also saw an increase of 7.6% from KRW1,385.8 billion in 2007 to KRW1,490.5 billion in 2008, as a result of higher employee promotion and other related expenses.
Selling, General and Administrative Expenses (In billions of KRW)
2008 1,490.5
2007 1,385.8
2006 1,276.0
2005 1,259.8
2004 1,284.9
71
Annual Report 2008
Management's Discussion & Analysis
6. NON-OPERATING INCOME/EXPENSES The considerable rise in non-operating income for 2008 was mainly due to gain on foreign currency translation. Foreign currency translation witnessed an increase of 1549.0%, from KRW28.6 billion to KRW471.6 billion. Another cause for the increase was gain on foreign currency transactions. Additional accruements were caused by gain on valuation of derivative financial instruments and gain on transactions of derivative financial instruments, which amounted to KRW102.0 billion and KRW64.1 billion, respectively. The 163.8% increase in non-operating income was not enough to cover for the rise in non-operating expenses. With regards to non-operating expenses, interest expense grew by 14.4% to KRW486.3 billion, due to the increase in interest-bearing debts. The loss on foreign currency transactions, loss on foreign currency translation, and loss on disposal of property, plant and equipment increased by 1586.1%, 2203.3% and 472.2%, respectively, to KRW392.6 billion, KRW2,022.8 billion and KRW166.7 billion. Loss on disposal of equity method investments rose by 1.9% to KRW14.9 billion, but considering the amount, there was no significant effect on non-operating expenses. Accordingly, net results from the non-operating side of the Company realized a loss of KRW2,351.5 billion.
Non-Operating Income/Expenses (In billions of KRW)
2008
2007
897.3
340.1
Interest Income
46.3
28.2
Dividend Income
1.8
2.4
Gain on Foreign Currency Transaction
90.9
67.2
Gain on Foreign Currency Translation
471.6
28.6
Non-Operating Income
Gain on Disposal of Property, Plant and Equipment Gain on Equity-method Others Non-Operating Expenses Interest Expense Loss on Foreign Currency Transactions Loss on Foreign Currency Translation Loss on Disposal of Property, Plant and Equipment Loss on Equity-method Others Ordinary Income (Loss)
1.9
116.6
49.5
76.5
235.3
20.6
3,248.9
882.5
486.3
425.1
392.6
23.3
2,022.8
87.8
166.7
29.1
55.4
4.3
125.1
312.9
(2,450.8)
94.4
(2,450.8)
94.4
(508.4)
81.5
(1,942.4)
12.9
Net Income Ordinary Income (Loss) Income Tax Expense Net Income (Loss)
72
7. FINANCIAL RATIOS As a result of increase in liabilities, the debt-to-equity ratio increased considerably from 243.7% to 462.0% between 2007 and 2008, mainly due to an increase in short/long-term debts, causing total liabilities to rise by 21.4% to KRW13,044.2 billion in 2008 from KRW10,743.7 billion in 2007. The EBITDAR margin declined to 9.4% in 2008, down 10.0%p from the previous year. The fixed-charge coverage ratio dropped to 1.27% from 2.2% in 2007, while PBR drastically decreased by 116.5%, from 117.5 to 0.92%.
Financial Ratios (%)
Debt-to-Equity Ratio EBITDAR Margin PBR
2008
2007
2006
2005
2004
462.0
243.7
210.5
236.8
260.5
9.4
19.4
19.3
19.3
20,5
90.9
117.5
54.2
52.9
33.1
8. HEDGING STRATEGY The financial results of the Company were greatly impacted by changes in jet fuel prices, accounted for 47.6% of our total operating expenses. As of December 31, 2008, Korean Air posted an average hedge ratio of 15.3% for 2008. Korean Air’s hedging policy is to maintain the hedging ratio at between 25-50% of the annual consumption amount. Korean Air utilized currency swaps and zero-cost collars to mitigate the risks associated with foreign currency exchange rates. During 2008 Korean Air’s average hedge ratio for foreign currency exchange rates was 22%, with the amount hedged totaling US$440 million.
III. FINANCIAL CONDITION 1. ASSETS In 2008, Korean Air’s total assets stood at KRW15,867.6 billion, an increase of KRW723.9 billion over the previous year. This was mainly due to an increase in non-current assets, which represents 87.5% of our total assets. Current assets decreased to KRW1,975.6 billion from the 2007 total of KRW1,982.0 billion. Cash and short-term financial instruments decreased substantially to KRW510.6 billion from KRW704.8 billion, a 27.6% decline from the previous year. Inventories also decreased by 10.1% from KRW279.2 billion to KRW251.0 billion from a year earlier.
73
Annual Report 2008
Management's Discussion & Analysis
While investment assets witnessed a slight decrease of 4.6% to KRW1,580.2 billion in 2008, net property, plant and equipment increased by 3.8% to KRW11,285.2 billion. Among non-current assets, leased aircraft and engine assets grew by KRW372.5 billion to KRW5,217.8 billion.
Assets (In billions of KRW)
2008
2007
Change (%)
1,975.6
1,982.0
-0.3%
Cash & Cash Equivalents
494.5
688.5
-28.2%
Trade Receivables
675.3
694.6
-2.8%
Inventories
251.0
279.2
-10.1%
Other Current Assets
554.8
319.7
73.5%
13,892.1
13,161.8
5.5%
1,580.2
1,655.9
-4.6%
11,285.2
10,869.7
3.8%
215.9
232.1
-7.0%
810.8
404.1
100.6%
15,867.6
15,143.7
4.8%
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
2. LIABILITIES Total liabilities for the Company in 2008 stood at KRW13,044.2 billion, an increase year-on-year of 21.4%. This was primarily due to respective increases in current liabilities and non-current liabilities of 17.6% and 23.4% over the previous year. Among current liabilities, short-term borrowings and the current portion of long-term debt increased by KRW258.3 billion and KRW269.7 billion compared to 2007. Trade payables, advance receipts and accrued expenses respectively declined by 50.9%, 43.9% and 11.2% to KRW96.1 billion, KRW272.2 billion and KRW421.1 billion in 2008, while short-term borrowings and current maturities of long-term liabilities increased by 48.7% and 22.1%, respectively. Non-current liabilities rose by 23.4% to KRW8,755.7 billion in 2008, mainly as a result of a 36.8% increase in debentures. While long-term obligations under installment purchases and asset-backed debt respectively fell 38.7% and 76.0% to KRW157.1 billion and KRW31.5 billion, obligations under capital leases significantly increased by KRW941.4 billion to KRW3,148.4 billion.
74
Liabilities (In billions of KRW)
Current Liabilities Trade Payables
2008
2007
Change (%)
4,288.5
3,647.7
17.6%
96.1
195.7
-50.9%
788.2
529.9
48.7%
Current Portion of Long-term Liabilities (incl. lease)
2,166.4
1,774.9
22.1%
Other Current Liabilities
1,237.8
1,147.2
7.9%
Short-term Borrowings
Non-Current Liabilities
8,755.7
7,095.9
23.4%
Debentures, net
2,544.7
1,860.1
36.8%
Obligations under Capital Leases
3,148.4
2,207.1
42.6%
Long-term Loans (Foreign Currency)
1,172.8
1,051.8
11.5%
Long-term Debt, net
703.7
640.1
9.9%
Long-term Obligations under Installment Purchases
157.1
256.3
-38.7%
Other Total Liabilities
1,029.0
1,080.5
-4.8%
13,044.2
10,743.7
21.4%
3. SHAREHOLDERS’ EQUITY Capital stock and capital surplus remained at the same level as the previous year, while other accumulated comprehensive income soared by 1376.4% to KRW429.2 billion, primarily due to gain on disposition of property, plant and equipment. As a result of this, shareholders’ equity decreased by 35.8% to KRW2,823.4 billion from the 2007 figure of KRW4,400 .0 billion.
Shareholders' Equity (In billions of KRW)
2008 Capital Stock
2007
366.8
366.8
Capital Surplus
3,008.8
3,008.6
Retained Earnings
(915.9)
1,061.0
Capital Adjustment
(65.4)
(65.4)
2,823.4
4,400.0
Total Shareholders' Equity
75
Annual Report 2008
Management's Discussion & Analysis
4. CASH FLOWS: OPERATING, INVESTING, FINANCING ACTIVITIES Cash Flows (In billions of KRW)
2008
2007
Cash Flow from Operating Activities
(118.4)
672.9
Cash Flow from Investing Activities
(570.3)
(1,687.8)
Cash Flow from Financing Activities
494.7
1,249.6
Increase (Decrease) in Cash Cash and Cash Equivalents at Year-end
(194.0)
234.8
494.5
688.5
Cash flow from operating activities decreased to negative KRW118.4 billion from KRW672.9 billion in 2007, despite the significant increase in non-cash related expenses by 201% to KRW3,287.4 billion in 2008 compared to the 2007 figure of KRW1,092.2 billion. This decrease stems from the substantial decline in net income from KRW12.9 billion in 2007 to negative KRW1,942.4 billion in 2008. Non-cash income also significantly increased by 206% to KRW678 billion from KRW221.5 billion. This resulted in a further decrease in cash flow from operating activities in 2008. Non-cash items, which were added to net income, such as depreciation, loss on foreign currency translation, and loss on disposition of property, plant and equipment, increased by 201% to KRW3,287.4 billion from KRW1,092.2 billion in 2007. The major relevant items for the increase were the substantial rise in foreign currency translation loss by KRW1,943.2 billion to KRW2,022.7 billion in 2008, as well as the increase in loss from disposal of property, plant and equipment by KRW137.6 billion to KRW166.7 billion. Non-cash items, which were deducted from net income, also substantially increased to KRW678 billion from KRW221.5 billion, a 206% increase, mainly due to the significant increase in gains on foreign currency translation. Gains on valuation of derivative instruments also increased to KRW102 billion from KRW2.5 billion, a 3,925.1% increase. Net cash outflow from investing activities decreased by KRW363.1 billion to KRW1,763.6 billion, while cash inflows from investing activities increased by 171.9% to KRW1,193.3 billion. This increase is primarily due to the disposal of aircraft and engines, which amounted to KRW461.1 billion, and the disposition of construction-in-progress which amounted to KRW333.8 billion. Net cash outflow from financing activities increased to KRW2,303.7 billion in 2008, up from KRW1,922.7 billion in 2007. The main reason for the increase in net cash outflow is the redemption of the current portion of long-term liabilities. Net cash inflow from financial activities declined by 11.8% to KRW2,798.4 billion, mainly due to a decrease in currency long-term borrowings on the Won, which fell by KRW390.6 billion, or 72.1%. Accordingly, Korean Air’s cash holdings were reduced by KRW194 billion to stand at KRW494.5 billion as of the end of fiscal year 2008.
76
IV. OUTLOOK FOR 2009 According to the International Air Transport Association, it is forecast that the world airline industry will post US$2.5 billion in losses, and global demand for airline services will shrink 3.6%. The global airline industry is expected to undergo massive restructuring. A weaker Korean won will result in a drop in the number of overseas travelers. By contrast, Korea is forecast to receive more foreign tourists. Beginning in the second half of 2009, low-priced airliners will begin offering international services, making the short-distance international route market fiercer. Korean Air inevitably chalked up losses due to high oil prices and a weakened Korean won. However, Korean Air has invested heavily over the past five years, which is expected to pay off this year, the airline’s 40th anniversary. Korean Air will lower its domestic passenger market sales ratio to 40%, and by focusing on overseas markets, will raise the ratio of overseas sales ratio up to 60% level, despite a slump in overseas markets as well. But the company feels that it is very possible to reach this goal thanks to a stronger US dollar, and is also planning to increase the number of allocated seats for overseas branches. Last year, Korean Air began a service to Milano, and the airline is pushing forward this year with a plan to develop routes to new destinations with high passenger demand. When Shizuoka Airport in Japan opens, Korean Air will develop an Incheon-Shizuoka route, and is considering launching a new route to Clark in the Philippines. Korean Air will increase the number of seats to Vancouver and Toronto in Canada with the successful signing of an aviation liberalization agreement, as seats available for the two cities were in short supply. The airliner will put larger airplanes into service for routes to American destinations, such as Hawaii, Chicago and Los Angeles, as these routes are popular with Koreans. From this year through 2015, Korean Air will gradually introduce environmentally friendly next-generation airplanes with high fuel efficiency, beginning with three B777-300ER models this year. By 2015, the Company will have introduced 48 nextgeneration airplanes, such as the A380 and B787, with the intent to secure its competitiveness as a premium airliner in the global market. Last December, Korean Air signed an agreement to manage Navoi Airport with the Uzbekistan government. Korean Air is planning to build the infrastructure for the airport over the course of the next five years, and by attracting logistics companies from around the world, turn Navoi Airport into a logistics hub for Central Asia by 2018. Along with the Navoi Airport project, Korean Air expects to raise its share in the global air cargo market to 10% and take this business to the next level when the construction of its cargo terminal in Tianjin is completed in 2010. Currently, Korean Air is the leader in the global air cargo service market. At home, KTX and low-priced airliners are now emerging as competitors in the domestic market. Korean Air’s domestic sales stand below 5%. The Company will cater to customers who want premium services at low prices through its subsidiary, Jin Air. This means Korean Air and Jin Air will do their own parts sincerely. Korean Air aims to base its business on profitability and operate in the black. The company will increase its overseas sales and beef up its market competitiveness through upgrades and differentiation. Oil prices began to fall beginning in the second half of last year, but the foreign exchange rate has stayed higher than expected. Korean Air is planning to raise sales goals based on currencies and manage a hedge program in an effort to mitigate foreign exchange risks.
77
Annual Report Report 2008 2008 Annual
Independent Auditors' Report ERNST & YOUNG HAN YOUNG Taeyoung Bldg., 10-2 Yeouido-dong, Yeongdeungpo-gu, Seoul 150-777 Korea
Tel: +82 2 3787 6600 Fax: +82 2 783 5890 www.ey.com/kr
The Board of Directors and Stockholders Korean Air Lines Co., Ltd. We have audited the accompanying balance sheets of Korean Air Lines Co., Ltd. (the Company) as of 31 December 2007 and 2008, and the related statements of operations, 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 31 December 2007 and 2008, 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 2008 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. Without qualifying our opinion, we draw attention to Notes 2 and 8 to the financial statements. The Company chose the revaluation model for its land and revalued them at fair value by early adopting SKAS 5 Amendments - Property, Plant and Equipment. As a result, the Company's net book value of land, related deferred income tax liabilities and net assets increased by ￦775,337 million, ￦170,574 million and ￦604,763 million as of 31 December 2008, respectively. 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 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.
27 February 2009 This audit report is effective as of 27 February 2009, the 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.
78
Balance Sheets
US dollars in thousands (Note 2)
Korean won in millions As of 31 December 2007 and 2008
2007
2008
2008
Assets Current assets: Cash and cash equivalents (Note 3)
￦
688,476
￦
494,488
US$
393,231
Short-term financial instruments (Note 3)
16,280
16,072
12,781
Short-term investment securities (Note 4)
268
876
697
694,641
675,338
537,048
27,558
25,617
20,371
Inventories, net of valuation allowance (Note 5)
279,184
250,975
199,583
Advance payments
106,084
87,363
69,474
Prepaid expenses
74,279
57,057
45,373
Trade accounts and notes receivable, less allowance for doubtful accounts of ￦5,928 million as of 31 December 2008 (￦7,017 million as of 31 December 2007) (Note 21) Other accounts receivable, less allowance for doubtful accounts of ￦65 million as of 31 December 2008 (￦166 million as of 31 December 2007)
Accrued income, less allowance for doubtful accounts of ￦682 million as of 31 December 2008 (￦799 million as of 31 December 2007)
83,415
68,267
54,288
Short-term derivative instrument assets (Note 13)
10,737
88,597
70,455
Current portion of deferred income tax assets (Note 17) Total current assets
1,031
210,921
167,730
1,981,953
1,975,571
1,571,031
Non-current assets: Long-term financial instruments (Note 3) Long-term investment securities (Notes 6 and 14) Equity method investments (Notes 7 and 14) Long-term receivable under capital lease (Note 21) Long-term loans, less allowance for doubtful accounts of ￦0 million as of 31 December 2008 (￦767 million as of 31 December 2007) Guarantee deposits Long-term derivative instrument assets (Note 13) Deferred income tax assets (Note 17) Property, aircraft and equipment, net (Notes 8, 14 and 24) Intangible assets, net (Notes 9, 14 and 24) Other non-current assets Total non-current assets Total assets (Continued) See accompanying notes.
