1370, Gonghang-dong, Gangseo-gu, Seoul, Korea · 1370, Gonghang-dong, Gangseo-gu, Seoul, Korea...

1370, Gonghang-dong, Gangseo-gu, Seoul, KoreaHttp://www.koreanair.com

This publication is printed on the paper produced from the woods grown by sustainable forest management efforts.

Excellence in Flight 2009 KOREAN AIR ANNUAL REPORT

ReachingBeyond,LeadingtheAviationArena34 ERP System 36 Maintenance & Engineering 38 Safety 40 Fuel Management 41 SkyTeam Alliance

Profile02 Financial Highlights03 Share Performance 04 Message from the Chairman08 Board of Directors 09 Corporate Governance 10 2009 Highlights

GrowingGreenDreamsfortheGlobe14 Business at a Glance16 Passenger Business 20 Cargo Business 24 Aerospace Business 28 Catering & In-Flight Sales Business 30 Hotel & Limousine Business

LandingInaSafeandCleanEnvironment44 Environmental Responsibility 48 Social Contributions 50 Human Resources

FinacialSection53 Management’s Discussion & Analysis 72 Auditors’ Report 73 Financial Statements & Notes 123 Organization Chart 124 Executive Officers 126 Route Network 128 Domestic / China / Japan Network 129 Company Information

Excellence in Flight

Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely, producing an operating profit of KRW133.4 billion. New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport –Incheon – as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent. Korean Air’s cargo division returned to profitability for the first time in two years last October, due in part to the worldwide popularity of Korean brand products.

We also launched cargo service to Sweden, adding to the company’s already extensive European network. On top of the airline’s considerable financial achievements, we also improved Korean Air’s stature in the global airline industry. For the fifth year in a row, IATA ranked Korean Air the world’s largest commercial airline cargo operation. The airline has been on industry best lists and ranked tops by passengers around the world. Travel media from Business Traveler to Travel & Leisure have rated the airline as one of the world’s best. We are honored that travelers and critics across the globe are appreciating our hard work.

400

200

600

-20,000

-10,000

10,000

15,000

20,000

Operating Income ( in billions of KRW )

OPERATING RESULTS Operatingrevenues Grossprofit Selling,general&administrativeexpenses Operatingincome Incomebeforetax Netincome

FINANCIAL CONDITION Totalassets Totalliabilities Totalequity

FINANCIAL RATIOS (%) Returnonaverageequity Returnonaverageassets Debt-to-equityratio EBITDARmargin Fixedchargecoverageratio(times) PBR

PER SHARE DATA EarningsPerShare(InKRW)

2005

7,584.21,692.31,259.8

432.5254.7200.4

13,568.69,539.74,028.9

5.11.5

236.814.21.4252.9

2,989

2006

8,077.91,773.41,276.0

497.4487.9383.0

13,584.79,209.34,375.4

9.12.8

210.520.01.9854.7

5,725

2007

8,812.02,022.71,385.8

636.894.412.9

15,143.710,743.7

4,400.0

0.20.1

243.720.02.19

117.6

180

2008

10,212.61,391.21,490.5

(99.3)(2,450.8)(1,942.4)

15,867.613,044.2

2,823.4

NetlossNetloss

462.09.9

1.2390.9

-28,762

2009

9,393.71,413.71,280.3

133.4(125.4)

(98.9)

16,919.313,862.2

3,057.1

NetlossNetloss

453.513.51.44

121.3

-1,464

2009

8,045.31,210.81,096.5

114.2(107.4)

(84.7)

14,490.611,872.4

2,618.2

NetlossNetloss

453.513.51.44

121.3

-1.25

PROFILE

FINANCIAL HIGHLIGHTS

Financial Highlights

RevenuePassengerCarriedAvailableSeat-Kilometers(millionASK)RevenuePassenger-Kilometers(millionRPK)RevenueFreightTonsCarriedAvailableFreightTon-Kilometers(millionAFTK)RevenueFreightTon-Kilometers(millionFTK)

change (%)

-5.5%2.3%0.1%

-5.6%-7.3%-6.4%

2005

21,708,82168,65949,046

1,527,23810,831

8,140

2006

22,353,16971,89452,178

1,629,70311,662

8,857

2007

22,834,00376,18255,354

1,758,99712,992

9,678

2008

21,960,94077,14055,054

1,667,64712,180

9,005

2009

20,746,41378,94155,127

1,573,76111,289

8,426

Operational Results

5,000

10,000

05

13,5

68.6

06

13,5

84.7

07

15,1

43.7

08

15,8

67.6

09

16,9

19.3

0

05

200.

4

06

383.

0

07

12.9

08

(1,9

42.4

)

09

(98.

9)

0

05

432.

5

06

497.

4

07

636.

8

08

(99.

3)

09

133.

4

3,000

9,000

6,000

12,000

05

7,58

4.2

06

8,07

7.9

07

8,81

2.0

08

10,2

12.6

09

9,39

3.7

Operating Revenues ( in billions of KRW )

Net Income ( in billions of KRW )

Total Assets ( in billions of KRW )

KOREAN AIRANNUAL REPORT 2009

02

* Korean Won figures are translated, solely for the convenience of readers into U.S. dollars at KRW1,167.6 : USD 1.00, the rates prevailing as of December 31, 2009

(In billions of KRW)(In millions of USD)

FaceValue(KRW) NumberofShares TotalMarketCapitalization(KRWbillions) SharePriceHighest(KRW) Lowest(KRW) ForeignOwnership(%)

2009

5,00071,971,631

3,951 56,000 29,650 24.2%

2008

5,00071,971,631

2,735 80,000 25,550 7.8%

2007

5,00071,971,631

5,527 87,400 32,550 12.8%

SHARE PERFORMANCE

Korean Air’s Stock Facts

Cho,YangHo&FamilyHanjinCo.InhaUniversityFoundationJungseokFoundationKoreaResearchFoundationfor21CTreasuryStock Sub TotalNationalPensionFundMiraeAssetInvestmentHanaUBSAssetManagementKTBAssetManagementOthersTotal

Number of Shares

8,017,4227,127,0961,953,1571,409,485

237,5524,437,327

23,182,0393,363,6732,842,532

992,157916,631

40,674,59971,971,631

Ownership (%)

11.14%9.90%2.71%1.96%0.33%6.17%

32.21%4.67%3.95%1.38%1.27%

56.51%100.00%

Major Shareholders (As of Dec 31, 2009)

2009 Korean Air Foreign Ownership

03

2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.122009.01 2009.02 2009.03

30%

25%

20%

15%

10%

5%

0%

2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12

KOSPI(NumberofShares)

2009 KOREAN AIR SHARE PERFORMANCE vs KOSPI ( KOSPI, STOCK PRICE )

2,000

1,800

1,600

1,400

1,200

1,000

0

STOCK PRICE (KRW)

50,000

45,000

40,000

35,000

30,000

25,000

20,000

* Preferred stocks excluded.

Dear Shareholders,

Before I discuss corporate business, I want you to know how much Korean Air and I, personally, appreciate your support and encouragement during 2009. We would not have accomplished all we did without our shareholders’ commitment and for that we thank you.

Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely, producing an operating profit of KRW133.4 billion.

New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport – Incheon – as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent.

Korean Air’s cargo division returned to profitability for the first time in two years last October, due in part to the worldwide popularity of Korean brand products. We also launched cargo service to Sweden, adding to the company’s already extensive European network.

On top of the airline’s considerable financial achievements, we also improved Korean Air’s stature in the global airline industry. For the fifth year in a row, IATA ranked Korean Air the world’s largest commercial airline cargo operation. The airline has been on industry best lists and ranked tops by passengers around the world. Travel media from Business Traveler to Travel & Leisure have rated the airline as one of the world’s best. We are honored that travelers and critics across the globe are appreciating our hard work.

Korean Air fared relatively better than most and realized operating income of KRW133.4

billion due to the company’s concerted efforts to overcome the worst effects of the on-

going crises backed by the support by its loyal shareholders.

MESSAGE FROM THE CHAIRMAN


PROFILE

05

PROFILEKOREAN AIRANNUAL REPORT 2009

06

Adhering to strict flight safety

practices

Leading a profit-oriented

business operation

Reinforcing capabilities to

deal with changing business

environments

Securing global

competitiveness for sustainable

growth

We also are continuing to expand our cultural and sports endeavors. We launched new audio guides that include the Korean language at the British Museum this year and continue to sponsor Korean language audio guides at Paris’ Louvre and Russia’s Hermitage museums.

In partnership with the Korean government, Korean Air became involved with the nation’s efforts to bring the 2018 Winter Olympic Games to PyeongChang. Korean Air’s global reach and mindset are benefits to this effort and we are working hard to communicate PyeongChang’s unique benefits to the world. In addition, Korean Air is sponsoring young talent through an athlete development program to enhance our nation’s brand value in the eyes of the world.

We have some aggressive objectives for the coming year: we will increase our global competiveness by operating a company that is profitable, productive yet flexible, and offering products customers want to return to.

Our aim is to reach KRW10,558.8 billion in operating revenue and KRW800.0 billion in operating income. We have set these objectives high, knowing that Korean Air and every one of our employees are focused on strategies and efficiencies that will support them.

We are energized by optimistic forecasts of economic recovery because recovery means increased air transport demand. So, in addition to maintaining one of Asia’s most extensive route networks, we will be expanding our reach into China and Russia. We also will benefit from some significant special events including the Shanghai EXPO, the G-20 Summit in Seoul and the 2010 World Cup Soccer Games in South Africa. We are determined to seize these and other opportunities to position Korean Air as a great global airline.

07

Respected Leader

in the World Airline

Community

We want to provide a unique product at Korean Air and investing in new aircraft is helping us achieve that. We are bringing in new B777-300ERs and A330-200s and look forward to introducing next generation A-380s and B-787-8s to our fleet. All to enhance our customer service, one of the tenets of the SkyTeam Alliance, of which Korean Air is a founding member. SkyTeam celebrates its 10th anniversary this year and we will continue to support its growth and value to our members and passengers.

Korean Air has achieved remarkable success over the past 40 years. We have grown from a small regional airline to a global carrier rated tops by travelers and critics around the world. Our promise to you is this: Together, with our 17,000 employees, we will strive to enhance your investment while raising the stature of Korean Air as a leading global carrier.

Again, thank you for your continued support. We look forward to sharing our successes with you in the future.

Best regards,

Cho,YangHoChairman & CEO

BOARD OF DIRECTORSThe Korean Air BOD is comprised of 11 members including highly capable executives who are leaders in the aviation industry and six non-standing directors who have high-level expertise in their respective areas

PROFILE


Chi,ChangHoonPresident & COO

Lee,TaeHeeGeneral Counsel

Lee,YunWooDirector, Counsel of Daewoo Securities

HyunJungTaikDirector, Professor Inha University

Suh,YongWonExecutive Vice President Korean Air Human Resources Division

Cho,HangJinExecutive Vice President KoreanAir Aerospace Busines Division

Park,OhSooDirectorProfessor Seoul National University

KimJaeIlDirectorProfessor Seoul National University

Lee,SogWooDirectorLawyerDoore Law Firm

Lee,HeeBeomDirectorChairman of STX Energy&Heavy Industries


08

Korean Air emphasizes corporate ethics in the activities of all of our employees and management. The Company is also fully aware that corporate openness will enhance our corporate image and strengthen our competitiveness.

