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Korean Air’s credit rating downgraded

Local ratings firms have downgraded their credit assessment on Korean Air, citing the flag carrier’s worsening business environment due to stiff competition and the financial burden of its huge investment plans.

Both Korea Ratings and NICE Investors Service said Monday they had lowered the credit ratings of Korean Air to “BBB+” from “A-.”

“Despite the company’s effort to improve its financial structure, there will be limitations on enhancing financial stability in the mid- and long-term basis in the wake of various factors including large-scale investments and measures to support its subsidiaries,” a NICE Investors Service official said.

The airline plans to invest 2.4 trillion won ($2.25 billion) per year between 2015 and 2017 to purchase new planes.

In June, it signed pacts to purchase 102 next-generation aircraft from Airbus and Boeing, including A321neo planes and 737 MAX-8 aircraft, from 2019-2025.

According to the ratings company, Korean Air’s market share is shrinking, as the amended aviation law has paved the way for other carriers to launch new international flight routes more easily.

“Korean Airline’s market share has plunged as local budget carriers and foreign airlines expanded their market shares,” it said.

Hanjin KAL, the de facto holding company of Korean Air, also had its rating downgraded by NICE Investors Service to “BBB+” from “A-.”

Analyst Kim Bong-kyun of Korea Ratings cited Korean Air’s massive net loss as the main factor behind its one-notch rating downgrade.

“The carrier was expected to increase profits due to falling oil prices this year but the outbreak of the Middle East respiratory syndrome and excessive investment costs led to net losses,” he said.

Last week, Korean Air said it swung to a net loss of 169.2 billion won in the second quarter of this year, hit by a drop in passengers due to the MERS virus.

By Park Han-na (hnpark@heraldcorp.com)
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