14
14
11
99,592
61,520
48,922
1,556,259
1,494,814
1,188,719
-
23,815
18,938
80,679
3,984
3,168
163,860
247,272
196,638
3,864
1,280
1,018
125,792
340,900
271,093
10,869,686
11,285,160
8,974,283
232,113
215,910
171,697
29,892
217,388
172,874
13,161,751
13,892,057
11,047,361
￦ 15,143,704
￦ 15,867,628
US$ 12,618,392
79
Annual Report 2008
Balance Sheets (Continued)
US dollars in thousands (Note 2)
Korean won in millions As of 31 December 2007 and 2008
2007
2008
2008
Liabilities and stockholders' equity Current liabilities: Trade accounts and notes payable (Note 21) Short-term borrowings (Notes 11, 13 and 14)
￦
195,706 529,882
￦
96,124 788,162
US$
76,441 626,768
Other accounts payable (Note 13)
73,709
110,629
87,975
Advance receipts from customers
485,441
272,227
216,483
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 12, 13 and 14) Current portion of obligations under capital leases (Notes 12, 13 and 14)
89,541
72,495
57,651
473,934
421,074
334,850
24,273
1,520
1,209
377
2,310
1,837
1,368,464
1,490,270
1,185,105
406,418
676,153
537,696
1
357,546
284,331
3,647,746
4,288,510
3,410,346
Bonds, net of discount on bonds (Notes 12, 13 and 14)
1,860,128
2,544,739
2,023,649
Long-term loans (Notes 12, 13 and 14)
1,691,851
1,876,489
1,492,238
256,290
157,054
124,894
2,207,080
3,148,449
2,503,737
57,032
52,845
42,024
Short-term derivative instrument liabilities (Note 13) Total current liabilities Non-current liabilities:
Long-term obligations under installment purchases, net of present value discount (Notes 12, 13 and 14) Obligations under capital leases (Notes 12 and 14) Guaranteed loans, net of present value discount (Notes 12, 14 and 21) Asset-backed securitization loans (Note 12)
131,069
31,499
25,049
Long-term other accounts payable (Note 13)
187,640
188,625
150,000
47,078
47,315
37,626
-
3,465
2,755
Long-term withholdings Long-term advance receipts from customers Severance and retirement benefits (Note 15)
465,109
469,970
373,734
Unredeemed mileage liabilities
192,659
235,275
187,097
Total non-current liabilities Total liabilities Commitment and contingencies (Notes 12, 13, 14 and 21) (Continued) See accompanying notes.
7,095,936
8,755,725
6,962,803
￦ 10,743,682
￦ 13,044,235
US$10,373,149
80
Balance Sheets (Continued)
US dollars in thousands (Note 2)
Korean won in millions As of 31 December 2007 and 2008
2007
2008
2008
Liabilities and stockholders' equity (cont'd) Stockholders' equity (Note 16): Capital stock: Common stock Preferred stock
￦
359,858
￦
359,858
US$
286,169
6,896
6,896
5,484
366,754
366,754
291,653
Capital surplus (Note 16): Paid-in capital in excess of par value Asset revaluation surplus Other capital surplus
190,823
191,077
151,950
2,815,926
2,815,926
2,239,305
1,825
1,760
1,400
3,008,574
3,008,763
2,392,655
(65,399)
(65,399)
(52,007)
(65,399)
(65,399)
(52,007)
Capital adjustments: Treasury stock (Note 16)
Accumulated other comprehensive income: Gain on valuation of long-term investment securities (Notes 6 and 18) Gain (loss) on valuation of derivative instruments (Notes 13 and 18) Equity adjustment arising from equity method investments (Notes 7 and 18) Revaluation surplus arising from property, aircraft and equipment (Notes 8 and 18) Gain on valuation of other non-current assets (Note 18)
31,166
4,229
3,363
1,321
(269,777)
(214,534)
(7,392)
54,052
42,984
-
635,537
505,397
3,976
5,161
4,104
29,071
429,202
341,314
925,200
930,500
739,960
135,822
(1,846,427)
(1,468,332)
1,061,022
(915,927)
(728,372)
Retained earnings (accumulated deficit): Appropriated (Note 16) Unappropriated (undisposed) Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes.
4,400,022
2,823,393
2,245,243
￦ 15,143,704
￦ 15,867,628
US$ 12,618,392
81
Annual Report 2008
Statements of Operations
US dollars in thousands (Note 2)
Korean won in millions Years ended 31 December 2007 and 2008
2007
2008
2008
Operating revenues (Notes 21, 23 and 24): Passenger
￦
5,217,127
￦
5,953,328
US$ 4,734,256
Cargo
2,532,957
3,026,849
2,407,037
Others-revenues
1,061,905
1,232,401
980,041
8,811,989
10,212,578
8,121,334
4,141,629
5,800,826
4,612,983
Operating expenses (Notes 13, 21, 22, 23 and 24): Flight operations Maintenance and overhaul
541,690
647,310
514,760
Passenger and cargo services
799,601
870,737
692,435
Station and ground operations
752,948
829,281
659,468
Others-expenses
553,449
673,214
535,358
6,789,317
8,821,368
7,015,004
Gross profit
2,022,672
1,391,210
1,106,330
Selling and administrative expenses (Note 22)
1,385,835
1,490,507
1,185,294
636,837
(99,297)
(78,964)
28,166
46,312
36,829
Operating income (loss) (Note 24) Other income (expenses): Interest income Dividend income
2,408
1,783
1,418
Interest expense
(425,071)
(486,349)
(386,759)
Bad debt expense Reversal of allowance for doubtful accounts Gain (loss) on foreign exchange transactions, net Loss on foreign currency translation, net (Continued) See accompanying notes.
￦
(410)
-
-
342
2,077
1,652
43,955
(301,685)
(239,909)
(59,253)
￦ (1,551,171)
US$ (1,233,536)
82
Statements of Operations (Continued)
US dollars in thousands (Note 2)
Korean won in millions Years ended 31 December 2007 and 2008
Equity in earnings (loss) of equity method investments (Note 7)
2007 ￦
Loss on disposal of equity method investments Gain on valuation of derivative instruments (Note 13)
2008
72,285
￦
2008
(5,878)
(14,590)
(14,867)
US$
(4,674) (11,823)
2,534
101,990
81,105
Gain on settlement of derivative instruments, net (Note 13)
369
23,152
18,411
Gain on valuation of interest rate swap contracts (Note 13)
725
4,238
3,370
(725)
(4,238)
(3,370)
87,490
(164,753)
(131,016)
-
(39,454)
(31,376)
-
41,495
32,998
509
2,439
1,940
Loss on valuation of long-term obligations under installment purchases (Notes 12 and 13) Gain (loss) on disposal of property, aircraft and equipment, net Impairment loss on property, aircraft and equipment (Note 8) Recovery of impairment loss (Note 8) Gain on disposal of investments Gain on assets contributed
1,786
-
-
Donations
(10,794)
(16,827)
(13,381)
Others, net
(272,124)
10,201
8,113
(542,398)
(2,351,535)
(1,870,008)
Income (loss) before income taxes
94,439
(2,450,832)
(1,948,972)
Provision for (benefit from) income taxes (Note 17)
81,546
(508,402)
(404,296)
￦ (1,942,430)
US$ (1,544,676)
￦
US$
Net income (loss) (Note 18)
￦
12,893
Net income (loss) per share (Note 19) (Korean won and US$ in units)
￦
180
See accompanying notes.
(28,762)
(22.87)
83
Annual Report 2008
Statements of Dispositions of Accumulated Deficit
US dollars in thousands (Note 2)
Korean won in millions Years ended 31 December 2007 and 2008
2007
2008
2008
Retained earnings before appropriations (accumulated deficit before dispositions) : Unappropriated retained earnings carried forward from the prior year
￦
Cumulative effect of changes in accounting policy (Note 2)
118,291
￦
4,638
Net income (loss) for the year
96,003
US$
-
76,344 -
12,893
(1,942,430)
(1,544,676)
135,822
(1,846,427)
(1,468,332)
Reserve for foreign currency valuation (Note 16)
-
170,000
135,189
Reserve for research and human resources development reserve (Note 16)
-
130,000
103,380
-
620,000
493,042
69,700
-
-
Transfer from other reserve to offset deficit (2008-proposed)
Reserve for facility usage (Note 16) Reserve for improvement of financial position (Note 16) Legal reserve (Note 16)
-
10,500
8,350
Asset revaluation surplus
-
900,000
715,706
69,700
1,830,500
1,455,667
5,000
-
-
Dividends
34,519
-
-
Reserve for foreign currency valuation
70,000
-
-
109,519
-
-
Appropriations in 2007 (Notes 16 and 20): Legal reserve
Unappropriated retained earnings (undisposed deficit) carried forward to the next year See accompanying notes.
￦
96,003
￦
(15,927)
US$
(12,665)
84
Statements of Changes in Stockholders' Equity
US dollars in thousands (Note 2)
Korean won in millions Years ended 31 December 2007 and 2008
Common stock As of 1 January 2007
Accumulated Retained Capital other earnings adjustments comprehensive (accumulated income deficit)
Capital surplus
￦ 363,343 ￦ 3,007,021 ￦ (65,399) ￦
Total
Total
16,689 ￦ 1,053,792 ￦ 4,375,446 US$ 3,479,480
Cumulative effect of changes in accounting policy
-
-
-
(13,638)
4,638
(9,000)
(7,157)
Cash dividends
-
-
-
-
(10,301)
(10,301)
(8,192)
Stock dividends
3,411
-
-
-
-
3,411
2,713
Net income for the year
-
-
-
-
12,893
12,893
10,253
Capital in excess of par value
-
(272)
-
-
-
(272)
(216)
Other capital surplus
-
1,825
-
-
-
1,825
1,451
Gain on valuation of long-term investment securities
-
-
-
7,602
-
7,602
6,045
Gain on valuation of derivative instruments
-
-
-
3,855
-
3,855
3,066
Equity adjustment arising from equity method investments, net
-
-
-
10,588
-
10,588
8,420
Gain on valuation of other non-current assets
-
-
-
3,975
-
3,975
3,161
As of 31 December 2007
￦ 366,754 ￦ 3,008,574 ￦ (65,399) ￦
29,071 ￦ 1,061,022 ￦ 4,400,022 US$ 3,499,024
As of 1 January 2008
￦ 366,754 ￦ 3,006,749 ￦ (65,399) ￦
46,415 ￦ 1,054,230 ￦ 4,408,749 US$ 3,505,964
Cumulative effect of changes in accounting policy
-
1,825
-
(17,344)
6,792
(8,727)
(6,940)
Cash dividends
-
-
-
-
(34,519)
(34,519)
(27,450)
Net loss for the year
-
-
-
-
(1,942,430)
(1,942,430)
(1,544,676)
Capital in excess of par value
-
254
-
-
-
254
202
Other capital surplus
-
(65)
-
-
-
(65)
(52)
Loss on valuation of long-term investment securities
-
-
-
(26,937)
-
(26,937)
(21,421)
Loss on valuation of derivative instruments
-
-
-
(271,098)
-
(271,098)
(215,585)
Equity adjustment arising from equity method investments, net
-
-
-
61,444
-
61,444
48,862
Revaluation surplus arising from property, aircraft and equipment
-
-
-
635,537
-
635,537
505,397
-
-
-
1,185
-
1,185
942
Gain on valuation of other non-current assets As of 31 December 2008 See accompanying notes.
￦ 366,754 ￦ 3,008,763 ￦ (65,399) ￦ 429,202 ￦ (915,927) ￦ 2,823,393 US$ 2,245,243
85
Annual Report 2008
Statements of Cash Flows
US dollars in thousands (Note 2)
Korean won in millions Years ended 31 December 2007 and 2008
Cash flow from operating activities: Net income (loss) Adjustments to reconcile net income (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 on foreign currency translation, net Equity in loss (earnings) 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 installment purchases, net Loss (gain) 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 Other non-current assets Trade accounts and notes payable Other accounts payable Advance receipts from customers Withholdings Accrued expenses Income taxes payable Unearned revenues (Continued) See accompanying notes.
2007 ￦
￦
2008
2008
12,893
￦ (1,942,430)
US$ (1,544,676)
729,259 17,120 128,649 940 (342) 410 23,783 46,696 17,113 (10,630) 67,936 (72,285) 14,590 (2,534) (725)
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)
602,967 14,138 76,973 (1,652) 33,889 37,839 16,012 (29,408) (52) 1,267,099 4,674 11,823 (81,105) (3,370)
725 (87,490) (509) (2,057)
4,238 164,753 39,454 (41,495) (2,439) (7,009)
3,370 131,016 31,376 (32,998) (1,940) (5,574)
(80,047) 7,783 (57,594) (74,368) (13,966) (41,411) (338) 38,597 8,455 (35,609) 33,110 109,768 6,673 (1,605) (18,236) 150
207,070 20,427 28,009 20,868 64,484 26,034 40,928 (516,700) 15,887 (164,700) (49,654) (213,074) (30,500) (131,000) (22,752) (2,545)
164,668 16,244 22,274 16,595 51,280 20,703 32,547 (410,895) 12,634 (130,974) (39,486) (169,443) (24,254) (104,175) (18,093) US$ (2,024)
￦
86
Statements of Cash Flows (Continued)
Korean won in millions Years ended 31 December 2007 and 2008
Changes in operating assets and liabilities (cont'd): Derivative instrument liabilities Long-term withholdings Long-term other accounts payable 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
2007 ￦
59 (1,611) 232,000 (144,976) (180,620)
US dollars in thousands (Note 2)
2008 ￦
(1) (4,040) 3,465 (126,175) 46,092
2008 US$
(1) (3,213) 2,755 (100,338) 36,654
3,172 660,035 672,928
2,533 1,824,065 (118,365)
2,014 1,450,549 (94,127)
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 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 Decrease in other assets Net cash used in investing activities
(1,077) 3,626 (7,944) (877,827) 37,109 (25,559) 215,670 (1,023,063) (19,965) 11,272 7 (1,687,751)
3,349 268 1,997 139,101 (35,993) 124,128 (30,058) 806,906 (1,595,345) (1,575) 16,617 290 (570,315)
2,663 213 1,588 110,617 (28,623) 98,710 (23,903) 641,675 (1,268,664) (1,252) 13,214 231 (453,531)
Cash flows from financing activities: Proceeds from short-term borrowings, net Proceeds from issuance of bonds Proceeds from long-term loans Proceeds from obligations under capital leases, net Proceeds from asset-backed securitization loans Repayment of current maturities of long-term liabilities Repayment of long-term obligation under installment purchases Stock issue costs Payment of dividends Proceeds from depositary Net cash provided by financing activities
156,701 1,070,718 802,255 33,686 206,706 (1,013,268) (272) (6,890) 1,249,636
111,566 1,060,156 483,474 306,687 (1,414,743) (18,183) (34,519) 254 494,692
88,720 843,066 384,473 243,886 (1,125,044) (14,460) (27,450) 202 393,393
234,813 453,663 688,476
(193,988) 688,476 494,488
(154,265) 547,496 US$ 393,231
Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at the beginning of the year (Note 25) Cash and cash equivalents at the end of the year (Note 25) See accompanying notes.