CORPORATE GOVERNANCE

Korean Air is fully committed to shareholder value through ethical behavior and social responsibility. In an effort to effectively deliver corporate transparency, the Company continues to maintain regulatory systems and operational processes ranging from major decision-making to everyday activities.

The Board of Directors makes important decisions of the company and guarantees independence in its work. Korean Air’s executive team reports to the Board at meetings so that all decisions can be made based upon a clear understanding of the business situation. The three committees under the Board - the Audit, Outside Director Nominating and Executive committees - maintain objectivity in business, impartiality in nominating directors, and expertise in decision- making.

Korean Air continues its efforts to encourage fair competition. Since the company announced its fair trade policies in 2004, Korean Air has maintained a ‘self-observance educational program’ to allow fair trade practices to take root and extend, while preventing unfair trade practices. Korean Air also is strengthening training programs to promote ethical practices among management and employees.

The Company emphasizes corporate ethics in the activities of all of its employees and management. Korean Air introduced standards for value judgment and behavior through its Corporate Code of Ethics and Practice Guidelines, and continues to make all employees aware of the importance of corporate ethics by providing relevant information and recurring training.

Since 2001, in particular, the Company has been helping all employees make corporate ethics a habit through mandatory corporate ethics courses, and all new employees are required to submit a written corporate ethics pledge. In 2006, Korean Air strengthened its ethical behavior principles on conducting business with interested parties.

In addition, Korean Air operates an Internal Misconduct Reporting System to help eliminate potential solicitations within the organization, unfair or unethical conduct, and irregularities in transactions with outside parties. Any of the above activities that are reported are thoroughly investigated by the Audit Department. To achieve corporate transparency, Korean Air is committed to increasing the reliability of all disclosed financial information and strengthening accounting transparency through our Internal Accounting Control system. Through an advanced internal accounting control system, we regularly monitor the efficiency of the internal accounting management and the operating status of internal controls.

Korean Air is fully aware that corporate openness will enhance our corporate image and strengthen our competitiveness. We will continue our efforts and practices to further achieve our goal of true corporate transparency.

09

2009 HIGHLIGHTS

PROFILE

Korean Air Adds Two A380 Aircraft to Fleet Order, Raising its A380 Order to TenIn February, Korean Air made the decision to purchase an additional two A380 aircraft. This raises the airline’s A380 order to ten aircraft.

Korean Air Celebrates 40th Anniversary: ‘Beyond 40 Years of Excellence’ Airline Announces Business Objectives for 2019In March, Korean Air celebrated its 40th anniversary and announced its slogan for the year and business goals for year 2019 (the 50th anniversary) at its world headquarters in Seoul. The new slogan “Beyond 40 Years of Excellence” stands in line with the corporate mission of Excellence in Flight and expresses the airline’s will to further pursue its vision “to be a respected leader in the world airline community” and possess an innovative and youthful spirit.

Korean Air Celebrates 40th Anniversary: Cabin Crew International Roadshow Showcases Uniform Design EvolutionAs part of its celebrations to mark the 40th anniversary of the airline, leading global carrier Korean Air showcased the evolution of its stylish uniform designs over the decades, culminating in today’s sophisticated Gianfranco Ferre design in the airline’s distinctive hallmark blue.

Korean Air CEO Yang Ho Cho Inducted into TIACA ‘Hall of Fame’In April, Korean Air Chairman & CEO, Yang Ho Cho, also Chairman of the Hanjin Group, was inducted to the TIACA (The

International Air Cargo Association) Hall of Fame. The induction was officially announced at a special celebration dinner on April 27th during the TIACA’s Executive Summit and Annual General Meeting in Vancouver, Canada.

Korean Air awarded Mongolian “Environmental Excellence Medal”In May, Korean Air, the South Korean flagship carrier which has volunteered to plant thousands of trees in order to prevent severe desertification in Mongolia, was awarded the “Environmental Excellence Medal” by the Mongolian government.

Korean Air, Number One Global Cargo Airline Five Years in a RowIn June, Korean Air topped the global rankings for commercial airline cargo operations for the fifth consecutive year in 2008, according to World Air Transport Statistics compiled by the International Air Transport Association (IATA).

Korean Air Sponsors Russia’s State Hermitage MuseumIn June, Korean Air announced the official launch of a Korean language guide service at Russia’s State Hermitage Museum in St. Petersburg. Korean Air also signed an MOU (Memorandum of Understanding) for further sponsorship over a five year period to produce the museum’s promotional materials, such as visitor guide maps and exhibition posters.

Korean Air Donates Mega-sized Collage Artwork to Russia’s State Hermitage MuseumIn August, Korean Air donated a mega-sized collage work created

05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25


10

by a group of college students in South Korea to commemorate the airline’s sponsorship of the recently unveiled Korean multimedia guide service at Russia’s State Hermitage Museum.

Korean Air Named the Best North Asian AirlineIn October, Recognizing its commitment to “Excellence in Flight”, Korean Air, the flagship carrier of South Korea, was honored as ‘The Best North Asian Airline’ at the 20th TTG Travel Awards 2009 in Bangkok.

Korean Air Contracted as Boeing 747-8 Wing Part SupplierIn October, Korean Air was selected at the 2009 Seoul International Aerospace and Defense Exhibition to produce wing structure components for the new Boeing 747-8 aircraft. Korean Air Awarded by PAX International:“Global catering distinction award” In November, Korean Air was awarded the “Global catering distinction award” by PAX International magazine, a leading publication in the global travel catering industry. The results of the ‘2009 PAX International Readership Awards’ were announced at an event in Dubai’s International Convention Center on November 18th.

Korean Air expands its Global Cultural Sponsorship with a new initiative at the British MuseumIn December, Korean Air announced that it will further expand its global cultural sponsorship program by making a significant investment in the British Museum’s new handheld Multimedia Guides, with a five-year partnership lasting to 2014. In this

challenging economic climate, Korean Air is proud to continue its support of the arts at a time when it has never been more important to do so.

( Global Traveler ) Readers Award Korean AirKorean Air was awarded the ‘Best Business Class Seat Design’ and ‘Best Airport Staff/Gate Agent’ by Global Traveler magazine in its 6th annual GT Tested Awards survey. The results of the awards were published in the magazine’s December issue, with the airline receiving the award at the Global Traveler’s awards dinner in New York on January 21, 2010.

Boeing, Korean Air Announce Order for New 747-8 IntercontinentalIn December, Boeing and Korean Air announced an order for five 747-8 Intercontinental jetliners. Korean Air is the first Asian airline to order the passenger version of the new fuel-efficient 747-8.

Korean Air best business class to Asia; Best Asian airline In December, Korean Air was rated as having the best business class to Asia by readers of Business Traveler magazine for the fourth consecutive year. The magazine’s readers also ranked Korean Air as the best airline in Asia for the third straight year. Furthermore, for the second year in a row, the magazine’s readers rated Korean Air’s advertising campaign the best in the business. Despite the global economic down turn, Korean Air has made a $200+million commitment to enhancing its fleet and attracting the attention and loyalty of business travelers.

05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25 30 05 10 15 20 25

11


12

Korean Air generates profits from the transporting of passengers and cargoes in connecting cities around the world, and thereby contributes to economic development through the international exchange of resources and culture. In 2009, we transported 20,746 thousand passengers and 1,574 thousand tons of freight to and from destinations around the world, contributing to economic activities around the globe. In 2009, Korean Air generatedKRW9,393.7 billion in operating revenues.

Growing Green Dreams for the Globe

Growing Green Dreams for the Globe

5,462.9 billion 2,704.6 billion


14

2009 HIGHLIGHTS PASSENGER BUSINESS

The Korean market, confronted with a prolonged decline in demand, prompted Korean Air’s Passenger Business Division to concentrate on the promotion of overseas sales, the development of new markets and expansion of the airline’s global network. The division also introduced the latest aircraft, upgraded cabin facilities and made scheduling arrangements more flexible. passenger revenue posted KRW5,462.9 billion for 2009.

CARGO BUSINESS

Korean Air Cargo posted KRW2,704.6 billion in revenue for 2009, a 10.6% decline from 2008 due to the economic recession that descended on the globe in the second quarter of 2008. However, boosted by a recovery in demand in the second half of the year, the company recorded a significant improvement during the peak season from October to December.

Businessataglance

OperatingRevenues OperatingRevenues

4,500.0

5,500.0

5,000.0

6,000.0

05

4,35

1.0

06

4,75

7.0

07

5,21

7.1

08

5,95

3.3

09

5,46

2.9

2,000.0

3,000.0

2,500.0

3,500.0

05

2,32

2.0

06

2,37

0.8

07

2,53

3.0

08

3,02

6.8

09

2,70

4.6

251.7billion 235.1billion 41.8 billion

15

AEROSPACE BUSINESS

At the 2009 Seoul International Aerospace and Defense Exhibition, Korean Air’s Aerospace Division had been selected to develop the wing structure for the Boeing 747-8. Korean Air’s Aerospace Division has also been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’ by the Korean Ministry of National Defense for excellence in quality and delivery to the Korean defense industry.

CATERING & IN FLIGHT SALES BUSINESS Korean Air Catering Division systematically manages the complete production process, from the purchase of food products and materials to the distribution of meals to individual aircraft. The division also utilizes Korean Air’s Food Safety Research Center attached to Inha University in Seoul, Korea.The center provides research and ensures Korean Air meals meet the industry’s highest quality standards in terms of taste and nutrition.

HOTEL & LIMOUSINE BUSINESS Korean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center]. Through the company’s hotel business, Korean Air not only maximizes customer satisfaction by providing high-quality services, but also creates synergies between the hotel’s and the airline’s core competencies.

OperatingRevenues OperatingRevenues OperatingRevenues

100.0

300.0

200.0

400.0

05

188.

0

06

211.

6

07

235.

1

08

367.

7

09

251.

7

150.0

250.0

200.0

300.0

05

213.

7

06

222.

1

07

260.

6

08

257.

9

09

235.

1

20.0

60.0

40.0

80.0

05

35.0

06

36.5

07

35.2

08

39.7

09

41.8

Passenger Business Division will continue to promote long-term growth strategies and management practices geared to the enhancement of profitability

PassengerBusiness

BUSINESS REVIEW IN 2009Where others see adversity, we at Korean Air see opportunity. Despite a variety of challenges, Korean Air performed better than most international airlines last year. We opened new routes, improved our fleet, increased our productivity and invested wisely. New passenger routes were added to Japan and China because both countries are showing strong demand and growth potential. With the world’s most popular international airport - Incheon - as our hub, we expanded the number of connections we offered and attracted new international customers who boosted our overseas sales by 14 percent.

In 2009, the world’s airline industry was hit by a global economic recession that stemmed from a financial crisis in the U.S. and a new strain of the H1N1 influenza, further depressing economic activity. In particular, the number of outbound Korean travelers decreased by about 24 percent from the previous year. The Korean market, confronted with a prolonged decline in demand, prompted Korean Air’s Passenger Business Division to concentrate on the promotion of overseas sales, the development of new markets and expansion of the airline’s global network. The division also introduced the latest aircraft, upgraded cabin facilities and made scheduling arrangements more flexible.

REVENUE ENHANCEMENT ACTIVITIESIn May 2009, Korean Air stepped up efforts to increase revenues with the introduction of an Incheon-Xian route, with flights running five times a week. We also started flights to Mudanjiang and Shizuoka. The airline also sought to create new markets and increase demand with the extension of charter flight operations beyond Japan to other countries. Furthermore, routes of high demand, such as New York, Ho Chi Minh City and Jakarta were equipped with upgraded seating and cabin facilities to maximize operating revenue. At the same time, Korean Air conducted marketing activities in association with the Incheon Airport Authority and the City of Metropolitan Seoul to attract more foreign visitors.

Korean Air sought to create new markets and increase demand with the extension of charter flight operations beyond Japan to other countries


16Growing Green Dreams for the Globe

OPERATING PERFORMANCE BY ROUTEOn the whole, overseas demand increased by 19 percent in 2009 while demand from within Korea dipped by 16 percent. Demand from Japan rose by 37 percent due to the strength of the Japanese yen and the preference of many Japanese for short-distance travel, whereas travel in the opposite direction, from Korea to Japan, decreased sharply by 24 percent over the same period. Overall, demand between Korea and Japan increased by 15 percent, with Japanese tourists more than making up for the shortfall in Korean visitors to Japan.

As for Korean Air’s routes to China, the number of passengers flying to or transferring through Korea increased by 14 percent because of the weak Korean won and intensified efforts to increase Chinese demand for flights to Korea. Korean Air introduced a free sale code share with China Southern Airlines on April 27, 2009, and created a total of seven code share routes. This improved access to Chinese destinations allowed the airline to offer more convenient scheduling and a better network of routes to customers.

For Southeast Asia, the effects of the global economic recession and widespread fears of the H1N1 influenza caused a 17 percent drop in Korean demand and an overall drop in demand of 3 percent for travel to the region. On routes to Oceana, the number of overseas passengers increased by 13 percent due to the strength of local currencies, whereas demand from Korea to Oceana dropped by 19 percent. Overall demand for transportation to this region declined by 4 percent.

The introduction of the U.S. Visa Waiver Program and Canada’s Open Skies agreement helped to create a steady growth of passengers to North America of 6 percent, encouraging results considering the trend of falling demand for tourism in most places across the world. In particular, the number of passengers traveling to Hawaii, a popular destination for honeymooners,

0

80

2030

40

5060

70

1090

5,462.9billion

PassengerRevenue

17

+ Seat Class Composition by Revenue Terms (Unit:%)

First Class 2% Business Class 17% Economy Class 81%

saw an increase of 14 percent from the previous year and demand continues to rise on many North American routes. In Europe, Korean Air flexibly adjusted its capacities in response to the depressed tourist market in the region, combining the Tashkent to Cairo route and reducing the frequency of flights bound for Europe. In addition, Korean Air signed a free sale code share agreement with Uzbekistan Airways and Aeroflot to enhance flight scheduling and the company’s network of routes to Central Asia and Russia.

COST SAVING ACTIVITIESKorean Air’s Passenger Business Division is continually looking at ways to reduce high costs and optimize productivity throughout the organization. For instance, we arranged charter flights, making effective use of standby aircraft at night, and increased aircraft utilization by improving flight connectivity. In regards to unprofitable flights, appropriate measures were taken to adjust capacities on a regular basis. Additionally, Korean Air’s major divisions collaborated on reducing costs by shortening routes, lowering aircraft fuel costs, facility charges, etc.

IT-BASED SERVICEAt Korean Air, we embrace technology that can help our customers enjoy a more pleasant experience. That starts at the airport. We have expanded the installation of KIOSK systems for international flight check-ins and developed the airline’s ‘Domestic Web Check-in’ system as part of efforts to enhance customer convenience and satisfaction. With the activation of Korean Air’s new ERP system, the Passenger Business Division has developed a Passenger Revenue Analysis BI system, which enables users to analyze operating and ticketing data on a real-time basis. The system facilitates decision-making processes, effectively improving business management practices.

CUSTOMER SERVICESKorean Air has continued to introduce new aircraft while upgrading seating and cabin entertainment facilities for the greater customer satisfaction. We also opened an exclusive check-in counter at Incheon International Airport called the China Express and launched an online service called ‘Travel Planner’ to assist foreigner travelers planning a vacation to Korea. Korean Air has extensively promoted culture to the Korean general public with the airline’s support of Korean language guides at major world museums, such as Le Musee du Louvre, The British Museum and the Hermitage Museum.

10.0%

30.0%

20.0%

40.0%

05

39%

06

38%

07

37%

08

37%

09

40%

Korean Air’s Passenger Business Division is continually looking at ways to reduce high costs and optimize productivity throughout the organization

+ International Passenger Market Share

(koreain/outboundNo.ofPassengers)


18 Growing Green Dreams for the Globe

AWARDSKorean Air was selected as the best airline in Asia for the third straight year and best business class flights to Asia for the fourth consecutive year by Business Traveler magazine readers. The magazine also awarded the airline for the ‘Best Airline Advertising Campaign’ for 2009. Korean Air also received accolades from well-known Chinese travel magazines for the airline’s efforts to enhance service to China. We debuted the China Express check-in desk at Incheon International Airport, made significant enhancements to fleet and services on Chinese routes, and made social contributions to Chinese society. In particular, Korean Air was recognized as the ‘Best Overseas Airline’ by the Global Times, included in the ‘Top 5 Carriers’ by National Geographic Traveler China, and chosen as ‘The Most Favorable Overseas Airline’ as selected by Chinese passengers and by Travel+Leisure magazine.

GOING FORWARDAs the world economy has begun to recover since the third quarter of 2009, the airline industry expects demand for air transport to gradually improve in 2010. However, competition is also expected to intensify due to a combination of high fuel prices and aggressive expansion of networks by low-cost carriers.

Nonetheless, despite such adversity, the Passenger Business Division will continue to promote long-term growth strategies and management practices geared to greater profitability. Such efforts will include intensified high-end marketing, the continual delivery of new aircraft and new retrofits to existing aircraft, and the development of overseas markets and a global network to ensure that Korean Air ranks as one of the top airlines in the world.

20.0%

60.0%

40.0%

80.0%

05

66%

06

65%

07

62%

08

58%

09

46%

+ Domestic Passenger Market Share

(No.ofPassengers)

20.7million

RevenuePassengerCarried

19

Boosted by a recovery in demand in the second half of the year, Korean Air recorded a significant improvement during the peak season from October to December.

CargoBusiness

Korean Air’s Cargo business was proud to celebrate another major accomplishment in 2009. For the fifth consecutive year, we were ranked No. 1 in the world in freight tonnage kilometers by the International Air Transportation Association (IATA). This remarkable achievement can be attributed to Korean Air’s competitive schedule, diversified route network, the flexible operation of routes in response to changing market demand, and improved customer service through investments in cargo terminals and IT infrastructure.

Korean Air is constantly working to discover and nurture long-term growth engines through new opportunities and the expansion of our overseas network. The company has built a network of cargo transport hubs connecting Europe, India, Southeast Asia and Korea. And, with Korean Air’s participation in the Navoi Development Project in Uzbekistan, the company has added a logistics hub for Central Asia. In addition to new routes, this unique location gives the airline an advantageous position in the Central Asian market with its strong potential for growth. This hub is expected to serve as the Cargo division’s core engine for sustainable growth for the long term. In October, 2009, cargo services to Hanoi, Vietnam were added as the airline explores new routes in Southeast Asia.

Korean Air also has been aggressively expanding to build market share in China -- the factory of the world -- which continues to grow by leaps and bounds. As of the end of 2009, Korean Air flew dedicated freighters to seven destinations in China including Shanghai, Hong Kong and Beijing, with a cargo terminal under construction in Tianjin. Grandstar Cargo, a joint venture between Korean Air and Chinese cargo giant, Sinotrans, currently operates a cargo transport business headquartered in Tianjin.

Korean Air Cargo achieved a 75 percent load factor, up 1 percent from the previous year due to the division’s flexibility in responding to changes in cargo demand. Boosted by a recovery in demand during the second half of the year,

As of the end of 2009, Korean Air flew dedicated freighters to seven destinations in China including Shanghai, Hong Kong and Beijing, with a cargo terminal under construction in Tianjin



the company recorded a significant improvement through the peak season from October to December.

Korean Air Cargo posted KRW2,704.6 billion in revenue for 2009, a 10.6 percent decline from 2008 due to the economic recession that impacted businesses worldwide.

ACTIONS TAKEN TO INCREASE PROFITABILITYIn late 2009, demand for air cargo transport began to rebound, following the recession in the first half of the year. In response to sagging demand in the early part of the year, Korean Air reduced the number of unprofitable routes, cushioning the effects of price cuts and losses in revenue, and expanded the number of profit-generating routes during high seasons to maximize profitability. As a result, the airline realized relatively sound performances, with moderate declines of -6 percent and -7 percent in transport and supply, respectively, in comparison to the air cargo business worldwide, which suffered declines of -10 percent and -8 percent (according to a December survey by IATA). In particular, Korean Air Cargo’s load factor grew from the previous year due to the flexibility of the division’s operations, resulting in merely a slight reduction in transport compared to a larger decline in supply.

Korean Air also adjusted prices, which had declined during off seasons, raising them again when market demand picked up and maximizing profitability during peak seasons. At the same time, the airline invested in improving the quality of its transport service through reinforcements of safety operations, the IT system and cargo terminal projects, hence the potential for enhancing customer satisfaction.

OUTLOOK IN 2010 The International Monetary Fund (IMF) forecasts that the economic growth rate in advanced economies of Europe and the U.S. will bounce back and that China’s

2,704.6 billion

CargoRevenue

21

growth rate will rebound to double-digit growth. The IMF estimates that global economic growth this year will be 3.9 percent. In addition, IATA predicts that global demand for cargo transport will grow by 7 percent in 2010, suggesting a much-improved business environment over last year. A global market trend of increasing demand for IT products, which are mostly transported via air, and the conclusion of a Korea-EU FTA (Free Trade Agreement) and a Korea-India CEPA, are expected to have a positive impact on Korean Air’s cargo business.

Nonetheless, risks remain. Potential risk factors include rising oil prices fueled by economic recovery, the possibility of a double-dip recession and the potential for radical change in such external variables as foreign exchange, oil prices and fiercer competition from competitors who have streamlined their operations. In response, Korean Air has developed a contingency plan and a variety of activities designed to reduce or avoid such risks.

BUSINESS PLAN IN 2010Although conditions in the market are turning favorable with the recovery of the global economy, uncertainty remains due to concerns about the possibility of a double-dip recession and hikes in oil prices. Against this backdrop, Korean Air Cargo will continue to respond flexibly and proactively to changes in external business environments while aiming to maximize profitability through enhancements to customer service.