￦
￦
87
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
1. ORGANIZATION AND BUSINESS Korean Air Lines Co., Ltd. (the Company) was incorporated on 19 June 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 inflight meals. The Company has been a publicly traded company upon listing its common stock at the Korea Exchange since 1966. The total capital stock of the Company as of 31 December 2008 amounted to ￦366,754 million. The financial statements of the Company for the year ended 31 December 2008 were approved by the Board of Directors on 26 February 2009.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of financial statement preparation The 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. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements. In the event of any differences in interpreting the financial statements or the independent auditors’ report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail.
Adoption of new and revised Statements of Korea Accounting Standards (SKAS) and Korea Accounting Institute Opinion (KAI Opinion) (a) Standards and amendments effective in 2008 The Company has adopted the following new and revised SKAS and KAI Opinion for the current financial year. •SKAS 8 Amendments - Investment in Securities •SKAS 15 Amendments - Investment in Associates •SKAS 16 Amendments - Income Taxes •KAI Opinion 06-02 Amendments - Accounting for the Recognition of Deferred Income Tax Assets/Liabilities Associated with Investments in Subsidiaries, Branches and Associates, and Interests in Joint Ventures The principal effects of these changes are as follows:
88
SKAS 15 Amendments - Investments in Associates The revised standard requires a parent entity’s reported net income and shareholder’s equity in its non-consolidated financial statements to agree with the net income and shareholder’s equity attributable to the parent entity in its consolidated financial statements, except for the case where the carrying amount of the investment in a subsidiary is below zero where the application of the equity method had already been discontinued. The comparative 2007 financial statements was restated in accordance with SKAS 1 Accounting Changes and Corrections of Errors and the effects of this change are as follows: Korean won in millions 2007 Equity method investments Capital surplus Accumulated other comprehensive income Retained earnings Net income Net income per share (Korean won)
2006
Before
After
￦ 1,564,986
￦ 1,556,259
Before
3,006,749
3,008,574
3,007,021
3,007,021
46,415
29,070
16,689
3,050
1,054,230
1,061,022
1,053,792
1,058,431
10,740
12,893
383,012
362,439
148
180
5,725
5,417
￦
624,395
After ￦
615,395
SKAS 16 Amendments - Income Taxes The revised standard requires an entity to apply the revised disclosures which enable users of the financial statements to better understand the components of income taxes reported in the financial statements. These revised disclosures are presented in Note 17. (b) Standard that is not yet effective and have been early adopted by the Company The Company has also early adopted the SKAS 5 Amendments - Property, Plant and Equipment for the current financial year. The principal effect of this change is as follows: SKAS 5 Amendments - Property, Plant and Equipment This revised standard allows an entity to choose either the revaluation model or cost model as its accounting policy to an entire class property, aircraft and equipment. The comparative 2007 financial statements shall not be restated. The Company has early adopted the revised standard and revalued its land at fair value. As a result, the Company’s net book value of land, related deferred income tax liabilities and net assets increased by ￦775,337 million, ￦170,574 million and ￦604,763 million as of 31 December 2008, respectively. The related disclosures are presented in Note 8.
89
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Financial statement translation The accompanying balance sheet as of 31 December 2008, and the related statements of operations, changes in stockholders’ 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 ￦1,257.5 to US$1, the exchange rate on 31 December 2008. 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 recognition Revenue 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 by reference to the stage of completion. Stage of completion is measured by reference to costs incurred to date as a percentage of total estimated costs for each contract. Allowance for doubtful accounts The 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 a review of the aging and current status of the outstanding receivables. Cash equivalents Highly 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 instruments Financial 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. Inventories Inventories are valued at the lower of cost or market, with cost being determined using the moving- average 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.
90
Investment securities Investments 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 stockholders’ 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 balance sheet date, except for non-marketable equity securities which are measured at cost subsequent to initial measurement if their fair values cannot be reliably estimated. 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 balance sheet 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 investments Investments 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 balance sheet. If the Company’s share of losses of the investee equal or exceed its interest in the investee, it
91
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
discontinues 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 5 years using the straightline 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 straight-line 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 nonmonetary 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 balance sheet 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 stockholders’ 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 in accordance with the Korean Assets Revaluation Law and are stated at revalued amount less accumulated depreciation. The revaluation is no longer allowed effective from 1 January 2001. 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. Borrowing costs directly attributable to the acquisition, construction or production of qualifying assets are expensed in the period in which they are incurred. Depreciation of property, aircraft and equipment is provided using the straight-line method over the estimated useful life of the assets as follows: Years Buildings
40
Aircraft and engine
20
Leased aircraft and engine
20
Others
6 - 15
92
The Company has early adopted the amended SKAS 5 Property, Plant and Equipment and chosen the revaluation model as its accounting policy for its land. As a result, land is measured at fair value and impairment losses recognized after the date of the 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 operations to the extent that it reverses a revaluation decrease of the same asset previously recognized in the statement of operations. If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in the statement of operations. However, the decrease shall be debited directly to other comprehensive income to the extent of any credit balance existing in the revaluation surplus in respect of that asset. Intangible assets Intangible 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 ranging from 5 to 30 years. Discount on bonds Discount 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 benefits In 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 for the years ended December 31, 2008 and 2007 is sufficient to state the liability at the estimated obligation arising from services performed to and at rates of pay in effect as of December 31, 2008 and 2007. Separate funding of this liability is not required by Korean law. The lesser of 5% of annual payroll expense or 35% of the accumulated severance and retirement benefits provision is deductible for corporate income tax reporting purposes unless benefits are actually paid or the non tax-deducted portion is deposited with financial institutions. Accordingly, the Company has deposited a portion of its severance and retirement benefits obligation with an insurance company. Since the Company’s employees are individually nominated as the vested beneficiaries of the deposit in respect of what is due to them as of 31 December 2008 and 2007, such deposit has been offset against the Company’s liability for severance and retirement benefits as of such dates.
93
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
In accordance with the Korean National Pension Law prior to revision, the Company had prepaid a portion of its severance and retirement benefits obligation to the Korean National Pension Service (KNPS) at the rate of 3% of payroll expense up through 31 March 1999. Such prepayments have been offset against the Company’s liability for severance and retirement benefits. In accordance with a revision in the Korean National Pension Law, additions to these prepayments are no longer required effective from 1 April 1999. Leases The 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. 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 balance sheet 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 finance charges 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 expenses. Income taxes Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered 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 balance sheet. 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 translation Transactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the balance sheet dates. The resulting unrealized foreign currency translation gains or losses are credited or charged to current operations. Valuation of long-term receivables (payables) at present value Receivables (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.
94
Impairment of assets When the recoverable amount of an asset is less than its carrying amount due to obsolescence, physical damage or abrupt decline in the market value of the asset, the decline in value, if material, is deducted from the carrying amount and recognized as an asset impairment loss in the current year. Derivative financial instruments Derivative 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 stockholders’ 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 program The 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. Per share amounts Basic 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. Significant judgments and accounting estimates The preparation of financial statements in accordance with Korean GAAP requires management to make judgments, 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.
95
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
3. CASH AND CASH EQUIVALENTS AND FINANCIAL INSTRUMENTS Cash and cash equivalents, and financial instruments as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007 Cash on hand
￦
Checking and passbook accounts Money market funds Other deposits Foreign currency deposits
(Note 2)
2008
1,280
￦
2008 723
US$
575
43,727
10,940
8,700
282,108
179,144
142,460
12,051
12,369
9,836
365,590
307,384
244,441
Guarantee deposits for the maintenance of checking accounts
14
14
11
704,770
510,574
406,023
(16,280)
(16,072)
(12,781)
Less: Short-term financial instruments Long-term financial instruments Cash and cash equivalents
(14) ￦
688,476
￦
(14)
(11)
494,488
US$ 393,231
4. SHORT-TERM INVESTMENT SECURITIES Short-term investment securities as of 31 December 2007 and 2008 are entirely consisted of government and public bonds.
5. INVENTORIES Inventories as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007 Merchandise
￦
14,412
(Note 2)
2008 ￦
2008
20,526
US$
16,323
Work-in-progress
58,472
-
-
Raw materials
36,924
56,776
45,150
163,899
160,872
127,930
8,742
12,801
10,180
282,449
250,975
199,583
(3,265)
-
-
250,975
US$ 199,583
Supplies Materials-in-transit Less valuation allowance ￦
279,184
￦
96
6. LONG-TERM INVESTMENT SECURITIES Long-term investment securities as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007 Available-for-sale securities
￦
96,787
￦
99,592
Held-to-maturity securities
(Note 2)
2008
2008
￦
58,739
￦
61,520
2,805
US$
46,711
US$
48,922
2,781
2,211
Available-for-sale securities as of 31 December 2008 and 2007 consist of the following: Korean won in millions 2008
2007
Equity
Fair value
Equity
ownership
Acquisition
Book
or net-asset
ownership
Book
(%)
cost
value
value
(%)
value
0.11
￦ 11,767
Marketable securities1: Hana Financial Group Inc.
0.11
￦
1,602
￦
4,553
￦
4,553
Hanil Cement Co., Ltd.
3.70
10,229
18,281
18,281
3.70
30,283
Meritz Securities Co., Ltd.
0.96
3,283
2,305
2,305
0.96
6,773
GS Home Shopping Inc.
4.50
20,226
14,134
14,134
4.50
19,849
Hanjin Heavy Industries Co., Ltd.
0.08
399
1,150
1,150
0.08
5,630
0.05
148
176
176
0.05
1,037
35,887
40,599
40,599
Hanjin Heavy Industries & Construction Holdings Co., Ltd.
75,339
Non-marketable securities1: The Korea Economic Daily Co., Ltd
0.05
145
145
58
0.05
145
Daehan Oil Pipeline Corporation
3.10
6,967
7,677
7,677
3.10
7,677
Kihyup Finance Co., Ltd.
1.72
500
500
655
1.72
500
Cheju Convention Center, Ltd.
0.52
700
700
732
0.52
700
Korea Tourist Supply Center Inc.
0.40
81
81
93
0.40
81
Entob Co., Ltd.
6.25
1,000
1,000
1,537
6.25
1,000
Incheon United Football Club
0.33
100
100
(4)
0.52
100
Sita Inc.
0.85
406
406
1,071
0.85
406
Seoul Tourism Marketing Co., Ltd.
2.84
2.84
500
500
469
￦ 10,399
￦ 11,109
￦ 12,288
500 ￦ 11,109 (Continued)
97
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Korean won in millions 2008
2007
Equity
Fair value
Equity
ownership
Acquisition
Book
or net-asset
ownership
Book
(%)
cost
value
value
(%)
value
Investments in affiliated companies2: Korea Global Logistics System Co., Ltd.
65.00
￦
650
￦
650
￦
1,888
￦
65.00
650
Hanjin International Japan
55.00
394
394
1,849
55.00
394
Terminal One Management Inc.
25.00
32
32
1
25.00
32
US Cargo Sales Joint Venture, Inc.
33.33
1,092
1,092
472
33.33
1,092
31.50
Global Logistics System Asia Pacific Co., Ltd.
31.50
Subordinated bonds Beneficiary certificates Investments in other equity securities
64
64
319
2,232
2,232
4,529
64
3,000
3,000
3,000
-
-
-
-
6,372
2,232
1,799
1,799
1,799
1,735
Total
￦ 53,317
￦ 58,739
￦ 62,215
￦ 96,787
US dollars in thousands (Note 2)
US$42,399
US$46,711
US$49,476
1 Marketable equity securities were valued at quoted market value as of the balance sheet date, while non-marketable equity securities whose fair values could not be reliably measured due to the lack of reliable information on the future cash flows of the investees were stated at acquisition cost. Daehan Oil Pipeline Corporation’s securities, non-marketable equity securities, are recorded at fair value according to [2006-5]“Accounting for Valuation on Non-listed Equity Securities”and the difference between acquisition cost and fair value is accounted for as other comprehensive income. 2 The Company’s equity interests in these investees are 20% or more with significant influence or control. However, the Company did not apply the equity method in accounting for these investees since the impact of using the equity method is not material to the Company on the valuation of the investments.
The details of changes in fair value adjustments of long-term investment securities recorded in accumulated other comprehensive income for the years ended 31 December 2008 are as follows: Korean won in millions 1 January
31 December
Hanil Cement Co., Ltd. Meritz Securities Co., Ltd. GS Home Shopping Inc. Hanjin Heavy Industries Co., Ltd. Hanjin Heavy Industries & Construction Holdings Co., Ltd. Beneficiary certificates Daehan Oil Pipeline Corporation
￦
2008
Decrease
2008 Hana Financial Group Inc.
10,165
￦
(7,214)
￦
2,951
20,054
(12,002)
8,052
3,490
(4,467)
(977)
(377)
(5,715)
(6,092)
5,231
(4,481)
750
890
(862)
28
2,825
(2,825)
-
710
-
710 (Continued)
98
Korean won in millions 1 January
31 December
2008
Decrease
2008
Total
42,988
(37,566)
5,422
Tax effect
(11,822)
10,629
(1,193)
Net total
￦
31,166
￦
US dollars in thousands (Note 2)
US$
24,784
US$ (21,421)
(26,937)
￦
4,229
US$
3,363
Held-to-maturity securities are entirely comprised of government and public bonds whose annual maturities as of 31 December 2007 and 2008 are as follows: US dollars in thousands Korean won in millions 2007 ￦
More than 1 year to 5 years
￦
2,792
More than 5 years to 10 years
13 ￦
(Note 2)
2008
2008
2,770
US$
2,203
11 ￦
2,805
8
2,781
US$
2,211
7. EQUITY METHOD INVESTMENTS Equity method investments as of 31 December 2007 and 2008 are as follows: Equity
Korean won in millions
ownership (%)
Acquisition cost
2008 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)
59.54
2007 ￦
93,320 ￦
Book value
2008
2007
Net asset value
2008
2007
2008
93,320 ￦ 130,631 ￦ 154,874 ￦ 130,631 ￦ 154,874
99.35 67.35 100.00 55.82 100.00 24.40 100.00 82.52
15,111 730 99,900 27,788 2,000 54,328 14,000 854,821
15,111 730 99,900 27,788 2,000 54,328 14,000 854,821
23,823 16,644 47,633 31,730 2,583 52,322 14,194 899,433
26,054 19,806 49,188 42,195 3,465 77,738 26,547 869,500
23,823 16,644 47,633 31,730 2,583 49,545 14,194 895,335
26,054 19,806 49,188 42,195 3,465 76,349 26,547 866,367
25.00
2,255
7,641
2,255
9,207
2,255
6,100 (Continued)
99
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Equity
Korean won in millions
ownership (%) Jin Air Co., Ltd. Homeo Therapy Co., Ltd. Hanjin International Corporation Korean Air Lease & Finance Co., Ltd. (KALF) Hanjin Shipping Co., Ltd.1 Keoyang Shipping Co., Ltd.1 US dollars in thousands (Note 2)
2008 100.00 100.00 100.00 100.00 5.53 -
Acquisition cost
Book value
Net asset value
2007 ￦
2008 2007 2008 2007 2008 - ￦ 20,288 ￦ - ￦ 7,852 ￦ - ￦ 7,617 7,035 6,792 6,792 189,078 189,078 18,638 23,026 18,638 23,026
891 891 163,590 6,462 118,245 2,638 57,720 60,468 150,211 172,108 156,518 178,684 4,640 2,572 2,572 ￦ 1,416,582 ￦ 1,447,399 ￦ 1,556,259 ￦ 1,494,814 ￦ 1,510,346 ￦ 1,489,702 US$1,126,507 US$1,151,013 US$1,237,582 US$1,188,719 US$1,201,071 US$1,184,654
1 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.