Korean Air Cargo aims to establish a more effective profit-generating structure with a revenue target this year of 25 percent over that of 2009, a year in which the volume of business was seriously affected by the economic slowdown. Costs are expected to increase by 12 percent given the growing volume of business and rising oil prices. To attain this goal of a 25 percent increase, the division has devised three core strategies:

Korean Air has developed a contingency plan and a variety of activities designed to reduce or avoid potential risk factors.



Profit-oriented route operationsIn response to instability in the markets and rapidly changing demand for air cargo services, Korean Air plans to alter route choices, expanding profitable ones while reducing the number of unprofitable ones. The airline will also manage pricing and make more effective use of load yields to cushion the effect of price cuts in off seasons. In addition, we will utilize the airline’s accumulated knowledge in flight operations and reputation for high-quality service in the transport business to attract high-yield specialty cargo, thus improving profitability.

Strengthening data-based sales activitiesKorean Air plans to augment its sales and distribution activities based on data collected from analysis of results. Our analysis includes prices, yields, returns on routes, research on demand by customers and according to product, and demand by nation and forwarder. Based on systematic data analysis, the company will expand its platforms for meeting market demand by rapidly responding to changes in the market, including the development and timely introduction of new products and a redoubling of efforts to select and attract new market demand.

Building a global leading serviceWith a focus on improving customer satisfaction, Korean Air plans to improve the quality of its services for its overall transport processes. For example, we plan to improve convenience for customers using IT services with an expansion of the ‘E-freight’ system and the introduction of an integrated portal service that allows for email tracking at each stage of transport and services covering related claims. To improve operational safety, the airline will reinforce security check procedures at its overseas branches and agencies. We will also strengthen our special cargo transport service and establish a ‘special care service’ to monitor and oversee the entire shipping process, from reservation to delivery. The goal of these efforts is to provide customers with excellent service befitting a leading global carrier.

1.6 millionRevenueFreightTonsCarried

23

20.0%

60.0%

40.0%

80.0%

05

47%

06

47%

07

47%

08

48%

09

50%

+KE’s Share in Korean Market (Unit:%)

Aerospace Division has been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’

AerospaceBusiness

INTRODUCTION Korean Air’s development of the 500MD helicopter marked the beginning of the Korean aerospace industry. Having accumulated experience in system integration with the development of the F-5 fighter (Jegong-ho), the UH-60 helicopter and the Chang-Gong 91, Korean Air’s Aerospace Division developed the 500MD as Korea’s first indigenous commercial aircraft. Over the past 30 years, the division has continued to strengthen its capabilities in military and commercial aircraft MRO (Maintenance, Repair & Overhaul), while expanding its capabilities in the manufacture of structures for commercial aircraft, the development of satellites and space launch vehicles, as well as in other related areas.

Korean Air’s Aerospace Division also participated in the joint development of the KT-1 Trainer, the KF-16 Fighter Jet and the Korean Utility Helicopter, the SURION, and is a leader in the development of UAVs (Unmanned Aerial Vehicles). Based on capabilities accumulated from the development and manufacture of aircraft fuselages and wings for major aircraft manufacturers, Korean Air has developed the capacity to contribute or lead such advanced projects.

The headquarters of Korean Air’s Aerospace Division is the Tech Center, located in Busan in an area encompassing 705,000m2, which includes assembly/maintenance hangars, and facilities for painting, the overhaul of electronic components and fabrication of parts and components. The division also utilizes Korean Air’s R&D Center in the Daeduck Science Town encompassing an area of 150,000m2, for the development and design of state-of-the-art technologies for aircraft, UAVs, satellites and launch vehicles.

As the leading MRO facility in the Asia-Pacific region, the Tech Center’s employees have performed heavy maintenance on over 3,500 military aircraft and 2,000 commercial aircraft. The center also provides logistic support for the F-4 Fighter, the P-3C anti-submarine patrol aircraft, the 500MD, UH-60, CH-47,

Aerospace division has continued to strengthen its capabilities in military and commercial aircraft MRO (Maintenance, Repair & Overhaul), while expanding its capabilities in the manufacture of structures for commercial aircraft, the development of satellites and space launch vehicles, as well as in other related areas

100.0

300.0

200.0

400.0

05

109

06

126

07

158

08

245

09

150

+Revenue(Commercial) (InbillionsofKRW)



Lynx, ALT-III helicopters (in conjunction with the Korean government), A-10 Attacker, F-15 and F-16 Fighters, and the CH-53 and CH-47 Helicopters for the U.S. government. In addition, the Aerospace Division not only services Korean Air’s fleet, aircraft, the 500MD, UH-60, CH-47, Lynx, ALT-III helicopters (in conjunction with the Korean government), A-10 Attacker, F-15 and F-16 Fighters, and the CH-53 and CH-47 Helicopters for the U.S. government. In addition, the Aerospace Division not only services Korean Air’s fleet,

but those of other airlines, including United Airlines, Grand Star, Southern Airlines, etc. We conduct heavy maintenance services on more than 120 aircraft every year backed by a large staff of in-house experts. The division also performs modifications of In-Flight Entertainment (IFE) Systems and cabin upgrades for Boeing 747-400s and 747-700s, as well as conversions of Boeing 747-400s from passenger to freight aircraft.

Every year, Korean Air conducts high quality maintenance on over 15,000 components utilizing advanced technology and the company’s accumulated experience in avionics, including communication and navigation systems, power systems and display units. The division also manufactures and repairs over 11,000 parts every year, and uses advanced testing equipment to monitor the performance of fuel systems, pneumatic valves and hydraulic systems. Moreover, Korean Air has been certified by the FAA, EASA and CAAC, which has enabled the company to expand its third-party business in maintenance and repair.

BUSINESS REVIEW IN 2009In 2009, Korean Air’s Aerospace Division participated in the KHP (Korea Helicopter Program), developing the aft fuselage and the tail rotor system andperformed structural and aviation equipment upgrades on the U.S. Air Force’s F-16 Fighter. The division also recently began similar upgrades for the U.S. Air Force’s A-10, as well as re-wiring of the electrical systems for the Force’s F-15.

50.0

150.0

100.0

200.0

05

79

06

86

07

77

08

122

09

102

+Revenue(Military) (InbillionsofKRW)

251.7billion

AerospaceRevenues

25

Since the 1980s, Korean Air’s Aerospace Division has designed and manufactured wings and fuselages for the Boeing 737, 747, and 777, as well as the Airbus 330 and 380. The division has also worked with Boeing for several years to develop the next generation Boeing 787 Dreamliner, and is now taking a leading role in the joint development and manufacture of this highly advanced aircraft. Korean Air is one of seven international partners in the development program for the 787, and has developed and invested in new equipment and facilities requiring advanced designs and manufacturing techniques for the manufacture of advanced composite products for the 787. Working in conjunction with major aerospace companies from around the world, Korean Air’s participation in this program constitutes a turning point for the company and will enable Korean Air to move forward in terms of the development of new technologies while becoming a world leader in in aircraft design and development.

At the 2009 Seoul International Aerospace and Defense Exhibition on October 21st, 2009, it was announced that Korean Air’s Aerospace Division had been selected to develop the wing structure for the Boeing 747-8. The Aerospace Division also received an award at the exhibition as ‘Supplier of the Year’ for its contributions to Boeing, having previously won the award in 2000 and 2006, and won as ‘Best Supplier’ for its efforts in supplying Sorgema of EADS in 2008 and 2009.

Korean Air’s Aerospace Division has also been recognized as a ‘Best Partner’ by Boeing and EADS in new aircraft development and was honored as the ‘Best Company of the Year for 2009’ by the Korean Ministry of National Defense for excellence in quality and delivery to the Korean defense industry. The Aerospace Division has continued to expand its stake in the space business sector. For instance, in 2009, the company completed such major milestones as the system integration of the KSLV-1 (Korea Space Launch Vehicle) program, the development of the main bus for the Arirang 3 and 5 satellites and the development of the test module for the Arirang 5 satellite. As was previously



reported in 2007, the division succeeded in developing a Close-Range Surveillance UAV named the KUS-7, and in November of this year, this success culminated in the successful first flight of the KUS-9, known as the Tactical Close-Range UAV. Another major accomplishment of 2009 was the formation of a new business unit for the development of UAVs. This unit is expected to be in a favorable position for the development of a follow-on UAV program due to the Aerospace Division’s advanced technical knowledge in the areas of systems integration, embedded software development and the manufacture of composite parts for fuselages, wings and radomes.

GOING FORWARDDue to the remarkable development, manufacture and on-time delivery of high quality components for the Boeing 787, the Aerospace Division has begun development on derivatives of the 787 aircraft and is currently in discussion with Airbus on participation in the development of the A350 extra-wide body. In 2010, the division will continue to expand its participation in the development of such new aircraft as the Boeing 787-9 and the succeeding models of the 737 and A320. The division is also aligning available resources and capacities in preparation for increased demand for the new 787.

Korean Air’s Aerospace Division is also planning to expand in the areas of heavy maintenance for commercial and military aircraft, equipment modification and cabin upgrades, as well as the overhaul of components. In addition, the division will continue to research the integration of liquid rocket engine systems, develop test facilities and focus on UAS (Unmanned Aerial Systems) for defense and civilian use so as to expand in the space and launch vehicle sector. The division’s target for revenue is KRW357 billion ($330 million) in 2010 and KRW1.2 trillion ($1.1 billion) in 2015. To achieve $1.1 billion in revenue, the Aerospace Division has announced its new vision, which focuses on excellence in technology, quality, and competitiveness.

27

We aim to better meet customer needs and increase customer satisfaction with continuous research and strict quality management

Catering&InFlightSales

CATERINGKorean Air’s catering business offers world-class, delicious cuisine suited to a wide range of tastes and preferences. Korean Air and its client airlines create menus based on customer preferences, and meals are prepared at Korean Air’s production centers and delivered on time in accordance with airline flight plans. In the air, flight attendants re-heat meals and serve passengers promptly to guarantee freshness.

Korean Air’s production facilities have all received HACCP (Hazard Analysis Critical Control Points) certification from the Korean Food & Drug Administration. The Catering Division systematically manages the complete production process from the purchase of food products and materials to the distribution of meals to individual aircraft. The division also utilizes Korean Air’s Food Safety Research Center attached to Inha University in Seoul, Korea. The center provides research and ensures Korean Air meals meet the industry’s highest quality standards in terms of taste and nutrition.

In line with the launch of Korean Air’s new corporate identity, we have installed sophisticated new equipment and developed a variety of new menus. These efforts have resulted in Korean Air winning accolades from the readers of PAX International magazine for the fifth year in a row.

Korean Air’s Catering Division aims to please its customers and provide delicious, nutritious, and healthy foods created in hygienic conditions. As we continue to strive for greater customer satisfaction, Korean Air aims to demonstrate the excellence of traditional Korean cuisine while developing new menus sensitive to regional and route-based preferences – all with a focus on the unique needs of customers.

Korean Air’s Catering Division aims to please its customers and provide delicious, nutritious, and healthy foods created in hygienic conditions



IN-FLIGHT SALESKorean Air’s In-flight Sales Business sells duty-free items to Korean and international passengers while in transit. Recently, we have worked to enhance the efficiency of our sales through an in-flight, pre-order system for duty-free items. We constantly strive to better meet our customers’ needs and increase their satisfaction with continuous research and strict quality management, all while providing a wide variety of items at attractive prices.

In 2010, Korean Air expects revenue to increase by further improving our passengers’ in-flight sale experience through continued cabin crew training, introducing new and upgraded goods, and enhancing our pre-order service.

235.1billion

Catering&InFlightSalesRevenue

29

Through the company’s hotel business, Korean Air maximizes customer satisfaction by providing high-quality services

Hotel&Limousine

KOREAN AIR HOTELSKorean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center]. Through the company’s hotel business, Korean Air not only maximizes customer satisfaction by providing high-quality services, but also creates important synergies between the hotels and the airline.

Combining contemporary design and state-of-the-art technologies with culinary expertise and classic standards of service, the Hyatt Regency Incheon offers guests world-class luxury, innovative dining and engaging entertainment. Despite fierce competition in the hotel business, the Hyatt Regency Incheon and KAL Hotels recorded an increase in revenue of 2.1 percent and 15.3 percent, respectively, as they promoted their specialized strengths.

With large long-term investments, the Wilshire Grand Hotel has proceeded with major renovations, including guest rooms and meeting facilities. These investments will make the hotel more profitable and provide customers with a more hospitable experience.

Korean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center].



KAL LIMOUSINE BUSThe KAL Limousine Bus Service provides customers with the most convenient way to get around by connecting domestic and international airports with major hotels and other destinations in Seoul. Revenue from the service posted a 0.9 percent decrease from 2008 to KRW17.8 billion, a result of the global economic downturn during the year 2009.

The installment of card readers for public transportation cards in the limousine buses is providing customers with added convenience. Meanwhile, the service is improving its quality by replacing older vehicles with new ones and offering better schedules and routes.

The KAL Limousine Bus Service provides customers with the most convenient way to get around by connecting domestic and international airports with major hotels and other destinations in Seoul.

31

41.8 billionHotel&LimousineRevenue


32

33

Korean Air set a goal to accomplish when it reaches its 50th anniversary. By 2019, the carrier aims to achieve KRW25 trillion in operating revenue and KRW2.5 trillion in operating profit. To achieve this goal, the airline plans to be one of the global top ten ranking in the passenger field. Already the global leader in cargo, Korean Air predicts it will retain this title and increase its annual cargo tons carried up to 2.5 million by 2019.

Reaching Beyond, Leading

the Aviation Arena

Korean Air kicked off its ERP Project in October 2007 and successfully introduced new systems in Finance, Procurement, Facilities, ASD, Revenue Accounting (RA) and Managerial Accounting (MA), consecutively.

ERP

In November 2009, Korean Air successfully introduced Revenue Accounting (RA) and Managerial Accounting (MA), the third phase of its ERP (Enterprise Resource Planning) Program.

KEY BENEFITS Korean Air kicked off its ERP Project in October 2007 and successfully introduced new systems in Finance, Procurement, Facilities, ASD, Revenue Accounting (RA) and Managerial Accounting (MA), consecutively. There are several key benefits of the new ERP Program, including a feed of revenue data within two hours that shortens the accounting closing period and facilitates decision-making processes. Also, by using the Manufacturing/Maintenance ERP System as a basis, Catering & ASD can make integrated plans and maximize the utilization of resources.

Financial Accounting (FA) Area – Fast & Transparent Global Integration System The FA System went live in January, 2009 and is now under stable operation. It encompasses the paperless environment based on e-documents/e-approvals, a fast and transparent approval/audit system, a Global Cash Management System interfacing with financial institutions to support credit/debit functions and a Payment Factory run by region for the centralization of funds at Korean Air’s headquarters.

Revenue Accounting Area – Flight Revenue Confirmation within 2 Hrs from Departure In 2009, all RA functions including audit, inter-line settlement and internal/

Reaching Beyond, Leading the Aviation Arena


34

external billing & settlement went live. By integrating e-Tickets and Oracle ERP, Korean Air has become the first airline to make it possible to confirm sales & revenue on a real-time basis and to complete the accounting process accordingly.

Managerial Accounting Area – Faster Decision-Making By integrating the FA/RA ERP and other relevant systems based on a standardized database, the MA ERP System can display real-time profitability information upon flight departure/arrival (three hours from departure). This creates a remarkable reduction in lead time until the information is received, and the MA System will serve as infrastructure to support faster decision-making in management.

Catering Area – Integrated Costing Information Management System The overall functions of the catering business from planning to loading, the management of in-flight items for domestic/overseas flights and purchasing for overseas catering have all been integrated to maximize resource utilization and make information of each function more accurate.

Maintenance Area – Improved Aircraft Utilization & Reliability Based on

Standardization & ERP ASD Maintenance has gone live as recently as January 2010, physically integrated with ASD Manufacturing. The benefits accruing from pre-cost management & resource-based production scheduling are expected to be seen gradually on the horizon. Currently, M&E (Monitoring and Evaluation) at the headquarters -- the last phase of the ERP Project -- is underway and scheduled to go live in January, 2011. When the system becomes operational, it will represent the integration of all aircraft maintenance processes incorporating maintenance planning, engineering, reliability and costing, and will mark the end of the three-year-long journey of the ERP Project, ultimately making standardization and integration complete.

35

Korean Air’s quality maintenance supports the airline’s mission of operational reliability and excellence in safety, and its maintenance operation continues to live up to the airline’s vision of ‘Operational Excellence’.

Maintenance&Engineering

Korean Air has achieved the highest levels of maintenance quality and competitiveness in the global airline industry. The reliability of the company’s maintenance operations continues to live up to our mission of ‘Operational Excellence.’ In November 2009, Korean Air was awarded the ‘A300-600 Operational Excellence Award’ from Airbus. Since introducing Airbus aircraft to its fleet in 1974, Korean Air has won several awards for its operation of the A300, A300-600 and A330 aircraft types. According to the operation reliability report released by Boeing & Airbus, Korean Air is one of the most reliable operators in the world.

Our Maintenance & Engineering Division, with state-of-the-art facilities and 2,600 highly skilled personnel, performs airframe, engine and component maintenance services for its own fleet and international customers at three maintenance bases in Gimpo, Incheon and Bucheon. We demand that our employees have specialized knowledge in this field and are highly skilled in maintenance techniques.

In 2004, Korean Air started a heavy aircraft maintenance and engine business for overseas customers to keep costs down while using resources more effectively. The highly reliable technical excellence of the Maintenance & Engineering Division has boosted Korean Air’s prestige and enabled the company to make contracts with global customers. For example, United Airlines (UA) selected Korean Air to perform aircraft cabin upgrade modifications and the painting of fuselages because of its increased satisfaction with Korean Air’s heavy maintenance work on UA aircraft.


36Reaching Beyond, Leading the Aviation Arena

Furthermore, Korean Air has contracted with Thai Airways for heavy maintenance on engines since 2008. Korean Air has been expanding its presence in the global MRO market and continues to improve customer satisfaction with shorter turn-around times and high-quality maintenance services. In the past six years, Korean Air has run a successful MRO business, enabling the company to gain a reputation as the most reliable MRO service provider in Northeast Asia.

Since September 2009, Korean Air has installed new cabin IFE (In-Flight Entertainment) systems with new seats in its Boeing 777 & Airbus A330 aircraft to provide a more comfortable flight experience. These upgrades are among our efforts to continuously improve customer convenience and satisfaction.

Korean Air is constantly looking to expand and modernize its maintenance capabilities to remain a leader in the Maintenance & Engineering field. The company’s new ERP project will replace current systems with cutting-edge IT systems and will increase Korean Air’s reliability and competitiveness among the world’s premier airlines.

37

Korean Air’s safety standards exceed global standards and the company is ranked with the world’s leading airlines, and validation and recognition of this excellence continued in 2009

Safety

Korean Air completed its 10th consecutive year of accident-free operations at the end of 2009. Korean Air’s safety standards exceed global expectations, and we are proudly ranked with the world’s leading airlines. Validation, recognition and appreciation of our efforts continued in 2009. Safety has always been a top priority and core value at Korean Air, and we will continuously strive to improve operational safety to be the world’s safest airline.

We strengthened our accident prevention program, established the Safety Management System (SMS) and integrated our Safety Management IT System, called ‘SafeNet.’ SafeNet was rolled out at the end of October 2009. Korean Air established the company-wide standardization of Safety Data Management by: 1 ) encouraging active safety reporting by all employees 2) identifying, analyzing and correcting any safety hazard before it becomes an issue 3) and accumulating and utilizing Safety Data

In support of the new SMS environment at Korean Air, the Safety, Security and Compliance Department will: * continue to provide the corporation with an invaluable source of expertise in

the fields of safety, security and quality assurance * anticipate and identify systemic trends and coordinate/suggest appropriate,

scientifically-based countermeasures targeted at mitigating human error and wherever possible eliminating these errors

* ensure that positive management control exists over anything directly related to the safety, quality and security of Korean Air’s products and services, including a well-designed system of procedural controls


38Reaching Beyond, Leading the Aviation Arena

Since its initial audit in 2005, Korean Air has undergone IATA Oversight Safety Audit (IOSA) recertification audits in 2006 and 2008. Each time, Korean Air successfully renewed its IOSA status with an impeccable record. Korean Air contracted to the U.S. Department of Defense (DOD), underwent its biennial DOD on-site survey, and once again, no finding was observed. In addition, Korean Air has joined a pool of IATA Safety Audit for Ground Operations (ISAGO) member airlines for the improvement of operational safety in the airport ground environment. Korean Air is taking a leading role in the IATA’s efforts to ensure operational safety.

Korean Air has not experienced any security problems for more than 30 years. This record of success is a direct result of our ongoing, company-wide effort. We have continued to sharpen our intelligence management procedures, repeatedly preformed mock emergency drills and updated security equipment to prevent the occurrence of a security incident.

The Safety Strategy theme for 2010 is: “Leadership, Communication, and Coordination.” Enhancing the Korean Air SMS and implementing a Just Culture at Korean Air.”

The theme supports the Vision & Mission of Korean Air: “To be a Respected Leader in the World Airline Community” and “Excellence in Flight.”

Korean Air expects its employees to be forthcoming and honest when they make mistakes. We foster a supportive environment that will help employees “learn” from errors to avoid bigger problems in the future. A strong culture that effectively supports the reporting of safety concerns can only be achieved in a fair and just environment where Korean Air employees feel that they can provide specific details and submit hazard reports regarding their mistakes without fear of punishment.

Korean Air will continue to advance a culture based on safety, including the reporting of safety concerns and the installment of a fair and Just culture. We will invest in the training of employees and identify additional partnership opportunities with all divisions and departments.

Everyone at our company will remain steadfast in striving for continued operational excellence in 2010 and beyond.

39

FuelManagement

Korean Air has consistently and proudly fulfilled its responsibilities as an environment-friendly corporate citizen. Our airline is committed to the slowing of global warming, and we’re focused on the government-driven, green growth initiative. To accomplish our goals, we employ fuel management policies to reduce our emissions of greenhouse gases and noise pollution. And, in preparation for the EU’s Emissions Trading Scheme (ETS), which is slated for implementation in 2012, we are upgrading related systems to improve the reliability of our fuel consumption data.