The changes in carrying amount of equity method investments for the years ended 31 December 2008 and 2007 are as follows: Korean won in millions Equity in Increase 1 Jan
(Decrease)
Dividends
- ￦
Other
earnings (loss)
Other
comprehensive
of investee
changes
income
(943) ￦ 12,146 ￦
31 Dec
Korea Airport Service Co., Ltd.
￦ 130,631 ￦
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 Co., Ltd. Keoyang Shipping Co., Ltd. 2008 2007
478 ￦ 12,562 ￦ 154,874
1,705 51 823 26,054 (348) 23,823 8,639 (89) 19,806 (5,388) 16,644 47,633 1,613 91 (148) 49,188 31,730 (94) 4,475 (94) 6,178 42,195 2,583 882 3,465 (122) 2,291 (109) 23,356 77,738 52,322 24 11 12,318 26,547 14,194 899,433 (5,316) (24,616) 869,500 2,255 8,668 (4,451) 2,735 9,207 20,288 (12,436) 7,852 7,036 (244) 6,792 18,638 (1,247) 582 5,052 23,026 163,590 (139,101) (6,114) (31,711) 5,269 14,528 6,462 150,211 2,747 (3,608) 17,572 (13,233) 18,419 172,108 2,572 (2,747) 180 (1) (4) ￦1,556,259 ￦ (103,109) ￦ (16,617) ￦ (5,878) ￦ (7,044) ￦ 71,203 ￦1,494,814 ￦ 614,339 ￦ 877,827 ￦ (11,272) ￦ 72,285 ￦ 70 ￦ 12,732 ￦1,556,259
100
In applying the equity method of accounting for the year ended 31 December 2008, the Company used the investees’ latest unaudited financial statements as their audited financial statements were not available. Market values of marketable equity method investments as of 31 December 2008 and 2007 are as follows:
Korean won
Korean won
in units
in millions
Number of
Market value
Market
shares
per share
capitalization
Korea Airport Service Co., Ltd.
1,885,134
Hanjin Shipping Co., Ltd.
4,890,802
Number of
￦
26,750
Hanjin Shipping Co., Ltd.
4,811,166
88,524 Korean won
in units
in millions
Market value
Market
per share
1,885,134
50,427
Korean won
shares Korea Airport Service Co., Ltd.
￦
18,100
￦
capitalization
53,000
￦
39,800
99,912 191,484
Changes in the goodwill (negative goodwill) for the years ended 31 December 2008 and 2007 are as follows: Korean won in millions Jungseok Enterprise Co., Ltd.
￦
Hanjin Energy Co., Ltd. Jin Air Co., Ltd. Hanjin Shipping Co., Ltd.1
Amortization
Increase
1 January 2,777
￦
-
￦
1,388
31December ￦
964
1,389
4,097
-
3,133
-
288
53
235
(6,306)
-
269
(6,575)
2008
￦
568
￦
288
￦
2,674
￦
(1,818)
2007
￦
(7,893)
￦
10,379
￦
1,918
￦
568
1 As of 31 December 2008, goodwill and negative goodwill amounted to ￦3,798 million and ￦10,373 million, respectively.
Unrealized loss arising from aircraft purchasing transactions with KALF amounted to ￦3,824 million as of 31 December 2008 (￦45,345 million as of 31 December 2007) and unrealized loss arising from aircraft selling transactions with GCIA amounted to ￦3,107 million as of 31 December 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 31 December 2007 and 2008 are as follows:
101
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
US dollars in thousands Korean won in millions
(Note 2) 2008
2007 Gain 1 January
￦
20,723
￦
32,939
Increase (decrease) 31 December
Loss ￦
(38,703)
￦
(40,331)
12,216
Gain
Loss
￦
32,939
￦
82,219
(1,628)
2008
￦
(40,331)
￦
(28,167)
49,280
Gain
Loss
US$
26,194 39,189
9,673
US$
65,383
US$ (22,399)
12,164
US$ (32,072)
The summary of financial position of the equity method investees as of 31 December 2008 and the results of their operations for the year then ended based on the investees’ latest available financial statements are as follows: Korean won in millions Stockholders’ Assets Korea Airport Service Co., Ltd.
￦
382,153
Liabilities ￦
Net income
equity
132,250
￦
249,903
Sales ￦
(loss)
326,787
￦
22,916
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 Co., Ltd.
46,573
20,813
25,760
94,369
1,868
40,157
10,751
29,406
53,279
12,826
147,728
95,362
52,366
45,363
1,521
88,836
34,513
54,323
30,710
8,255
6,697
3,232
3,465
26,822
882
336,840
60,856
275,984
32,748
16,218
14,219
1
14,218
-
24
2,068,670
1,018,837
1,049,833
62,903
(5,274)
127,925
103,350
24,575
29,625
(30,082)
36,729
29,112
7,617
10,189
(12,383)
6,831
39
6,792
-
(208)
92,606
69,580
23,026
50,309
(1,247)
2,638
-
2,638
21,247
57,189
8,322,258
5,093,739
3,228,519
9,355,790
321,399
102
8. PROPERTY, AIRCRAFT AND EQUIPMENT Cost of property, aircraft and equipment and related accumulated depreciation as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007 ￦
Land Buildings
593,574
(Note 2)
2008
2008
￦ 1,410,447
US$ 1,121,628
851,806
863,972
687,055
Aircraft
5,302,405
4,430,529
3,523,283
Engines
1,452,227
1,271,760
1,011,340
Leased aircraft
5,161,484
5,773,049
4,590,894
Leased engines
1,251,980
1,328,806
1,056,705
595,452
502,704
399,765
Construction in-progress Other
846,510
856,455
681,078
16,055,438
16,437,722
13,071,748
(5,126,718)
(5,152,562)
(4,097,465)
(59,034)
-
-
￦ 10,869,686
￦ 11,285,160
US$ 8,974,283
Less accumulated depreciation Less accumulated impairment losses
Changes in net book value of property, aircraft and equipment for the years ended 31 December 2007 and 2008 are as follows:
Korean won in millions Disposals
Buildings Aircraft Engines Leased aircraft
￦
683,352
/transfers
Additions
1 January Land
￦
-
￦
(89,778)
Depreciation ￦
31 December -
￦
593,574
681,001
1,522
272
(21,566)
661,229
2,964,144
2,775
379,842
(295,292)
3,051,469
837,568
9,582
33,158
(88,348)
791,960
3,710,197
17,226
383,650
(216,111)
3,894,962
Leased engines
982,343
4,160
18,756
(54,939)
950,320
Construction in-progress
545,397
1,210,918
(1,160,863)
-
595,452
Others
345,823
53,093
￦ 10,749,825
￦ 1,299,276
(15,193) ￦
(450,156)
￦
(53,003)
330,720
(729,259)
￦ 10,869,686
103
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Korean won in millions Disposals 1 January
Revaluation
593,574 ￦
42,007 ￦
661,229
15,606
Aircraft
3,051,469
274,595
Engines
791,960
67,911
Leased aircraft
3,894,962
319,530
Leased engines
950,320
65,544
595,452
724,964
330,720
85,188
Land
￦
Additions
Buildings
/transfers
814,791 ￦ -
Impairment Depreciation
(471) ￦
- ￦
loss
31 December
(39,454) ￦ 1,410,447
(1,424)
(21,848)
-
653,563
-
(568,286)
(288,023)
41,495
2,511,250
-
(116,795)
(81,303)
-
661,773
-
293,514
(260,740)
-
4,247,266
-
14,826
(60,170)
-
970,520
-
(817,712)
-
-
502,704
-
(42,124)
(46,147)
-
327,637
Construction in-progress Others
￦10,869,686 ￦ 1,595,345 ￦
814,791 ￦ (1,238,472) ￦ (758,231) ￦
2,041 ￦11,285,160
US$8,643,885 US$1,268,664 US$ 647,945 US$ (984,867) US$ (602,967) US$
1,623 US$8,974,283
As of 31 December 2008, the value of the Company’s land, determined by the Government of the Republic of Korea for tax administration purposes, amounted to ￦831,604 million (US$661,315 thousand). The Company engaged Pacific Appraisal Co., Ltd., an accredited independent valuer, to determine the fair value of its land. Fair value is determined by reference to market-based evidence. This means that valuation performed by the valuer is based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. The date of the valuation was 31 December 2008. If the land was measured using the cost model, the carrying amounts would be amounted to ￦635,110 million. As the Company has chosen the revaluation model, increasing carrying amount was credited to other comprehensive income and decreasing carrying amounted was recognized in the statements of operations, amounting to ￦814,791 million and ￦39,454 million, respectively. And related deferred income tax liabilities amounted to ￦170,574 million were recognized. As of 31 December 2007 and 2008, the Company’s insurance policies to cover losses from fire and other casualty losses are as follows: Korean won in millions and US dollars in thousands 2007
2008
Aircraft and engines
US$
9,056,945
US$
9,227,341
Buildings and machinery
￦
1,389,019
￦
1,452,273
Cash and investments
￦
11,602
￦
11,501
National properties
￦
475,991
￦
475,991
Others
￦
71,068
￦
72,110
104
9. INTANGIBLE ASSETS Changes in net book value of intangible assets for the years ended 31 December 2007 and 2008 are as follows:
Korean won in millions 1 January ￦
Facility usage rights Development costs
32,511
Amortization
31 December
￦
￦
(10,460)
191,193
23,324
19,965
(5,090)
38,199
4,290
-
(1,569)
2,721
Others ￦
Additions ￦
169,142
￦
196,756
52,476
￦
(17,119)
￦
232,113
Korean won in millions 1 January ￦
Facility usage rights Development costs
Additions ￦
191,193
162
38,199
Others
31 December
￦
￦
(11,410)
1,191
2,721 ￦
Amortization (4,966)
222
232,113
34,424
(1,402)
￦
1,575
￦
US$
1,252
US$ (14,138)
(17,778)
179,945 1,541
￦
215,910
US dollars in thousands (Note 2)
US$ 184,583
US$ 171,697
Research and development costs incurred in connection with the development of aircraft parts and new routes that were charged to selling and administrative expenses amounted to ￦8,961 million (￦6,089 million for the year ended 31 December 2007) and operating expenses amounted to ￦13,394 million (￦4,375 million for the year ended 31 December 2007) for the year ended 31 December 2008.
10. FOREIGN CURRENCY DENOMINATED MONETARY ASSETS AND LIABILITIES Foreign currency denominated monetary assets and liabilities as of 31 December 2007 and 2008 are as follows: 2007
2008 Korean won
Assets
Korean won
Foreign currency
equivalent
Foreign currency
equivalent
in thousands
in millions
in thousands
in millions
￦
￦
US$
937,500
879,562
US$
643,186
JPY
22,466,259
187,218
JPY
11,580,443
808,807 161,419
HKD
131,896
15,862
HKD
162,830
26,419
TWD
29,355
847
TWD
69,538
2,669 (Continued)
105
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
2007
2008 Korean won
Foreign currency in thousands SGD
equivalent in millions
7,043
￦
4,571
Korean won Foreign currency in thousands SGD
in millions
9,494
￦
8,312
GBP
4,191
7,854
GBP
5,657
10,282
EUR
22,931
31,673
EUR
29,008
51,524
CNY
394,984
50,736
CNY
453,097
83,411
-
61,722
Other
-
69,600
Other
￦ 1,240,045 Liabilities
equivalent
￦ 1,222,443
US$
5,856,507
￦ 5,494,575
US$
5,718,506
￦ 7,191,021
JPY
62,140,109
517,832
JPY
38,601,408
538,061
HKD
15,144
1,821
HKD
22,623
3,671
TWD
2,150
62
TWD
123
5
SGD
2,183
1,416
SGD
1,518
1,329
GBP
3,450
6,466
GBP
1,122
2,038
EUR
9,399
12,983
EUR
85,815
152,425
CNY
69,432
8,919
CNY
56,351
10,374
14,687
Other
Other
-
-
￦ 6,058,761
10,649 ￦ 7,909,573
11. SHORT-TERM BORROWINGS Short-term borrowings as of 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate
Korean won in millions
in 2008
2007
(Note 2)
2008
2008
Borrowings from: KDB1 -Singapore branch
3M Libor+1.00%
-Korea
3M Libor+0.58~0.82%,
Kookmin Bank
3M Libor+0.48~0.58% CD Rate+1.95%
￦
16,888
￦
22,635
US$
18,000
142,300
136,882
108,852
93,896
192,997
153,476 (Continued)
106
US dollars in thousands Annual interest rate
Korean won in millions
in 2008
2007
2008
Hana Bank
3M Libor+2.40%
NACF2
3M Libor+0.39%
106,768
8.85%
CD Rate+3.10% Mirae Asset Life Insurance
￦
(Note 2)
110,030
￦
2008
151,143
US$ 120,193
118,695
94,390
30,000
30,000
23,857
3M Libor+0.74%
-
62,875
50,000
Bank of Communications
3M Libor+2.00%
-
35,210
28,000
Woori Bank
3M Libor+1.60% -
37,725
30,000
20,000
-
-
KEB3
CD Rate+2.60% Samsung Life Insurance
-
Samsung Fire & Marine Insurance
-
10,000 ￦
529,882
￦
-
-
788,162
US$ 626,768
1 Korea Development Bank 2 National Agricultural Cooperative Federation 3 Korea Exchange Bank
12. LONG-TERM LIABILITIES Bonds The non-guaranteed bonds issued and outstanding as of 31 December 2007 and 2008 are as follows: US dollars in thousands Issuing
Annual interest rate
Korean won in millions 2007
(Note 2)
Series
date
Maturity
in 2008
19-2nd
04.11.12
09.11.12
4.00%
th
20
05.03.08
08.03.08
-
300,000
-
-
21st
05.09.15
08.09.15
-
200,000
-
-
nd
22
05.11.24
08.11.24
-
187,640
-
-
23-1st
06.04.17
09.04.17
4.00%
150,000
150,000
119,284
23-2nd
06.04.17
11.04.17
5.00%
150,000
150,000
119,284
24-1st
06.09.25
09.09.25
4.00%
150,000
150,000
119,284
nd
24-2
06.09.25
11.09.25
4.00%
250,000
250,000
198,808
25-1st
07.02.08
10.02.08
5.00%
200,000
200,000
159,046
￦
120,000
2008 ￦
2008
120,000
US$
95,427
(Continued)
107
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
US dollars in thousands Issuing
Annual interest rate
Korean won in millions 2007
(Note 2)
Series
date
Maturity
in 2008
25-2nd
07.02.08
12.02.08
5.00%
st
26-1
07.05.25
10.05.25
5.00%
100,000
100,000
79,523
26-2nd
07.05.25
12.05.25
5.00%
100,000
100,000
79,523
27-1st
07.09.17
10.09.17
5.00%
150,000
150,000
119,284
27-2nd
07.09.17
12.09.17
5.00%
50,000
50,000
39,761
th
28
07.10.31
10.10.31
6.01%
200,000
200,000
159,046
29-1st
07.11.12
10.11.12
5.00%
140,000
140,000
111,332
nd
29-2
07.11.12
12.11.12
5.00%
40,000
40,000
31,809
30-1st
08.03.06
11.03.06
5.00%
-
200,000
159,046
30-2nd
08.03.06
13.03.06
5.00%
-
100,000
79,523
31-1st
08.05.14
11.05.14
5.00%
-
220,000
174,950
31-2nd
08.05.14
13.05.14
5.00%
-
80,000
63,618
31-3rd
08.05.14
11.05.14
3M Libor+1.90%
-
113,176
90,000
th
32
08.09.01
11.09.01
7.00%
-
300,000
238,569
33th
08.11.14
11.11.14
8.00%
-
100,000
79,523
2,587,640
3,013,176
2,396,163
(42,075)
(51,597)
(41,031)
2,545,565
2,961,579
2,355,132
(685,437)
(416,840)
(331,483)
2,544,739
US$ 2,023,649
￦
Less discount on bonds Less current portion of bonds, net of discount on bonds ￦
2008
100,000
1,860,128
￦
￦
100,000
2008 US$
79,523
Korean won denominated long-term loans Korean won denominated long-term loans as of 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate
Korean won in millions
in 2008
2007
2008
(Note 2) 2008
Korean won denominated long-term loans from: KDB
4.15%~5.10%, KDB Bond+0.77~1.26%
￦
313,218
￦
394,886
US$ 314,025 (Continued)
108
US dollars in thousands Annual interest rate
Korean won in millions
in 2008 IBK1 Hana Bank Kookmin Bank Kyobo Life Insurance NACF Korea Life Insurance Samsung Life Insurance
5.07%
2007 ￦
(Note 2)
2008 -
￦
2008
4,000
US$
3,181
CD Rate+1.53%
32,090
32,090
25,519
3.00%
15,011
14,443
11,485
6.90%
30,000
30,000
23,857
CD Rate+0.99~1.30%
250,000
235,715
187,448
5.40%~6.90%
40,000
40,000
31,809
5.50%
40,000
40,000
31,809
720,319
791,134
629,133
(80,234)
(87,450)
(69,543)
703,684
US$ 559,590
Less current portion ￦
640,085
￦
1 Industrial Bank of Korea
Foreign currency denominated long-term loans Foreign currency denominated long-term loans as of 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate
Korean won in millions
in 2008
2007
(Note 2)
2008
2008
￦ 1,053,265
US$ 837,586
Foreign currency denominated long-term loans from: NACF
3M Libor+0.60~1.70%
188,205
412,324
327,892
EIBK1
3M Libor+1.65%
152,174
170,422
135,525
3M Libor+0.60~2.20%
KEB Washington Mutual
50,825
56,052
44,574
3M Libor+2.80%
-
12,575
10,000
Federal Housing Int.