In 2009, fuel consumption improved by about 144 million pounds through eco-friendly fuel management programs. Consequently, emissions of carbon dioxide declined 205,000 tons, a significant achievement in terms of green growth and environmental protection initiatives. Specifically, of the 48 total missions that have been implemented since last year, 33 have been continued from 2008 and 15 were newly developed and applied in 2009.

The missions, broken down by category, are described as follows: * Flight Operations: to expand the application of low-noise, eco-friendly and economic

flight operation procedures such as the Continuous Descent Approach and to strengthen monitoring

* Flight Planning: to improve fuel policies through revision of regulations on legal contingency fuel * Ground Support: to check and improve the implementation of fuel management

missions at airports—to encourage the use of the ground power system (GPS) and ground power unit (GPU) to minimize the waste of fuel on the ground, to improve jet re-fueling procedures at domestic and international airports, and to discourage overloading of jet fuel

Korean Air has several major initiatives in store for 2010, including: * Preparing for changes in external business environments, including the

implementation of the EU ETS in 2012 * Reinforcing capacities for undertaking analyses by upgrading current systems of fuel management * Improving standards and procedures in order to establish rational jet fuel loading standards * Conducting continuous check-ups in the field, especially on airports with low fuel

efficiency so as to develop measures for improving fuel efficiency customized to the specific needs of airports.

In preparation for the new EU ETS regulations, Korean Air will develop fuel management policies that improve fuel efficiency while protecting the environment. As a responsible, environment-friendly corporate citizen, we continue striving to create a cleaner, greener world.


40

Korean Air employ fuel management policies to reduce our emissions of greenhouse gases and noise pollution

Reaching Beyond, Leading the Aviation Arena

SkyTeam

Korean Air has always enjoyed an ambitious vision of a worldwide partnership with other airlines that share a similar dedication to unparalleled customer service.

Hence, SkyTeam was launched in June 2000. We originally founded the SkyTeam alliance with Delta Airlines, Air France and Aero Mexico. The response has been nothing short of phenomenal. Since it began, SkyTeam has added new partners, including CSA Czech Airlines, Alitalia, KLM Royal Dutch Airlines, Aeroflot, China Southern Airlines and two associate airlines, Air Europa and Kenya Airways to become a global-leading alliance of airlines.

Today, SkyTeam’s extensive network of hubs provides our 384 million annual passengers with access to more than 13,133 daily flights to major destinations around the world. Remarkably, during the last nine years, SkyTeam has increased the number of FFP (Frequent Flyer Program) members from 40 million to 116 million and the number of destinations from 451 cities to 856 cities.

Through SkyTeam’s extended network, passengers enjoy more choices of flights and convenient departure schedules when traveling with SkyTeam carriers. It also offers customers improved benefits such as access to lounges worldwide, a reward program for loyalty and consistent high-quality service at all member airlines’ counters. With confirmation that Vietnam Airlines and Tarom will join SkyTeam in June 2010, the alliance will increase the range of its seamless service, especially in the regions of South Asia and Eastern Europe.

As expressed in its slogan, “Caring more about you,” SkyTeam has developed new benefits, ensured consistency in its services and offered products that enhance the customer experience. Newly opened in November 2009, the SkyTeam’s dedicated facility at London Heathrow T4 offers an array of customer benefits to meet individual needs, including: * a one-stop transfer system * a premium check-in area * self-service kiosks * a co-branded lounge with luxurious amenities

In addition, in keeping with SkyTeam’s “Corporate Social Responsibility Statement,” each member of the alliance is committed to conducting business with eco-friendly policies and best practices of the airline industry. SkyTeam’s members also aim to promote social responsibility while promoting the concept of equitable economic prosperity for all stakeholders.

SkyTeam will continue to intensify its efforts to exceed the expectations of its customers and the international community in 2010.

41

SkyTeam’s extensive network of hubs provides our 384 million annual passengers with access to more than 13,133 daily flights to all major destinations all around world


42

Landing in a safe and clean

Environment

Korean Air has made consistent efforts to preserve the environment and minimize the company’s impact on the environment through environmental management policies and mid- to long-term environmental objectives. In the future, Korean Air will continue to pursue prosperity for the benefit of humankind through balanced development of the aviation industry and the environment.

Korean Air was involved in the seventh round of the carbon disclosure project (CDP7) in 2009, disclosing the risk and opportunity factors of the CO2 emissions of its flight operations. In the CDP8 in 2010, the company will offer further information on its internal strategies for countering climate change

EnvironmentalResponsibility

TACKLING CLIMATE CHANGESince Korean Air’s maiden voyage more than 40 years ago, we have prided ourselves on being an environmentally conscious organization across the globe. The aviation industry’s responsibility to the environment coincides with the growing demand for global air transportation. That’s why Korean Air strives to minimize the growth in its CO2 emissions while making consistent efforts to meet the rising demand for air travel. Emissions of CO2 from flight operations account for approximately 2 percent of total CO2 emissions caused by human activities.

We have an ambitious goal: Zero emissions of CO2 by 2050. To reach that milestone, the company has implemented a four-pillar strategy: Improve technology, infrastructure, and operations while building a “green” economic approach to address climate change. In particular, Korean Air will concentrate on improving operational efficiency, while introducing new high-efficiency aircraft, the most effective countermeasure to climate change in the short term.

A rising global demand for air travel has created more than 60 percent growth in transportation demands since 2000. Korean Air’s emissions of CO2 peaked at 50 percent growth during the same period, saving 10 percent on environmental surcharges. The company’s emissions intensity against the 2000 level decreased by 9 percent.

FLEET MODERNIZATION Korean Air is always looking toward the future, challenging itself to be better, smarter and more efficient. We are replacing older aircraft, such as the B747 and

Landing in a safe and clean Environment


44

A300, with the highly efficient, next-generation B787 and A380 aircraft. Both of these aircrafts offer 20 percent higher fuel efficiency.

By 2015, our plan is to phase in 45 new passenger aircrafts: * 10 A380s * 10 B787s * 12 new freighters, including 5 B747-

8Fs and 5 B777Fs

A380 : The Airbus A380 is an eco-friendly jumbo jet with a 40% higher maximum take-off weight than the B747, which allows for a reduced number of take-offs and landings, while consuming less than 3.0 liters per 100 passenger-kms of fuel. Starting in 2010, Korean Air plans to adopt the A380 for its high-demand long-haul routes connecting hub airports.

B787 : Developed by Boeing, the B787 is the first private aircraft to employ a light carbon complex over the entire fuselage, with 30% higher fuel-efficiency per seat than the B767 thanks to state-of-the-art engine technology. Korean Air plans to adopt the B787 starting from 2011 for its new long-haul routes and mid-range commercial routes.

IMPROVING OPERATIONAL EFFICIENCY OF AIRCRAFT Korean Air has consistently improved the efficiency of its fuel management procedures to reduce greenhouse gas emissions. By implementing a total of 48 missions for fuel efficiency management in four categories in 2009: flight operations procedures, flight planning, weight management and improvements in aircraft performance, the company reduced its carbon dioxide emissions by 205,000 million tons.

45

ALTERNATIVE FUELWe are committed to tackling climate change. Korean Air is currently working to develop a bio-fuel as an alternative jet fuel. Going forward, we will work with aircraft manufacturers and fuel suppliers in verifying the safety and ethical responsibilities of using bio-fuel. We are constantly weighing the balance between safe and secure flight operations and reducing the environmental impact on plants

CARBON DISCLOSURE AND CARBON OFFSETSKorean Air was involved in the seventh round of the Carbon Disclosure Project (CDP7) in 2009, disclosing the risk and opportunity factors of the CO2 emissions of its flight operations. In the CDP8 in 2010, the company will offer further information on its internal strategies for countering climate change. In addition, we are reviewing adoption of the carbon offset program, allowing passengers to voluntarily purchase credits to offset the CO2 emissions created by their own air travel. Korean Air will wait until a reliable program with an objective calculation formula to determine a customer’s CO2 emissions, a reasonable level of offset costs and a transparent fund and investment vehicles is established.

GREEN FORESTATION PROJECTAt Korean Air, being environmentally friendly is more than just a slogan, it’s a mindset. In a bid to slow down climate change due to deforestation, we have been planting forests in the deserts of Baganuur in Mongolia and Kubuchi in China since 2004. A total of 36,000 trees are growing in a 50,000m2 Korean Air Forest in Mongolia. In the Kubuchi Desert, the airline plants trees every year with a goal of planting a total of 1.8 million trees on the 6 million m2 site by 2011. Korean Air’s unique global green initiatives also include a tree-planting campaign in Los Angeles, California, which began in March, 2009 as part of an urban forestation project.


46Landing in a safe and clean Environment

Korean Air participates in a variety of eco-friendly activities to save energy and curtail the amount of greenhouse gas emissions arising from energy consumption during ground support activities.

EU ETS (EMISSIONS TRADING SCHEME) Korean Air operates in the global community. We have developed a comprehensive internal procedure that encompasses monitoring, reporting and verification. The company’s IT systems are consistently updated to maintain accurate and consistent control of its CO2 emissions. Recently, the Council of the European Union passed a bill that applies an emissions trading scheme to the aviation industry. In 2012, all airlines flying in and out of Europe are subject to the regulations for limiting CO2 emissions. Airlines will be required to purchase credits for their CO2 emissions in excess of regulatory standards through the emissions trading scheme. Korean Air prefers global measurements under an international agreement to address climate change as instituted by the Post-Kyoto Protocol and ICAO. We always have believed that objective, international agreement is more fair, honest and equitable than regional climate change countermeasures, such as that of the EU ETS.

CLIMATE CHANGE AND ISO 14001Korean Air participates in a variety of eco-friendly activities to save energy and curtail the amount of greenhouse gas emissions arising from energy consumption during ground support activities. In 1996, we earned the prestigious ISO14001 certification, an international standard for environmental management systems. This certification covers the company’s five divisions; Maintenance & Engineering, Aircraft Manufacturing, Catering, Headquarters & General Affairs, and the Hotel Business. Recently, we instituted specified regulations and guidelines for our environmental management system suited to the characteristics of the airline business to minimize the impact of the company’s flight operations on the environment. More details on Korean Air’s initiatives and performances in addressing climate change are available in the 2010 Korean Air Sustainability Report .

47

Korean Air’s “sharing management” continued on the airline’s 40th anniversary in 2009. Under the slogan of “Wings of Love, Wings of Hope,” our social contribution activities go beyond borders to deliver hope to local communities in every corner of the world.

Under the slogan of “Wings of Love, Wings of Hope,” Korean Air’s charitable contributions transcend borders to deliver hope to local communities in every corner of the world.

Our founding chairman, Joong Hoon Cho, believed that “a company’s profits should be given back to society and an altruistic attitude enlightens the spirit of community.” Korean Air actively engages in volunteer work for the underprivileged, the environment, culture, education, sports and medical aid. We encourage our employees to volunteer their time to worthy causes.

Corporate social responsibility is part of the fabric and soul of Korean Air. We have formed networks and partnerships to create an organized community service program, where our employees actively participate. In recognition of these endeavors, Korean Air was awarded the Korea Ethical Management Grand Prix (KEMG) in 2008 and the grand prize at the 2009 Korea Ethical Management Awards by the Korea Economic Magazine and Hankook Business Daily newspaper.

Our Korean Air Volunteer Corps includes 23 in-house, service groups. Each month, these groups assist teenage mothers and fathers, sponsor scholarships, care for the disabled and senior citizen shut-ins, and visit charities to volunteer their time. Volunteers fly to remote regions in Malaysia, the Philippines, Mongolia and other isolated areas to deliver love and care to people in need.

Committed to improving local communities, the Korean Air Volunteer Corps routinely donates rice and conducts kimchi-making events for people in need.

SocialContributions



In addition to our sisterhood tie with Myeongdong-ri in Hongcheon-gun, Gangwon Province, we tied a second sisterhood knot with Songsan-dong in Seogwipo-si, Jeju, providing volunteer and medical service programs. Korean Air also actively participates in the Habitat for Humanity program for the homeless. Dedicated to protecting cultural assets, we entered into an agreement to protect the Woljeongsa Temple on Odaesan Mountain.

Marking the 40th anniversary of the foundation of Korean Air, the company invited children of underprivileged families from across the nation to a three-day, two-night camp on Jeju Island and hosted a heartwarming event called the “Sky Love Bazaar.” All of the proceeds were donated to the local community.

Korean Air has also spearheaded the providing of disaster relief and environmental management activities. In February 2009, we donated 5,000 boxes of bottled water to regions suffering from drought. We are proud of our tree-planting programs in Mongolia as part of the “Korean Air Forest” project and the Kubuchi Desert in China that is included in the company’s Green Eco-Forestation Project.

Korean Air’s company-wide ethos of sharing and caring transcends geographical, cultural and economic boundaries. While striving to provide reliable, creative customer services along with excellence in safety and reliability, we will work hard to help build a society where people can enjoy better lives.

49

Korean Air’s “sharing management” continued on the airline’s 40th anniversary in 2009. Under the slogan of “Wings of Love, Wings of Hope,” our social contribution activities go beyond borders to deliver hope to local communities in every corner of the world.

The “Company is the People” is a philosophy that has guided Korean Air’s human resources (HR) strategies and management philosophies since our inception. The philosophy is based on the corporate principle of our late chairman and founder, Joong Hoon Cho, who said “people create the company and the company evolves upon the people’s endeavors.” From the very beginning, Korean Air has placed a significant focus on creating effective human resource policies and strategies. We’re proud that Korean Air has consistently been at the forefront of practicing effective human resource management.

Korean Air’s HR philosophy encompasses three basic principles: a) People are the company’s most valuable resource b) Corporate development is achieved through people c) Co-development of the company and people is essential

KALMANSHIP is the term used to describe the ideal type of employee that Korean Air wants and needs to hire, and a person we must retain to succeed.

Korean Air respects and supports those who have a very proactive mindset, possess an open-minded view of the world, are highly service-oriented, and have good discipline. This KALMANSHIP is based on the HR philosophy, the “Company is the People” and is reflected in the company’s HR policies.

a) Proactive Mindset *Always thinks innovatively *A future-oriented mindset that breaks stereotypesActive and creative mindsets are significant factors in recruiting new employees to

HumanResources



Korean Air. To this end, Korean Air offers employees various educational programs aimed at stimulating a proactive mindset. Korean Air also includes innovative thinking in the employee appraisal system.

b) Open-minded view of the world * Able to understand and embrace different cultures from all over the world

without being self-centered *Open-minded with extensive cultural knowledge along with proficiency in other languages Korean Air has implemented various policies and rules to foster an open-minded view of the world in our employees. We strive to instill the concept of cosmopolitan and worldly citizenship in our new employees through our annual commitment to international volunteer services. Korean Air also dispatches employees at the level of assistant manager to foreign stations for a one-year term, thus providing opportunities to acquire knowledge of foreign cultures and lifestyles. In addition, several employees are sent to world-renowned MBA schools to gain highly advanced academic knowledge.

c) Service-oriented mindset and politeness *Neat appearance, warm-hearted, well-mannered *Professional and polite in all situations involving customers During the recruitment process, Korean Air carefully monitors the service-oriented mindset of candidates to ensure that each is a good fit with the standards of the company. A service-oriented mindset is one of the key factors in the evaluation of all Korean Air employees and the company operates an institute that trains employees to be service-oriented.

d) Good discipline *Fully responsible for the job assigned *Maintains good interpersonal relationships with other employees in the organization With service and safety being crucial factors in the airline business, Korean Air places a high value on the integrity and teamwork of its employees. Those values are directly reflected in the employment, education, appointments and evaluations of our personnel.

51

Financial Section


52

Independent financial statements such as business results and forward-looking statements in this

Management’s Discussion and Analysis has been prepared in accordance with accounting principles generally

accepted in Korea (Korean GAAP). This document contains projections, plans and estimates related to Korean

Air’s financial information, operational performance and business. It also discusses management’s plan and

strategy. Forward-looking statements that have been directly expressed or implied include known and unknown

risks, and may differ from actual results as a result of uncertain factors. These differences could be materially

important. The Company does not make any representation or warranty, expressed or implied, as to the

accuracy or completeness of the information contained in this section, and nothing contained herein is, or shall

be relied upon as, a promise, whether as to the past of the future. Since business results and forward-looking

statements include projections, plans and estimates that reflect political and economic circumstances that the

Company will face in the future, investors should not place undue reliance above reasonable levels on such

statements. Since the projections, plans and estimates represent conditions as of the date they were made, the

Company undertakes no obligation to provide additional information as to potential future events. Going

forward, unless there is no other qualifying description, the term “the Company” used hereinafter shall refer to

“Korean Air Lines.”

I. ExEcutIvE Summary

1. ECONOMIC ENVIRONMENT2009 was a meaningful year in the history of the global and domestic economic. After the Lehman Brothers crisis, the confusion in the financial markets and contraction in sentiment of all parties that followed projected an economic recession that would last a long time. However, as a result of various countries’ financial stabilization and expansion policies to overcome the global economic crisis, the domestic and international economies witnessed a turnaround at a relatively short time span. From a domestic economy’s perspective, although the Korean economy has substantially grown in size, the economic crisis has reconfirmed the domestic economy’s current and growing high dependency on the global economy. Any changes in the global economy tend to create greater fluctuations for the domestic economy.

The real domestic economy significantly slowed down after the Lehman Brothers crisis, but then entered a recovery phase starting in early 2009. The domestic economy achieved a compound annual growth rate of 10% for the 2nd and 3rd quarter of 2009 with the help of increased exports due to the depreciation of the FX and aggressive economic support measures by the government. If the economic recovery was led by exports during the 1st half of 2009, the domestic sector, including investments and consumption, showed a fast growth in the 2nd half amidst the slowdown in exports during the same period. This was due to various major economic recovery factors affecting the real economy with a time lag.

+ GDP GROwTh RaTE

+ CURRENCY DEVELOPMENT (aNNUaL aVERaGE)

maNaGEmENt’S DIScuSSION & aNaLySIS

53

2005 2006 2007 2008 2009

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

4.2%

5.0% 5.0%

2.5%

0.2%

2005

2,100,00

1,800,00

1,500,00

1,200,00

900,00

600,00

300,00

20092008

(UNIT : Krw)

2006

USD JYP 100 GBPEUR

2007

Financial SectionKOREAN AIRANNUAL REPORT 2009

54

The global market share of domestic corporates in the 5 major sectors, semiconductor, mobile phone, display, automobile and shipbuilding significantly increased in 2009 at unprecedented levels. In the semiconductor sector, with the recovery in PC demand and increase in substitution demand for next generation memory (DDr 3) chips, Korean semiconductor manufacturers achieved a global market share of more than 60%, overwhelmingly maintaining its number 1 position. As for mobile phones, domestic corporates have been able to secure diverse general purpose mobile phones (touch screen) that meet the needs of each market segment, resulting in a global market share exceeding 30%. Despite the declining global demand of automobiles, aggressive marketing initiatives have elevated Korean automobile manufacturers as a new powerful player globally. This has led the Korean automobile manufacturers to expand their market share in the U.S. market.

Exports by domestic corporates declined at a relatively steady rate. This was despite the decrease in global demand and trade due to the global financial crisis. Compared to the previous year, the decline in exports by 14% in 2009 was quite acceptable considering the global trade flow.

The favorable external environment, including the “3 lows,” such as FX, interest rate and oil price, the strengthening of the Japanese Yen, and China’s large scale economic stimulus packages contributed to improvement of corporate results. The level that the Korean won depreciated off-set the disadvantageous internal and external market factors helping play a role in enhancing export competitiveness and performance.

2009 was also a year focused on “Green Growth” to help overcome the 3 challenges related to the environment, resource and economics. As the environment and resources have come into spotlight as a potential crisis due to the recent changes in climate and depletion of resources, various governments have adopted the “Green Industry” as a new growth engine to help counter this crisis on a mid- to long-term basis. Governments have also planned large scale eco-friendly investments. with environmental-related regulations emerging as a new trade barrier, it has become critical to secure core “Green Technologies” related to green house gas reductions and energy efficient improvements. As such, no matter the size of the airline, the international airline industry is also carefully observing the trends of the “Green Competition.”

2. aIRLINE INDUsTRY OVERVIEwIn the midst of the H1N1 virus and global economic crisis, the international passenger and cargo performance declined last year, whereas domestic passenger performance increased.

According to the 2009 survey on airline transport performance carried-out by the Ministry of Land, Transport and Maritime, international transport passengers showed another minus growth in 2009. Total international transport passengers decreased by 5.4% or 33,440,000 passengers in 2009 compared to the previous year. International cargo transportation also decreased to 2,910,000 tons, a 3.1% decrease over the previous year. However, with the advent of new low cost carriers, domestic passenger transportation recorded 18,020,000 passengers in 2009, a 6.1% increase compared to the previous year. Carefully analyzing the potentials, there are signs that the airline transport business is expected to show a recovery in 2010.

Based on documents by the Ministry of Land, Transport and Maritime, international passenger transportation is expected to continue decreasing until the summer peak period when it is expected to turnaround, achieving a two-digital growth by December 2010. Since its opening 8 years ago, passengers at the Incheon International Airport also exceeded 5 million. Passenger increased from 15% to 18.6% in 2010. International cargo processing also showed a minus growth rate for two consecutive years. However, the two digital minus growth rate during the 1st half of 2009 showed a recovery starting in September due to the increase in exports of IT products.

55

+ CaRGO TRaNsNPORTaTION aT IIaC (TON)

+ CaRGO TRaNsPORTaTION (TON)

The Ministry of Land, Transport and Maritime alluded to the many positive factors providing the road to positive growth in 2010. The positive factors include improved consumer sentiment as a result of the steady recovery trend of economic indices since the 2nd half of 2009, suppressed expansion of the H1N1 virus, increased number of new low cost international carriers, expected G20 High Level Conference and hosting of the 2010 world Cup in South Africa and Asian Games in Guangzhou, China. As a result of these positive factors, the Ministry of Land, Transport and Maritime projects international passenger demand, domestic passenger demand and international cargo demand to increase by 9.7%, 4.8% and 13%, respectively in 2010.