61
69
55
SCFBK2
3M Libor+3.00%
-
54,362
43,230
Longboat Quay Aviation Ltd
3M Libor+1.30%
Less current portion
2
783,857
3M Libor+2.90%
Hana Bank
1
￦
KDB
The Export-Import Bank of Korea Standard Chartered First Bank Korea Limited
47,113
35,747
28,427
1,222,235
1,794,816
1,427,289
(170,468)
(622,011)
(494,641)
￦ 1,051,767
￦ 1,172,805
US$ 932,648
109
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Long-term obligations under installment purchases Long-term obligations under installment purchases related to aircraft and engines as of 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate
Korean won in millions
in 2008
2007
(Note 2)
2008
2008
Installment purchases from: Wilmington
1Y Libor+0.75~0.85% 4.37%~5.16%
KE Apollo
￦
3M Libor+0.05~0.69%
551,060
￦
325,005
US$ 258,453
49,562
13,286
10,565
600,622
338,291
269,018
11,037
9,452
7,517
611,659
347,743
276,535
(57,880)
(24,388)
(19,394)
553,779
323,355
257,141
Accumulated losses on valuation of fixed liabilities1 Less present value discounts Less current portion, net of present value discounts
(297,489) ￦
256,290
￦
(166,301)
(132,247)
157,054
US$ 124,894
1 The amounts as of 31 December 2007 and 2008 represent accumulated losses on valuation of derivative transactions according to the interpretation of Korea Accounting Standards 53-70.
The Company received payment guarantees amounting to US$36 million from KDB related to the above long-term obligations under installment purchases as of 31 December 2008.
110
Obligations under capital leases Obligations under capital leases as of 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate in 2008 Aircraft/Engines: KALF KE Cayman Leasing Ltd. KE Export Leasing KE August Ltd. KE Octavius Ltd. KE Jumbos V Ltd. Arirang Ltd. KE U Simjo Ltd. KE Atomos KE Harmony Ltd. Andros Aviation Ltd. Brooklyn Leasing Ltd. Duria Aviation Ltd. KAL-ECA 2001 Aviation Ltd. KALECA03 Aviation Ltd. KALeidos Aviation Ltd. KALeidos Two Aviation Ltd. KALeidos Three Aviation Ltd. KE innisfree Ltd.C72 Millenium KAL Ltd. Sejong Aviation Ltd. Constitution Aircraft Leasing 3 Ltd. Sumisho Aircraft Asset Management B. V. Less current portion
Korean won in millions 2007
￦ 1,733,505 3M JPY Libor+1.39~2.20% 100,034 3M Libor+1.80% 4.55%~8.45% 338,935 3M Libor+0.54%, 4.55% 146,428 3M Libor+0.70%, 4.76% 294,595 5.38%~5.79% 5.55%~5.76% 4.70% 3M Libor+1.50% 3M Euribor+1.35% 3M Libor+0.60% 6.84%~7.29% 3M Libor+0.99%~2.60% 3M Libor+0.77% 3M JPY Libor+0.15% 6M Libor+1.75%, 6.68% 6M Libor+1.60%, 6.68% 6M Libor+1.75%, 6.68% 3M Libor+1.64%~2.80% 4.97%~6.93% 6M Libor+1.60%, 6.66% 9.56% 5.73%
(Note 2)
2008 ￦
129,988
2008 US$
103,370
1,427,222 175,692 355,199 193,648 196,631 68,555 147,756 145,792 109,553 247,821 55,689 73,533 79,317 31,611 38,119 40,677 69,919 159,004 18,700 30,175
1,134,968 139,715 282,464 153,994 156,367 54,517 117,500 115,938 87,120 197,074 44,285 58,476 63,075 25,138 30,313 32,348 55,602 126,444 14,871 23,996
-
30,001
23,858
2,613,497
3,824,602
3,041,433
(406,418)
(676,153)
(537,696)
￦ 2,207,079
￦ 3,148,449
US$ 2,503,737
The Company has guaranteed the amounts of US$88 million to Kookmin Bank and other financial institutions on behalf of Andros Aviation Ltd. in connection with capital and operating lease agreements as of 31 December 2008.
111
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Minimum lease payments and present value of long-term obligations under installment purchases and capital leases as of 31 December 2008 are as follows: US dollars in thousands Korean won in millions
(Note 2)
Long-term obligations
Obligations
under installment
under
purchases
capital leases
Total
Total
850,507
￦ 1,029,976
US$ 819,066
158,822
2,702,149
2,860,971
2,275,126
-
898,370
898,370
714,410
￦
388,291
￦ 4,451,026
￦ 4,789,317
US$ 3,808,602
￦
323,355
￦ 3,824,602
￦ 4,147,958
US$ 3,298,574
1
Less than 1 year
￦
More than 1 year to 5 years More than 5 years Present value
179,469
￦
1 Accumulated losses on valuation of long-term liabilities related to the interest rate swap contracts were excluded.
Guaranteed loans The Company has agreed to assume certain guaranteed liabilities of Hanjin Shipping Co., Ltd. with KEB and other financial institutions (Guaranteed loans), pursuant to the Government Guidelines for the Rationalization of the Marine Industry. The aggregate amount of guaranteed loans assumed from Hanjin Shipping Co., Ltd. was ￦159,933 million. The guaranteed loans accrue no interest, and are payable in equal installments over 20 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 31 December 2007 and 2008 are as follows:
112
US dollars in thousands Korean won in millions 2007
(Note 2)
2008
2008
Guaranteed loans from: ￦
KDB Woori Bank
26,162
￦
17,137
23,545
US$
18,723
15,424
12,265
Korea Asset Management Corp.
1,103
992
789
Hanshin Federation of Savings Bank
1,320
1,188
945
Kookmin Bank
985
887
705
Shinhan Bank
4,401
3,961
3,150
Daegu Bank KEB TongYang Life Insurance Co., Ltd.
3,236
2,913
2,318
42,601
38,341
30,490
8,771
7,894
6,278
907
816
649
Lotte Insurance Co., Ltd Less present value discounts Less current portion, net of present value discounts ￦
106,623
95,961
76,312
(39,661)
(33,186)
(26,391)
66,962
62,775
49,921
(9,930)
(9,930)
(7,897)
57,032
￦
52,845
US$
42,024
Asset-backed securitization loans The 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 31 December 2007 and 2008 are as follows: US dollars in thousands Annual interest rate
Korean won in millions
in 2008 KAL-Japan 2 ABS
-
KAL-Japan 3rd ABS
1.20%
nd
2007 ￦
14,027
￦
241,948
Less current portion ￦
(Note 2)
2008
2008 -
US$
219,236
174,343
255,975
219,236
174,343
(124,906)
(187,737)
(149,294)
131,069
￦
31,499
US$
25,049
113
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
The maturity of long-term liabilities The maturity of long-term liabilities as of 31 December 2008 is as follows: Korean won in millions Long-term Korean won
Foreign
obligations
currency
under
Obligations
Asset-backed
denominated denominated installment under capital Guaranteed securitization Matured Year
Bonds
loans
loans
purchases1
leases
loans
loans
Total
31 December 2009 ￦ 420,000 ￦ 87,450 ￦ 622,011 ￦ 179,469 ￦ 676,153 ￦ 10,662 ￦ 187,737 ￦ 2,183,482 31 December 2010
790,000
321,524
245,447
158,822
749,525
10,662
31,499
2,307,479
31 December 2011
1,333,175
170,949
426,916
-
585,042
10,662
-
2,526,744
31 December 2012
290,000
29,316
145,382
-
522,965
10,662
-
998,325
31 December 2013
180,000
27,496
134,467
-
470,962
10,662
-
823,587
-
154,398
220,593
-
819,955
42,651
-
1,237,597
1 January 2014 and thereafter
￦3,013,175 ￦ 791,133 ￦1,794,816 ￦ 338,291 ￦3,824,602 ￦ 95,961 ￦ 219,236 ￦10,077,214 1 Accumulated losses on valuation of fixed liabilities related to the interest rate swap contracts amounting to ￦9,451 million were excluded.
13. COMMITMENTS AND CONTINGENCIES Guarantees received As of 31 December 2008, Seoul Guarantee Insurance Company has provided guarantees of ￦17,051 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 31 December 2008, the Company has a bank overdraft agreement for up to ￦5,000 million, opening of letters of credit for up to US$5 million and B2B marketplace agreements for up to ￦30,000 million with Woori Bank. The Company has also a credit line agreement for up to ￦210,000 million with Kookmin Bank and others and US$120 million with Woori Bank and others as of 31 December 2008. As of 31 December 2008, the Company has two outstanding promissory notes pledged as collateral to creditors and guarantors.
114
Pending litigations As of 31 December 2008, 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 alleged anti-trust violation relating to the Company and other parties colluding on price fixing of aircargo services, the Company made a plea to the United States Department of Justice on 1 August 2007 for the payment of fines totaling US$300,000 thousand (￦278,700 million), to be paid in annual installments up to 2012 with interest rate of 4.30% per annum. The fines were charged to current operations as other expenses for the year ended 31 December 2007. The related outstanding balance of ￦251,500 million as of 31 December 2008 was accounted for as other accounts payable of ￦62,875 million and long-term other accounts payable of ￦188,625 million. 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 and New Zealand Commerce Commission for allegedly colluding on price fixing. As of 31 December 2008, the ultimate outcome of this investigation cannot be presently determined.
New aircraft purchase commitments The Company has entered into various aircraft purchase contracts with aircraft manufacturers, including The Boeing Company. The amount of such contracts is approximately US$7,982 million as of 31 December 2008.
Interest rate swap contracts The Company has entered into interest rate swap contracts with KEB and other financial institutions in order to hedge against interest rate fluctuation related to long-term obligations under installment purchases of aircraft. The details of the contracts outstanding as of 31 December 2008 are as follows: Notional amount
:
US$163,059 thousand
Terms
:
Pay fixed interest rate of 8.00 ~ 8.04% and receive floating interest rate of Libor + 0.75 ~ 0.85 %
Swap contract period
:
July 1995 to January 2010
Interest expense from the long-term obligations amounting to ￦7,852 million for the year ended 31 December 2008 has been offset against the gain on settlement of interest rate swap contracts. Gain on valuation of interest rate swap contracts and loss on valuation of long-term obligations under installment purchases, each amounting to ￦4,238 million, were recognized as nonoperating income and non-operating expense, respectively, for the year ended 31 December 2008.
115
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Foreign currency option contracts In order to hedge the exposure of changes in exchange rates related to foreign currency liabilities, the Company has entered into foreign currency zero-cost collar option contracts, which consist of call-options in long positions and put-options in short positions, with Development Bank of Singapore (DBS) and other financial institutions. The terms of outstanding foreign currency zero-cost collar option contracts as of 31 December 2008 are as follows (United States dollars in thousands): Notional Counterparty
Unsettled
Contract
amount
amount
DBS
US$
60,000
US$
currency
Contract date
Settlement date
35,000
KRW
16 Jul 2008
Aug 2008 ~ Jul 2009
KDB
60,000
60,000
KRW
20 Nov 2006
Jan 2009 ~ Dec 2009
KEB
60,000
35,000
KRW
9 Jul 2008
Aug 2008 ~ Jul 2009
120,000
120,000
KRW
6 Nov 2006
Jan 2009 ~ Dec 2009
JP Morgan
In accordance with the foreign currency option contracts, the Company has recognized a gain and a loss from settlement of foreign currency option contracts amounting to ￦64,098 million (US$50,973 thousand) and ￦40,946 million (US$32,562 thousand), respectively, for the year ended 31 December 2008. Unrealized valuation gain recognized arising from the foreign currency option contracts amounting to ￦87,704 million (US$69,745 thousand) was charged to other income for the year ended 31 December 2008.
Foreign currency swap In order to hedge against interest rate fluctuation and changes in exchange rate related to foreign currency denominated bond, the Company has entered into foreign currency swap contracts with HSBC. The details of the contracts outstanding as of 31 December 2008 are as follows: Notional amount
:
US$90,000 thousand
Terms
:
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 maturity
Swap contract period
:
May 2008 to May 2011
The Company recognized unrealized valuation gain amounting to ￦14,286 million (US$11,360) for the year ended 31 December 2008.
Oil-price option and oil-price swap contracts In 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 31 December 2008 was 700,000 BBL which will be last settled in
116
December 2009. The unsettled quantity of the oil-price swap contracts as of 31 December 2008 was 8,570,000BBL 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. In relation to oil price option and oil price swap contracts that qualified for cash flow hedge accounting treatment, the Company recorded a gain of ￦3,318 million from the settlement of the oil price option contracts which has been offset against the operating expense and a loss of ￦95,460 million from the settlement of the oil price swap contracts which has been added to the operating expense for the year ended 31 December 2008. The unsettled oil price option and oil price swap contracts as of 31 December 2008 are all qualified for cash flow hedge accounting treatment. As a result, unrealized loss of ￦269,777 million, net of taxes, arising from fair value adjustments on the unsettled oil price option and oil price swap contracts were recorded in other comprehensive income. ￦216,153 million out of ￦269,777 million will be settled and charged to cost of sales within a year from the balance sheet date. As of 31 December 2008, there was no amount of hedge ineffectiveness to be credited or charged to current operations. Changes in the fair value of derivative instruments relating to the above derivative instrument transactions for the year ended 31 December 2008 are summarized as follows: Korean won in millions
Period ended
1 Jan.
Settled
Accumulated
Foreign
other
currency
Gain on
Loss on comprehensive Current
translation
valuation
valuation
gain (loss)
income
portion
31 Dec.
Current assets: Interest rate swap
￦
Currency option Currency swap Oil-price option
7,172 ￦ (8,692) ￦
- ￦
- ￦
- ￦
8,284 ￦
1,408 ￦
8,172
1,743
(40,928)
87,452
-
-
-
15,005
63,272
-
-
14,285
-
-
-
1,228
15,513
1,822
(1,822)
-
-
-
1,640
-
1,640
￦ 10,737 ￦ (51,442) ￦ 101,737 ￦
- ￦
1,640 ￦
￦
- ￦
- ￦ (8,284) ￦ -
-
(253)
8,284 ￦ 17,641 ￦ 88,597
Non-current assets: Interest rate swap
3,865 ￦
- ￦
4,238 ￦
1,461 ￦
1,280
Current liabilities: Currency option
1
(1)
253
-
Oil-price option
-
-
-
-
(7,135)
-
-
7,135
Oil-price swap
-
-
-
-
(350,411)
-
-
350,411
￦
1 ￦
(1) ￦
253 ￦
- ￦(357,546) ￦
- ￦
-
(253) ￦ 357,546
117
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Operating lease contracts The Company has entered into operating lease agreements to lease 24 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 31 December 2008, the schedule of lease payments on these agreements is summarized as follows: Korean won equivalent US dollars in thousands 1 January 2009 ~ 31 December 2009
US$
121,344
in millions ￦
152,590
1 January 2010 ~ 31 December 2010
110,936
139,502
1 January 2011 ~ 31 December 2011
92,292
116,057
1 January 2012 ~ 31 December 2012
56,829
71,462
1 January 2013 ~ 31 December 2013 1 January 2014 and thereafter US$
35,973
45,236
126,485
159,055
543,859
￦
683,902
KDB has provided a guarantee of US$25 million on behalf of the Company for the aircraft operating lease agreements as of 31 December 2008. In addition, the Company has opened letters of credit at HSBC in the aggregate amount of US$79.4 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 31 December 2008. 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$388 million to IDA for the industrial revenue bonds (IR Bonds) issued by the IDA. The IR Bonds were issued for the purpose of financing the construction of the new terminal one of JFK Airport (Terminal One). In return, IDA will redeem its IR Bonds through the collection of lease payments from the JFK Users. Terminal One Group Association (TOGA) was established by the JFK Users to operate and administer the Terminal One, including collection of the above mentioned lease payments and making schedule repayment to IDA in respect of the IR Bonds. In accordance to an Association Agreement entered into between TOGA and the JFK Users, TOGA has been granted the right to collect additional lease payments from the JFK Users, in the event of a shortage of funds after making such schedule repayment to IDA, to cover its operating expenses.
118
The Company has entered into operating lease agreements to provide two aircraft and certain aircraft parts to Jin Air Co., Ltd. as of 31 December 2008, the schedule of lease collection on these agreements is summarized as follows: Korean won equivalent US dollars in thousands 1 January 2009 ~ 31 December 2009
US$
1 January 2010 ~ 31 December 2010
7,476
in millions ￦
7,476
9,401 9,401
1 January 2011 ~ 31 December 2011
7,476
9,401
1 January 2012 ~ 31 December 2012
7,476
9,401
1 January 2013 ~ 31 December 2013 1 January 2014 and thereafter US$
7,476
9,401
20,906
26,289
58,286
￦
73,294
In December 2007, the Company made a joint venture agreement to incorporate Tianjin Cargo Terminal (TCT) at the Tianjin Binhai International Airport with Sinotrans Air Transportation Development, one of China’s biggest logistics companies. The Company plans to inject the investment of US$43.85 million into TCT with the eventual equity ownership of 47%. No investments have been made during 2008.
14. PLEDGED ASSETS A substantial portion of the property, aircraft and equipment as of 31 December 2008, has been pledged as collateral for certain borrowings from banks and other financial institutions are as follows: Korean won in millions, US$, JPY and NLG in thousands Amount KDB
US$ NLG ￦
KEB
Collateral
1,873,085 1,143 1,080,900
Land, building, aircraft and engines Land and building Land, building and facility usage right
US$
25,956
Aircraft and engines
￦
73,000
Land and building
20,544
Land and building
Kookmin Bank
￦
EIBK
US$
354,559
Aircraft and engines
￦
384,401
Aircraft and engines
US$
185,280
Aircraft and engines
NACF Hana Bank
US$
96,850
Aircraft and engines
￦
45,500
Facility usage rights
SCFBK
JPY
5,070
Aircraft and engines
Wilmington
US$
65,000
Aircraft and engines
119
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
As of 31 December 2008, the following investment securities and equity method investments are pledged as collateral (Korean won in millions): Number of
Book
shares
value
Financial institution
Purpose
Held-to maturity securities: National housing bond
- ￦
National housing bond
-
450 2,793
Defense Procurement Agency Contract guarantee Incheon Airport Customs
Import customs clearance guarantee
KEB
Guaranteed loans
Hana Bank
Borrowing guarantee
Equity method investments: Hanjin Shipping Co., Ltd. Hanjin Energy Co., Ltd.
313,950
11,048
34,000
869,500 ￦ 883,791
15. SEVERANCE AND RETIREMENT BENEFITS Changes in severance and retirement benefits for the years ended 31 December 2007 and 2008 are summarized as follows: US dollars in thousands Korean won in millions 2007 Beginning balance
￦
791,197
￦
128,649
Provisions Transfer to affiliates
(Note 2)
2008
2008
777,337
US$ 618,161
96,793
76,973
2,467
1,047
832
Payments
(144,976)
(126,175)
(100,338)
777,337
749,002
595,628
Deposits for severance and retirements benefits
(298,165)
(267,501)
(212,724)
Accumulated prepayment to KNPS Net balance
(14,063) ￦
465,109
￦
(11,531)
(9,170)
469,970
US$ 373,734
16. STOCKHOLDERS’ EQUITY Preferred stock 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.
120
Capital surplus Capital surplus as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007 Paid-in capital in excess of par value
￦
2008 ￦
2008
191,077
US$ 151,950
2,815,926
2,815,926
2,239,305
1,825
1,760
1,400
￦ 3,008,574
￦ 3,008,763
US$ 2,392,655
Asset revaluation surplus
190,823
(Note 2)
Other capital surplus
Paid-in capital in excess of par value, asset revaluation surplus and other capital surplus may not be utilized for cash dividend, but may used to offset a future deficit, if any, or may be transferred to capital stock.
Retained earnings Retained earnings as of 31 December 2007 and 2008 consist of the following: US dollars in thousands Korean won in millions 2007
(Note 2)
2008
2008
Appropriated retained earnings: Legal reserve
￦
5,500
￦
100,000
Reserve for foreign currency fluctuation
10,500 170,000
US$
8,350 135,189
Reserve for research and manpower development
130,000
130,000
103,380
Reserve for facility usage
620,000
620,000
493,041
Reserve for financial position improvement Unappropriated retained earnings (deficit)
69,700
-
-
925,200
930,500
739,960
135,822 ￦ 1,061,022
￦
(1,846,427)
(1,468,332)
(915,927)
US$ (728,372)
Legal reserve In accordance with the Korean Commercial Code, an amount equal to at least 10% of cash dividends is required to be appropriated as a legal reserve until the reserve equals 50% of paid-in capital. The legal reserve may not be utilized for cash dividend, but may used to offset a future deficit, if any, or may be transferred to capital stock.
121
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Reserve for facility usage The reserve for facility usage is voluntary in nature and is not restricted; this reserve may be used for dividends or to offset a deficit, if any. Reserve for foreign currency fluctuation This reserve is voluntary reserve, which has no restrictions. Research and man power development reserve Pursuant to the Korean Tax Incentives Limitation Law, the reserve for research and human development reserve are provided in order to obtain tax benefits with respect to the year for which the appropriations are proposed. These reserves may be utilized for cash dividends after the expiration of specified grace period. Treasury stock As of 31 December 2008, the Company has 4,437,327 shares of common stock and 11,869 shares of preferred stock held as treasury stock with carrying value of ￦65,264 million and ￦135 million, respectively.
17. INCOME TAXES For the financial year ended 31 December 2008, the Company is subject to corporate income taxes, including resident surtax, at the aggregate rates of 12.1% on taxable income of up to ￦200,000 thousand (2007: 14.3% on taxable income of up to ￦100,000 thousand) and 27.5% on taxable income in excess of ￦200,000 thousand (2007: 27.5% on taxable income in excess of ￦100,000 thousand). The aggregate tax rate will be reduced to 24.2% from 2009 and 22% from 2010 and thereafter on taxable income in excess of ￦200,000 thousand. The major components of provision for (benefit from) income taxes for the years ended 31 December 2007 and 2008 are as follows: US dollars in thousands Korean won in millions 2007 Current income taxes
￦
45,148
(Note 2)
2008 ￦
7,231
2008 US$
5,750
Changes in deferred income tax arising from temporary differences
45,632
(424,998)
(337,971)
Additional payment of income taxes(Income tax refunds)
(2,198)
1,066
848
Deferred income tax which is charged (credited) directly to equity Provision for (benefit from) income taxes
(7,036) ￦
81,546
￦
(91,701)
(72,923)
(508,402)
US$ (404,296)
122
A reconciliation of provision for (benefit from) income taxes applicable to income (loss) before income taxes at the Korea statutory tax rate to provision for (benefit from) income taxes at the effective income tax rate of the Company for the years ended 31 December 2007 and 2008 are as follows: Korean won in millions 2007 ￦
Income (loss) before income taxes
2008 ￦
94,439
Income tax revenue at income tax rate of 27.5%
(2,450,832)
25,971
(673,979)
Expenses not deductible for tax purpose
81,089
14,058
Deferred tax assets not recognized
26,795
3,172
(58,625)
(3,158)
Utilization of previously unrecognized temporary differences
9,107
154,723
Additional payment of income taxes (income tax refunds)
(2,198)
1,067
-
(4,285)
(593)
-
Adjustments:
Changes in temporary differences resulting from the prior year tax reconciliation
Tax credit Others ￦
Provision for (benefit from) income taxes
￦
81,546
(508,402)
Significant changes in cumulative temporary differences and deferred income tax assets and liabilities for the year ended 31 December 2008 are as follows: Korean won in millions Beginning
Ending Increase
balance
Decrease
balance
Deductible temporary differences: Accrued severance and retirement benefits
￦
Depreciation Foreign currency translation adjustment debit
240,561
￦
39,704
￦
-
￦
280,265
164,309
-
50,708
113,601
42,319
-
28,159
14,160
Discount in aircraft purchased
213,603
-
15,472
198,131
Unredeemed mileage liabilities
192,659
42,616
-
235,275
54,322
-
-
54,322
-
1,551,171
-
1,551,171
-
39,454
-
39,454
Gain from assets contributed Loss on foreign currency translation, net Impairment loss on property aircraft and equipment, net Other
165,718 ￦
1,073,491
￦
1,672,945
150,498 ￦
244,837
15,220 ￦
2,501,599 (Continued)
123
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Korean won in millions Beginning
Ending
balance
Increase
Decrease
balance
Taxable temporary differences: Provision for temporary depreciation
￦
Present value discount on guaranteed loan
(38)
￦
-
￦
(17)
￦
(21)
(39,660)
-
(6,475)
(33,185)
(124,000)
-
(78,300)
(45,700)
investment securities
(42,988)
-
(37,566)
(5,422)
Equity method investments
(122,736)
-
(162,635)
39,899
-
(101,990)
-
(101,990)
(1,822)
-
(357,728)
355,906
-
(814,791)
-
(814,791)
Reserve for research and human development Gain on valuation of long-term
Gain on valuation of derivatives Loss (gain) on valuation of derivatives (other comprehensive income) Revaluation surplus arising from property, aircraft and equipment Gain on valuation of other non-current assets Other
(5,484)
(1,133)
-
(6,617)
(102,129)
-
(29)
(102,100)
(438,857)
(917,914)
(642,750)
(714,021)
Total
634,634
1,787,578
Temporary difference unrecognized 1
(173,460)
(184,996)
-
797,405
461,174
2,399,987
-
4,285
Tax loss carry forward Temporary difference recognized Tax credit Deferred income tax asset, net
￦
126,823
￦
551,821
1 The Company did not recognize deferred income tax assets for deductible temporary differences, arising from equity method investments amounting to ￦232,774 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 additional temporary differences arising from the revaluation of land amounting to ￦102,100 million, in consideration that the Company has no firm commitment to dispose of the land in the foreseeable future.
124
Details of gross deferred income tax assets and liabilities as of 31 December 2008 are as follows: Korean won in millions Deferred income tax assets Temporary
(liabilities)
differences
Current
Non-current
Temporary difference: Accrued severance and retirement benefits Depreciation Foreign currency translation adjustment debit Discount on aircraft purchased Unredeemed mileage liabilities Loss on foreign currency translation, net Provision for temporary depreciation
￦
280,265
￦
113,601
-
￦
61,659
-
24,992
14,160
-
3,115
198,131
47,948
-
235,275
-
51,761
1,551,171
-
341,258
(21)
-
(5)
Present value discount on guaranteed loan
(33,185)
-
(7,301)
Reserve for research and human development
(45,700)
-
(11,059)
(5,422)
-
(1,193)
Gain on valuation of long-term investment securities Equity method investments
(192,874)
-
(42,432)
Gain on valuation of derivatives
(101,990)
(24,681)
-
355,906
86,128
-
(814,791)
(15,064)
(164,190)
39,454
-
8,680
Loss on valuation of derivatives (other comprehensive income) Revaluation surplus Impairment loss on property, aircraft and equipment, net Gain on valuation of other non-current asset
(6,617)
-
(1,456)
Others
15,220
(20,890)
22,339
797,405
137,480
50,447
-
4,285
Tax loss carry forward Tax credit Deferred income tax assets
271,556
568,536
Deferred income tax liabilities
(60,635)
(227,636)
Deferred income tax assets, net
￦
Deferred income tax assets, net
US$ 167,730
210,921
￦
340,900
US$ 271,093
125
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Deferred income tax which is charged (credited) directly to equity for the years ended 31 December 2007 and 2008 are as follows: US dollars in thousands Korean won in millions 2007 Gain (loss) on valuation of long-term investment securities
￦
(Note 2)
2008
10,486
￦
(36,980)
2008 US$ (29,408)
Equity adjustment arising from equity method investments
7,795
47,387
37,683
Gain (loss) on valuation of derivative instruments
1,822
(357,728)
(284,476)
-
814,791
647,945
5,483
1,133
902
Revaluation surplus arising from property, aircraft and equipment Gain on valuation of other non-current assets Total
25,586
468,603
372,646
Income tax rate
27.5%
22% (24.2%)
22% (24.2%)
Charged (credited) directly to equity
￦
(7,036)
￦
(91,701)
US$ (72,923)
18. COMPREHENSIVE INCOME (LOSS) The Company’s comprehensive income (loss) for the years ended 31December 2007 and 2008 are computed as follows: US dollars in thousands Korean won in millions Net income (loss)
￦
(Note 2)
2008
2008
12,892
￦ (1,942,430)
US$(1,544,676)
7,602
(26,937)
(21,421)
2007
Other comprehensive income (loss), net of taxes: Gain (loss) on valuation of long-term investment securities (Note 6) Gain (loss) on valuation of derivative instruments Equity adjustment arising from equity method investments (Note 7)
3,855
(271,098)
(215,585)
10,588
61,444
48,862
-
635,537
505,397
Revaluation surplus arising from property, aircraft and equipment (Note 8) Gain on valuation of other non-current assets Comprehensive income (loss)
￦
3,976
1,186
943
26,021
400,132
318,196
38,913
￦ (1,542,298)
US$(1,226,480)
126
19. PER SHARE AMOUNTS The Company’s per share amounts for the years ended 31 December 2007 and 2008 are computed as follows: US dollars in thousands Korean won in millions 2007 Net income (loss)
￦
2008
12,893
￦ (1,942,430)
US$(1,544,676)
752
-
-
12,141
(1,942,430)
(1,544,676)
Preferred stock dividends Net income (loss) attributable to common stock
(Note 2)
2008
Weighted-average number of shares of common stock outstanding (in units) Net income (loss) per share(Korean won and US$ in units)
67,534,304 ￦
180
67,534,304 ￦
(28,762)
67,534,304 US$
(22.87)
The weighted-average number of shares of common stock outstanding 31 December 2007 and 2008 have been calculated by deducting treasury stock and preferred stock dividends in accordance with the annual stipulated dividend rate in 2007 and 2008 on a pro rata basis. There are no outstanding convertible bonds or other dilutive securities as of 31 December 2007 and 2008 that have a dilutive effect on the Company’s per share amounts.
20. DIVIDENDS Details of 2007 dividends approved at the ordinary stockholders’ meeting held on 21 March for the year ended 31 December 2007 are as follows: Common stock Number of shares (A)
Preferred stock 1,397,308
67,534,304
Dividend per share (rate) (B) (Korean won in units)
￦
500 (10%)
￦
550 (11%)
Dividends (A x B) (Korean won in millions)
￦
33,767
￦
752
The dividend payout ratio for the year ended 31 December 2007 was as follows: Korean won in millions Dividends (A) Net income (B) Dividend payout ratio(A / B)
￦
33,767 12,893 267.7%
127
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
The dividend yield ratio for the year ended 31 December 2007 was as follows: Korean won in units Common stock ￦
Dividend per share (A) Market value per share at balance sheet date (B)
Preferred stock ￦
500 76,800
Dividend yield ratio(A x B)
550 29,000
0.7%
1.9%
21. RELATED PARTY DISCLOSURES The Company is the ultimate holding company for the following list of subsidiaries as of 31 December 2008. 1. Korea Airport Service Co., Ltd.
9. Korean Air Lease & Finance Co., Ltd.
2. Hanjin Travel Service Co., Ltd.
10. Hanjin Int’l Corp.
3. Jungseok Enterprise Co., Ltd.
11. Waikiki Resort Hotel Inc.
4. Hanjin Information Systems & Telecommunication Co., Ltd.
12. Jedong Leisure Co., Ltd.
5. Topas Co., Ltd.
13. Hanjin Energy Co., Ltd.
6. In-cheon International Airport Oiling Facility
14. Jin Air Co., Ltd.
7. KAL Hotel Network Co., Ltd.
15. Homeo Therapy Co., Ltd.
8. Air Total Service Co., Ltd. Significant transactions which occurred in the ordinary course of business with related companies for the years ended 31 December 2007 and 2008 are summarized as follows: 2007 Revenue/ other income 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. KALF Jin Air Co., Ltd. S-Oil Corporation GCIA Others
￦
Total
￦
1,494 300 64 -
Expense ￦
228 20,219 8 7,729 6 623 30,671
2008
9,957 239,257 16,382 883
Revenue/ other income ￦
29,127 23,499 25,966 236,820 244,052 34,869 ￦
860,812
1,670 467 210 -
Expense ￦
240 21,041 1 3,715 8,981 27 876 ￦
37,228
12,512 252,739 15,854 983 32,624 23,259 26,721 90,423 393,645 13,199 39,255
￦
901,214
128
The expense amount related to KALF incurred on capital leases consists of interest expense amounting to ￦51,552 million and operating lease payments amounting to ￦38,871 million, and revenues from KALF consist of interest income from long-term loans. The expense amount related to Korea Airport Service Co., Ltd. consists of mainly charges incurred from aircraft refueling services. The expense amount related to GCIA arose from selling aircraft. Related party incomes and expenses from/to other than KALF, Korean Airport Service Co., Ltd. and GCIA mainly incurred in operations. The related account balances outstanding with related parties as of 31 December 2007 and 2008 are summarized as follows: 2007 Receivable Hanjin Transportation Co., Ltd.
￦
2008 Payable
20
￦
Receivable
2,677
￦
Payable 53
￦
2,896
Korean Airport Service Co., Ltd.
375
44,501
117
49,779
Hanjin Travel Service Co., Ltd.
68
2,470
185
2,423
Jungseok Enterprise Co., Ltd.
413
-
421
-
56
7,877
76
5,570
1,769
2,611
4,505
4,150
-
2,583
-
4,207
162,854
1,814,910
-
-
Hanjin Information Systems & Telecommunication Co., Ltd. Topas Co., Ltd. Air Total Service Co., Ltd. KALF Jin Air Co., Ltd.
-
-
25,096
5,976
S-Oil Corporation
1
16,180
-
16,519
GCIA Others Total
￦
-
-
-
-
56
3,229
136
2,712
165,612
￦
1,897,038
￦
30,589
￦
94,232
Payables to Korean Airport Service Co., Ltd. and S-Oil Corporation are trade in nature. Receivable from Jin Air Co., Ltd. arose from rendering capital lease and payable to Jin Air Co., Ltd. is unearned revenues arising from rendering maintenance service. Receivable from GCIA arose from selling aircraft. Related party receivables and payables from/to other than Korean Airport Service Co., Ltd., S-Oil Corporation, Jin Air Co., Ltd. and GCIA are mainly trade in nature.
129
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
The Company has guaranteed the repayment of various obligations of the following affiliated companies of the Hanjin Group as of 31 December 2008 as follows: Korean won in millions and US$ in thousands Guaranteed amounts Korea Airport Service Co., Ltd.
Hanjin Transportation Co., Ltd.
24,925
KEB
￦
15,308
KDB
￦
18,977
Woori Bank and others
￦
18,690
KEB
￦
11,481
KDB
15,198
Woori Bank and others
￦ Hanjin Shipping Co., Ltd.
Financial institutions
￦
US$
546,131
KSH INTL S.A. and others
GrandStar
US$
36,603
Bank of China
Others
US$
50,000
Hana Bank
Total
￦
104,579
US$
632,734
In addition to the above guarantees provided on the behalf of affiliated companies, the Company has provided guarantees to KDB and other financial institutions to the extent of ￦19,563 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 for repayment. The Company made a commitment to Woori Bank to secure the repayment for the principals and interests of KAL Hotel Network Co., Ltd. (KHN)’s bond by means of participation in paid-in capital increase of KHN in case KHN has insufficient funds for repayment.
130
The outstanding repayment guarantees provided by affiliated companies to other third parties for the Company’s obligations as of 31 December 2008 are as follows: Korean won in millions Guaranteed amounts Hanjin Transportation Co., Ltd.
Korea Airport Service Co., Ltd.
Hanjin Shipping Co., Ltd.
Jungseok Enterprise Co., Ltd.
Total
Financial institutions
￦
49,843
KEB
￦
30,608
KDB
￦
40,392
Woori Bank and others
￦
49,843
KEB
￦
30,608
KDB
￦
40,392
Woori Bank and others
￦
49,843
KEB
￦
30,608
KDB
￦
41,208
Woori Bank and others
￦
49,843
KEB
￦
30,608
KDB
￦
40,392
Woori Bank and others
￦
484,188
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 ￦120,843 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 31 December 2008, amounted to ￦3,010 million and ￦1,913 million, respectively.
131
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
22. VALUE ADDED INFORMATION In accordance with SKAS 21 Preparation and Presentation of Financial Statements, the“value added”items as defined by the standard, which are required to be disclosed by the Company for the years ended December 31, 2007 and 2008, are as follows: Korean won in millions 2007
2008 Selling and Operating
Total Salaries and wages
￦
996,554
administrative
expenses ￦
828,862
expenses ￦
207,194
Total ￦
1,036,056
Severance and retirement benefits
128,649
79,616
17,177
96,793
Depreciation
729,259
731,916
26,315
758,231
Rent
381,313
316,994
18,015
335,009
Employee fringe benefits
219,371
132,778
53,989
186,767
Taxes and dues
31,416 ￦
USD in thousands (Note 2)
2,486,562
US$ 1,977,386
16,410 ￦
2,106,576
US$ 1,675,210
17,510
33,920
￦
340,200
￦
US$
270,536
US$ 1,945,746
2,446,776
23. OPERATING RESULT FOR THE FORTH QUARTER (UNAUDITED) The Company’s operating results (unaudited) for the three-month periods ended 31 December 2007 and 2008 are summarized as follows: US dollars in thousands Korean won in millions Sales Gross profit
(Note 2)
2007
2008
2008
￦ 2,301,964
￦ 2,711,797
US$ 2,156,499
1,817,890
2,295,750
1,825,646
Operating income
128,643
22,623
17,990
Net loss
(35,272)
(644,003)
(512,130)
(525)
(9,539)
(7.59)
Loss per share(Korean won and US dollars in units)
132
24. SEGMENT INFORMATION The Company defines its business segments by the nature of services and products as follows: Products or services
Major customers
Airline
Transporting passengers and cargoes
Individual customers
Aerospace
Maintaining aircraft and
Boeing Commercial, defense
In-flight meals
Catering for in-flight meals
Singapore Airlines Ltd. and other foreign airlines
Hotel and limousine
Land transport, accommodations and others
Individual customers
manufacturing aircraft parts
procurement agency and others
The following tables present the segment information of business segments and geographical segments as of 31 December 2007 and 2008:
Business segments Korean won in millions Airline
Aerospace
In-flight
Hotel and
meals
limousine
Total
Operating revenues: External revenues
￦ 9,747,103
Inter-segment revenues 31 December 2008
￦
367,712
￦
377,606
7,319 ￦ 9,754,422
External revenues
58,030
￦
161,299
9,894
8,483,271
Inter-segment revenues
￦
39,733 4,987
125,469
￦
44,720
￦ 10,338,047
35,237
8,811,990
103,269
235,083
58,399
18,345
98,730
￦ 10,212,578
6,700
130,874
￦ 8,490,370
￦
253,428
￦
157,129
￦
41,937
￦ 8,942,864
31 December 2008
￦
(136,365)
￦
28,377
￦
13,925
￦
(5,234)
￦
(99,297)
31 December 2007
￦
622,223
￦
7,810
￦
13,844
￦
(7,040)
￦
636,837
31 December 2008
￦ 10,784,331
￦
532,603
￦
54,515
￦
129,621
￦ 11,501,070
31 December 2007
￦ 10,506,819
￦
393,531
￦
58,892
￦
142,556
￦ 11,101,798
31 December 2008
￦
753,233
￦
13,816
￦
6,088
￦
2,871
￦
776,008
31 December 2007
￦
724,201
￦
12,749
￦
6,257
￦
3,171
￦
746,378
31 December 2007
7,099
￦
Operating income (loss):
Property, aircraft and equipment, and intangible assets, net:
Depreciation and amortization:
133
Annual Report 2008
Notes to Financial Statements 31 December 2007 and 2008
Geographical segments Korean won in millions Domestic
Asia
America
Europe
Oceania
Total
Operating revenues: Airline ￦ 1,298,827 Aerospace 93,324 In-flight meals 58,031 Hotel and limousine 39,733
￦ 3,033,745 3,864 -
￦ 3,048,248 174,368 -
￦ 1,913,509 96,156 -
￦
452,773 -
￦ 9,747,102 367,712 58,031 39,733
31 December 2008
￦ 1,489,915
￦ 3,037,609
￦ 3,222,616
￦ 2,009,665
￦
452,773
￦ 10,212,578
31 December 2007
￦ 1,421,540
￦ 2,573,744
￦ 2,744,165
￦ 1,676,007
￦
396,533
￦ 8,811,989
25. SUPPLEMENTARY CASH FLOW INFORMATION Significant non-cash investing and financing activities for the years ended 31 December 2007 and 2008 are as follows: US dollars in thousands Korean won in millions Transfer of construction-in-progress to property, aircraft and equipment Transfer of leased aircraft and engines to lease receivable Reclassification of current portion of bonds Reclassification of current portion of Korean Won denominated long-term loans Reclassification of current portion of foreign currency denominated long-term loans Reclassification of current portion of obligations under installment purchases Reclassification of current portion of obligations under capital leases Reclassification of guaranteed loans Reclassification of current portion of ABS loans
(Note 2)
2007
2008
2008
￦ 849,668 685,000 33,105 151,696 333,690 369,850 10,662 102,066
￦ 484,409 22,184 420,000 87,467 682,133 149,493 648,383 10,662 150,211
US$ 385,216 17,641 333,996 69,556 542,452 118,881 515,613 8,479 119,452
26. EVENT AFTER THE BALANCE SHEET DATE Non-guaranteed bonds issued after the balance sheet date are as follows: US dollars in thousands Issuing
Korean won in millions Annual interest rate
Face value
(Note 2)
Issued amount
Issued amount
date
Maturity
09.02.12
10.02.11
5.80%
09.02.12
10.08.11
6.60%
100,000
100,000
79,523
09.02.12
12.02.11
7.40%
250,000
250,000
198,807
￦
￦
150,000
500,000
￦
￦
150,000
500,000
US$
US$
119,284
397,614
134
Internal Control over Financial Reporting Review Report ERNST & YOUNG HAN YOUNG Taeyoung Bldg., 10-2 Yeouido-dong, Yeongdeungpo-gu, Seoul 150-777 Korea
Tel: +82 2 3787 6600 Fax: +82 2 783 5890 www.ey.com/kr
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 31 December 2008. The Company's management is responsible for the design and operations of its ICFR, including the reporting of its operations. 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 IACS as of 31 December 2008, the Company's IACS has been effectively designed and has operated as of 31 December 2008, in all material respects, in accordance with the IACS 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 place as of 31 December 2008, and we did not review the ICFR subsequent to 31 December 2008. 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.
27 February 2009 This report is annexed in relation to the audit of the financial statements as of 31 December 2008 and the review of internal accounting control system pursuant to Article 2-3 of the Act on External Audit for Stock Companies of the Republic of Korea
135
Annual Report 2008
Report on the Operations of the Internal Accounting Control System
To the Board of Directors and Audit Committee of Korean air Lines Co., Ltd. I, as the Internal Accounting Control Officer ("IACO") of Korean Air Lines., Ltd. ("the Company"), assessed the status of the design and operations of the Company’s internal accounting control system ("IACS") for the year ended December 31, 2008. The Company's management including the IACO is responsible for the design and operations of its IACS, as the IACO, assessed whether the IACS has been effectively designed and has operated to prevent and detect any error or Fraud which may cause any misstatement of the financial statement, for the purpose of establishing the reliability of financial reporting and the preparation of Financial Statements for external financial reporting purposes. I, as the IACO, applied the IACS standards (name of other standard, if used) for the assessment of design and operations for the IACS. Based on the assessment of the operations of the IACS, the Company’s IACS has been effectively designed and has operated as of December 31, 2008, in all material respects, in accordance with the IACS standard.
February 3, 2009
Lee, Jong Hee President & Chief Operating Officer
Lee, Sang Kyoon Internal Accounting Control Officer
136
Organization Chart Chairman & CEO President & COO
Customer Service
Passenger Business DIV.
Cargo Business DIV.
Flight Operations DIV.
Internal Auditing
Passenger Business Planning & Administration
Cargo Business Planning & Administration
Flight Operations Planning
International Affairs
Passenger Network & Revenue Management
Cargo Network & Revenue Management
Passenger Strategy & Development
Cargo Strategy & Development
Passenger Business IT
Cargo Logistics & Service
Legal Affairs Facilities & Environment Corporate Safety, Security & Compliance Purchasing Information Technology Corporate Communications
Corporate Strategy & Planning DIV.
Airport Customer Service Passenger Service Center, Korea Catering & In-Flight Sales Business DIV.
Hotel Business DIV.
Human Resources DIV. Cabin Service DIV. Employee Relations Human Resources Development Center
Cabin Crew Operations Planning Cabin Crew Operations
Human Resources General Affairs
Corporate Finance DIV. Revenue Accounting Finance Accounting
Operations Control DIV. Scheduling Operations Control
Hanjin Group Corporate Management
Aerospace Business DIV.
Flight Operations Technical Support Line Operations Flight Standards Flight Operations Quality Assurance Flight Crew Training Center
Planning & Administration Marketing & Contract
Maintenance & Engineering DIV.
Quality Management
Maintenance Planning
R&D Center
Engineering
Defense & Aircraft Modification Plant
Material Supply
Commercial Aircraft Manufacturing Plant
Maintenance Quality Assurance Maintenance Training Center
Regional H/Q Incheon INT'L Airport
Gimhae Maintenance Center Line & Base Maintenance Center Powerplant Maintenance Center
137
Annual Report 2008
Executive Officers Company Headquarters
Cho, Yang Ho Chairman & CEO
Lee, Jong Hee President & COO
Internal Auditing
Customer Service
Corporate Strategy & Planning Division
Kim, Hyun Seok
Bang, Sun Oh
Chang, Kyung Hwan
Cho, Won Tae
Vice President
Vice President
Executive Vice President
Managing Vice President
Hanjin Group Corporate Management
Hwang, Soo Young
Yoo, Yun Kil
Legal Affairs
Managing Vice President
Managing Vice President
Kim, Se Tai
Won, Jong Seung
Shin, Hyun Ho
Hwang, Myung Sun
Managing Vice President
Managing Vice President
Managing Vice President
Senior Vice President
Human Resources Division
Managing Vice President
Seo, Yong Won
Managing Vice President
Passenger Business Division
Park, Hak Jin Corporate Safety, Security & Compliance
Facilities & Environment
Blake Peter John
Kwon, Kyung Hwan
Managing Vice President
Managing Vice President
Vice President
International Affairs
Purchasing
ERP Project Kim, Joon Suk Managing Vice President
Corporate Communications Park, Nam Il Managing Vice President
Lee, Soo Keun
Suh, Kang Yoon Managing Vice President
Information Technology
Managing Vice President
Kim, Yong Soon Lee, Kwang Soo
Shin, Mu Chol Vice President
Managing Vice President
Kim, Chul Woo
Lee, Myung Hye Vice President
Cargo Business Division
Kim, Tai Won
Chi, Chang Hoon
Managing Vice President
Senior Vice President
Jung, Ji Young
Kim, Choong Nam
Vice President
Managing Vice President
Kim, Jong Cheol Corporate Finance Division
Vice President
Lee, Sang Kyoon
Vice President
Lee, Hwa Suk
Managing Vice President
Vice President
Managing Vice President
Managing Vice President
Managing Vice President
Lee, Sang Man
Lee, Jong Suk
Managing Vice President
Han, Ki Doo Managing Vice President
Executive Vice President
Lee, You Sung
Ban, Seung Eum
Kim, Jae Ho
Kim, Eui Ho
Senior Vice President
Hur, Young Jin
Jung, Yoon Dong Vice President
Managing Vice President
Hotel Business Division
Ha, Eun Yong Vice President
Catering & In-flight Sales Business Division
Operations Control Division
Managing Vice President
Kim, Heung Sik
Managing Vice President
Kim, Nam Sun Managing Vice President
Cho, Hyun Ah Chung, Jin Hong
Senior Vice President
Moon, Kap Suck Managing Vice President
Kwon, Byung Chan Vice President
Cho, Byung Taek Managing Vice President
138
Regional Headquarters
Aerospace Business Division
Flight Operations Division
Korea
Americas
Cho, Hang Jin
Lee, Young Duck
Song, Yong Hoon
Lee, Jong Eun
Executive Vice President
Senior Vice President
Managing Vice President
Managing Vice President
Kim, Se Han
Kim, Kyu Whan
Jung, Yung Hak
Kang, Chang Hoon
Managing Vice President
Managing Vice President
Managing Vice President
Managing Vice President
Choi, June Chul
Ahn, Sang Hoon
Lee, Jin Kul
Woo, Ki Hong
Managing Vice President
Managing Vice President
Managing Vice President
Managing Vice President
Yoon, Shin
Seo, Hwa Sok
Han, Dae Hang
Managing Vice President
Managing Vice President
Managing Vice President
Lee, Chang Hyo
Nam, Suk Woo
Lee, Seung Bum
Managing Vice President
Vice President
Managing Vice President
Japan Lee, Nae Kyu Managing Vice President
Jang, Kwang Soo
Lee, Sang Chul
Lee, Woo Pyung
Managing Vice President
Vice President
Managing Vice President
Ham, Myung Rae
Kim, Kie Sick
Koh, Byung Woo
Managing Vice President
Vice President
Managing Vice President
Do, Hyun Jun Vice President
Kim, Jong Ha Vice President
Maintenance & Engineering Division Kang, Young Sik
Park, Woon Ho Lee, Hyung Ho
Southeast Asia
Vice President
Kim, Jong Dae Kim, Maeng Gon
Kang, Kyoo Won Managing Vice President
Vice President
Executive Vice President
Cabin Service Division
China
Vice President
Lee, Soon Young Managing Vice President
Managing Vice President
Lee, Hyung Keun Kim, Jong Nam
Jang, Wan Soo
Managing Vice President
Managing Vice President
Lee, Kang Hoon
Cho, Kyoo Bin
Managing Vice President
Managing Vice President
Jung, Woo Jin
Kwon, Young Hwan
Managing Vice President
Managing Vice President
Vice President
Europe & Middle East
Park, Hyung Soon
Park, Yong Soon
Vice President
Managing Vice President
Commonwealth of Independent States
Kwon, Hyuk Min
Kim, Suk Hwan
Managing Vice President
Managing Vice President
Yoo, Jong Seok
Choung, Do Kun
Managing Vice President
Managing Vice President
Kim, Sung Gab Vice President
Choi, Tai Jung Vice President
139
Annual Report 2008
Overseas network
Passenger & Cargo Passenger Cargo
140
141
Domestic / China / Japan network
Passenger & Cargo Passenger Cargo
COMPANY INFORMATION
DIRECTORY OF REGIONAL/ DISTRICT OFFICES
Date of Establishment _ June 19, 1962 | Privatized on March 1, 1969
KOREA Service Center Seoul Cargo Sales
1588-2001 (02) 751-7200
Head Office _ 1370 Gonghang-dong, Gangseo-gu, Seoul, Korea Tel: 82-2-2656-7114 | Reservation: 82-1588-2001
JAPAN Service Center Tokyo Cargo Sales
0088-21-2001 (03) 5443-3388
Website _ www.koreanair.com Listing _ The stock was listed on Korean Stock Exchange in March 1966 Paid-in Capital _ KRW 367 billion Common Stock _ 71,971,631 shares
SOUTHEAST ASIA Singapore Office Singapore Cargo Sales Bangkok Office Bangkok Cargo Sales
6796-2001 6542-0685 (02) 267-0985 (02) 137-4807
OCEANIA Sydney Office Auckland Office Guam Office
(02) 9262-6000 (09) 914-2000 (671) 642-3217
CHINA Service Center Hong Kong Passenger Sales Hong Kong Cargo Sales Beijing Office Beijing Cargo Sales Shanghai Office Shanghai Cargo Sales Tianjin Office Tianjin Cargo Sales
40065-88888 2733-7110 2215-3572 (10) 8453-8421 (10) 6454-3666 (21) 5208-2080 (21) 5208-2117 (22) 2330-8219 (22) 8488-8273
America Service Center Los Angeles Passenger Sales Los Angeles Cargo Sales New York Passenger Sales New York Cargo Sales Toronto Passenger Sales Toronto Cargo Sales
(800) 438-5000 (213) 484-5700 (310) 410-2000 (800) 438-5000 (718) 632-5555 (905) 676-8440 (905) 672-7473
General Shareholders' Meeting _ March 20, 2009 For More Information _ e-mail :
[email protected] [email protected]
Major Shareholders (As of Dec 31, 2008)
Excellence in Growth _20 Business at a Glance _22 Passenger Business _24 Cargo Business _28 Aerospace Business _32 Catering & In-Flight Sales Business _34 Hotel Business _36
Excellence in Service _38 ERP System _40 Maintenance & Engineering _41 Safety _42 Fuel Management _44 SkyTeam Alliance _45
Excellence in Responsiblity _46 Environmental Responsibility _48 Social Contribution _52 Human Resources _54
Ownership(%) 11.93
Finacial Section _56 Management’s Discussion & Analysis _58 Auditors’ Report _78 Financial Statements & Notes _79
23,221,145
33.98
Organization Chart _137 Executive Officers _138 Overseas Network _140 Domestic / China / Japan Network _142 Company Information _143
Subtotal National Pension Fund Mirae Asset Investment Hana UBS Asset Investment Others
5,894,630 5,841,313 1,226,772 35,787,771
8.73 8.65 1.82
Total
71,971,631
CONTENTS Profile _03 Financial Highlights _04 Highlights of 40 Years & Timeline _06 2008 Highlights _12 Message from the Chairman _14 Board of Directors _18 Corporate Governance _19
Number of shares 8,056,528 7,127,096 1,953,157 1,409,485 237,552 4,437,327
Name Cho, Yang Ho & Family Hanjin Co. Inha University Foundation Jungseok Foundation Korea Research Foundation for 21C Treasury Stock
10.55 2.89 2.09 0.35 6.17
46.82 100.00
Europe/CIS Service Center Paris Office Paris Cargo Sales Frankfurt Office Frankfurt Cargo Sales Moscow Office Moscow Cargo Sales Tashkent Office
00800-0656-2001 (01) 4297-3080 (01) 4816-9950 (180) 500-9800 (69) 695-0310 (495) 725-2727 (495) 578-2726 (71) 129-2001
COMPANY INFORMATION
DIRECTORY OF REGIONAL/ DISTRICT OFFICES
Date of Establishment _ June 19, 1962 | Privatized on March 1, 1969
KOREA Service Center Seoul Cargo Sales
1588-2001 (02) 751-7200
Head Office _ 1370 Gonghang-dong, Gangseo-gu, Seoul, Korea Tel: 82-2-2656-7114 | Reservation: 82-1588-2001
JAPAN Service Center Tokyo Cargo Sales
0088-21-2001 (03) 5443-3388
Website _ www.koreanair.com Listing _ The stock was listed on Korean Stock Exchange in March 1966 Paid-in Capital _ KRW 367 billion Common Stock _ 71,971,631 shares
SOUTHEAST ASIA Singapore Office Singapore Cargo Sales Bangkok Office Bangkok Cargo Sales
6796-2001 6542-0685 (02) 267-0985 (02) 137-4807
OCEANIA Sydney Office Auckland Office Guam Office
(02) 9262-6000 (09) 914-2000 (671) 642-3217
CHINA Service Center Hong Kong Passenger Sales Hong Kong Cargo Sales Beijing Office Beijing Cargo Sales Shanghai Office Shanghai Cargo Sales Tianjin Office Tianjin Cargo Sales
40065-88888 2733-7110 2215-3572 (10) 8453-8421 (10) 6454-3666 (21) 5208-2080 (21) 5208-2117 (22) 2330-8219 (22) 8488-8273
America Service Center Los Angeles Passenger Sales Los Angeles Cargo Sales New York Passenger Sales New York Cargo Sales Toronto Passenger Sales Toronto Cargo Sales
(800) 438-5000 (213) 484-5700 (310) 410-2000 (800) 438-5000 (718) 632-5555 (905) 676-8440 (905) 672-7473
General Shareholders' Meeting _ March 20, 2009 For More Information _ e-mail :
[email protected] [email protected]
Major Shareholders (As of Dec 31, 2008)
Excellence in Growth _20 Business at a Glance _22 Passenger Business _24 Cargo Business _28 Aerospace Business _32 Catering & In-Flight Sales Business _34 Hotel Business _36
Excellence in Service _38 ERP System _40 Maintenance & Engineering _41 Safety _42 Fuel Management _44 SkyTeam Alliance _45
Excellence in Responsiblity _46 Environmental Responsibility _48 Social Contribution _52 Human Resources _54
Ownership(%) 11.93
Finacial Section _56 Management’s Discussion & Analysis _58 Auditors’ Report _78 Financial Statements & Notes _79
23,221,145
33.98
Organization Chart _137 Executive Officers _138 Overseas Network _140 Domestic / China / Japan Network _142 Company Information _143
Subtotal National Pension Fund Mirae Asset Investment Hana UBS Asset Investment Others
5,894,630 5,841,313 1,226,772 35,787,771
8.73 8.65 1.82
Total
71,971,631
CONTENTS Profile _03 Financial Highlights _04 Highlights of 40 Years & Timeline _06 2008 Highlights _12 Message from the Chairman _14 Board of Directors _18 Corporate Governance _19
Number of shares 8,056,528 7,127,096 1,953,157 1,409,485 237,552 4,437,327
Name Cho, Yang Ho & Family Hanjin Co. Inha University Foundation Jungseok Foundation Korea Research Foundation for 21C Treasury Stock
10.55 2.89 2.09 0.35 6.17
46.82 100.00
Europe/CIS Service Center Paris Office Paris Cargo Sales Frankfurt Office Frankfurt Cargo Sales Moscow Office Moscow Cargo Sales Tashkent Office
00800-0656-2001 (01) 4297-3080 (01) 4816-9950 (180) 500-9800 (69) 695-0310 (495) 725-2727 (495) 578-2726 (71) 129-2001
Annual Report 2008
Korean Air has a goal of becoming a respected leader in the global airline industry and we have made great strides towards reaching that goal. By maintaining the most stringent safety standards in the industry, offering our customers exceptional products and restructuring our corporation, we are affecting a corporate culture change that is achieving profitability.
Excellence Flying to New Heights of
Annual Report 2008
EXCELLENCE IN FLIGHT Operational Excellence Service Excellence Innovative Excellence
1370, Gonghang-dong, Gangseo-gu, Seoul, Korea Http://www.koreanair.com
This publication is printed on the paper produced from the woods grown by sustainable forest management efforts.
Annual Report 2008
Korean Air has a goal of becoming a respected leader in the global airline industry and we have made great strides towards reaching that goal. By maintaining the most stringent safety standards in the industry, offering our customers exceptional products and restructuring our corporation, we are affecting a corporate culture change that is achieving profitability.
Excellence Flying to New Heights of
Annual Report 2008
EXCELLENCE IN FLIGHT Operational Excellence Service Excellence Innovative Excellence
1370, Gonghang-dong, Gangseo-gu, Seoul, Korea Http://www.koreanair.com
This publication is printed on the paper produced from the woods grown by sustainable forest management efforts.