According to an official at the Ministry of Land, Transport and Maritime, “These growth rates exceed the projected average global demand growth rates.” He also went on to mention that “Airline passenger and international cargo transportation will recover to levels similar to that before the global economic crisis in 2008.”

130.000

120,000

110,000

100,000

90,000

80,000

70,000

Korean Air Cargo Transportation

2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12

250,000

225,000

200,000

175,000

150,000

100,000

50,000

(IIAC) Incheon International Airport

2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12


56

+ PassENGER TRaNsPORTaTION aT IIaC (ThOUsaNDs)

+ PassENGER TRaNsPORTaTION (ThOUsaNDs)

However, according to major international organizations and groups such as ICAO-IATA, global passenger transportation will increase by 3~5% and cargo transportation by 6~7% in 2010 in the midst of increasing international oil prices and fixed asset administrative expenses, making it difficult to fully recover to levels prior to the global economic crisis.

+ aIR TRaVEL aND FREIGhT VOLUMEs ON INTERNaTIONaL MaRKETs

* Source : IATA

2005 2006 2007 2008 2009 2010 2011

280

260

240

220

200

180

160

13.5

13.0

12.5

12.0

11.5

11.0

10.0

PASSENGErrPKs(left scale)

FrEIGHTFTKs(right scale)

Contribution toavg. 2010growth fromstarting point inJanuary

2009 avg. FTK

2010 avg. FTK

rPK billion FTK billion

1,300

1,200

1,100

1,000

900

800

700

Korean Air Passenger Transportation

2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12

3,000

2,800

2,600

2,400

2,200

2,000

1,800

(IIAC) Incheon International Airport

2008.07 2008.08 2008.09 2008.10 2008.11 2008.12 2009.01 2009.02 2009.03 2009.04 2009.05 2009.06 2009.07 2009.08 2009.09 2009.10 2009.11 2009.12

57

+ INDUsTRY NET PROFIT aND EBIT MaRGIN

* Source : IATA

+ INTERNaTIONaL aIR TRaFFIC VOLUME

* Source : IATA

Affected by the global economic crisis and H1N1 virus the previous year, international passenger transportation and cargo transportation declined by 5.4% and 3.1%, respectively. However, domestic passenger transportation increased by 6.1%.

According to 2009 airline transportation results, international passenger transportation decreased by 5.4% to 33,440,000 passengers. In addition to the 4.1% decrease in 2008 due to the economic crisis, 2009 showed a minus growth rate for 2 consecutive years. In case of domestic passenger transportation, it increased by 6.1% to 18,020,000 due to expansion of low cost carriers. International cargo transportation declined by 3.1% to 2,910,000 tons, which was slightly better that the decrease in 4.5% compared to that of the previous year.

Looking at the results more closely, international airline passengers decreased due to the economic stagnation and consumer sentiment contraction. However, a turnaround occurred starting in the summer peak period in 2009. In December, there was a two-digit growth compared to the previous year, a significant turnaround. Since opening the airport 8 years ago, passengers at Incheon International Airport exceeded 5 million in 2009.

YTD 2009 vs. YTD 2008

Africa

Asia/Pacific

Europe

Latin America

Middle East

North America

Industry

RPK Growth

-7.80%

-6.80%

-5.30%

-0.30%

10.40%

-6.10%

-4.20%

ASK Growth

-3.60%

-6.70%

-4.40%

1.70%

13.50%

-5.40%

-3.20%

PassengerLoad-Factor

69.7

73.5

76.5

72.8

73.1

79.4

75.4

FTK Growth

-14.90%

-12.40%

-17.70%

-7.80%

1.60%

-13.00%

-12.70%

AFTK Growth

-4.20%

-12.60%

-10.80%

-0.30%

6.10%

-9.80%

-9.20%

SYSTEM-wIDE coMMERcIAL AIRLINES EBIT MARGIN, % REvENuES Net profits, uS$ billion

Global

including exceptional items

Regions

North America


Europe


Asia-Pacific


Middle East

Latin America


Africa

2007

3.9%

5.5%

4.0%

2.9%

0.0%

2.0%

1.0%

2008

-1.6%

-1.8%

0.1%

-4.7%

1.0%

2.3%

-0.9%

2009E

-0.1%

1.3%

-1.9%

0.0%

-0.9%

3.9%

-1.7%

2010F

1.6%

1.9%

-0.6%

3.7%

0.2%

4.1%

-0.6%

2007

12.9

14.7

3.7

5.5

6.4

6.4

3.0

3.0

-0.1

0.1

0.1

-0.2

2008

-15.9

-36.0

-9.5

-24.3

0.1

-0.9

-5.0

-9.0

-0.3

-1.2

-1.5

-0.1

2009E

-9.4

-9.4

-3.1

-3.1

-3.8

-3.8

-2.7

-2.7

-0.5

0.8

0.8

-0.2

2010F

-2.8

-2.8

-1.8

-1.8

-2.2

-2.2

0.9

0.9

-0.4

0.8

0.8

-0.1


58

Domestically, the recent appreciation of the FX resulted in passengers changing their international destination to Jeju Island. As a result, whereas other domestic routes declined by 4.6%, the Jeju Island route increased by 10.6%.

In addition, although international cargo processing showed a minus growth rate after the 4.5% decline in 2008, and a double-digit minus growth rate in the 1st half of 2009, starting in September 2009, international cargo processing showed a turnaround due to the recovery of the economy and increase in IT products such as LCDs and semiconductors. This turnaround allows a speedy economic recovery projection.

Based on the Ministry of Land, Transport and Maritime, the effects from the improvement of consumer sentiment as a result of the steady recovery in economic indices starting from the 2nd half of 2009, suppression of H1N1 expansion, expansion of low cost carriers(LLC), 2010 South Africa world Cup, G20 High Level Conference, and Guangzhou, China Asian Games is projected to increase international passenger transportation, domestic passenger transportation and cargo transportation by 9.7%, 4.8% and 13%, respectively, in 2010.

This positive projection far exceeds average global airline demand growth rate, enabling a recovery to levels prior to the 2007 global economic crisis.

According to the major international organizations and groups such as the ICAO-IATA, global passenger transport and cargo transport volume is projected to increase by 3~5% and 6~7%, respectively in 2010. Due to the increase in global oil prices and fixed asset administrative expenses, this growth rate will not be sufficient to help performance recover to levels prior to the 2007 global economic crisis.

+ GROwTh IN PassENGER NUMBERs BY MaRKET

* Source : Paxls

3. KOREaN aIR’s OVERVIEw

BUsINEss aCTIVITIEs As of the end of December 2009, Korean Air had a fleet of 127 aircrafts, with passenger and cargo routes to 117 cities in 39 countries, concentrating on enhancing customer convenience as an air transport business. In addition to the air transport business, Korean Air is creating synergies with diverse businesses including aerospace, focused on research & development of aircraft parts manufacturing, maintenance and satellites, in-flight catering, in-flight duty free sales, and hotel operations. Korean Air is also part of the SkyTeam, a global alliance. The air transport business includes passenger transport, cargo transport, maintenance service, training, and building lease, taking up 95% of total sales. International passenger transport comprised of the largest portion at 54%. As of the end of 2009, within the Korean airline industry, Korean Air’s market share in international passenger transport and cargo transport stood at 39.9% and 50.1%, respectively.

2006 2007 2008 2009

30%

20%

10%

0%

-10%

-20%

-30%

Middle - East - Asia

within Asia

within - EuropeNorth Atlantic

North & Mid Pacific

Change over year

59

2009 was a year filled with hardships and successes. As situations worsened due to the global economic slowdown which emanated from the U.S., on top of the sharply declining demand for cargo transportation and business travel, demand for global travel also dropped as a result of the H1N1 virus, creating one of the worst external environments the airline industry can experience.

Despite the hardships, Korean Air was able to receive various prestigious awards from the U.S. and many top awards from China, as a non-Chinese airliner. As a result, 2009 became a year enabling Korean Air to enhance its influence within the global airline industry. Domestically, through the unique “Fun” management, Korean Air was selected as one of the best large conglomerates to work for.

Korean Air was able to position itself from a national carrier representing Korea to a sensational young global airline.

II.rESuLtS Of OpEratION

1.OVERVIEwThe difficult business environment persisted in 2009 with the sharp decline in air transport demand due to the economic stagnation and H1N1 virus, and the increase in foreign currency costs as a result of the appreciation in the FX. In the midst of all this, Korean Air was able to turn profitable on an annual basis stemming from the recovery of passenger and cargo transportation demand during the 2nd half of last year. By enhancing Incheon International Airport’s connection schedule as a hub, Korean Air aggressively attracted transit customers and increased revenues from overseas locations, resulting in a positive Krw133.4 billion in operating income. Despite the difficult external environment, these results were the due to the continuous efforts to enhance customer convenience as a premier airline by flexibly adjusting flight routes that reflects the market situation, and by adding new high quality aircrafts to the existing fleet.

Korean Air achieved Krw9,393.7 billion in operating revenue, an 8% decrease compared to the previous year. The Company made a turnaround by realizing Krw133.4 billion in operating income. This was a significant recovery considering that Korean Air recorded an operating loss of Krw99.3 billion in 2008. By realizing Krw98.9 in net loss, the Company was able to reduce the level of loss recorded in 2008, which was Krw1,942.4 billion. This was mainly due to the positive turnaround of the operating income stemming from decreased oil prices and reduction in net foreign currency translation losses.

4th quarter 2009 operating revenues stood at Krw2,578.3 billion, a 4.9% decline compared to the same period the previous year. However, during the same period, operating income increased 580.9% to Krw154.0 billion due to the depreciation of the FX by 14.3% and decrease in fuel expenses by 22.2%. Net income stood at Krw122.3 billion.

The thing that was most notable in the 4th quarter was that the cargo sector achieved rapid progress. As AFTK increased by 6.0%, L/F also increased by 5.9%p. The US$ based yield also increased by 13.4%. In relation to fuel, the yield, excluding fuel related ancillary expenses, reached a historical high, enabling cargo profitability to improve rapidly.

One of the main reasons for this rapid improvement is the significant increase in outbound cargo, which improved yield. However, in the passenger sector, outbound passenger profitability substantially improved by the end of the year. In spite this improvement, the affects of the H1N1 virus limited the yield improvement level.

with the increase in exports of IT products and automobile components in the 4th quarter, cargo revenues increased 22% compared to the same period the previous year.


60

Korean Air’s annual revenues in 2009 decreased 8.0% to Krw9,393.7 billion due to the decline in international transportation and cargo transportation revenues. with the reduction in flight expenses by Krw1,097.5 billion, gross profit increased by 1.6% to Krw1,413.7 billion.

+ REVENUE BREaKDOwN BY BUsINEss

* In Flight sales revenue included in “others”.

+ REVENUE BREaKDOwN BY ROUTE - PassENGER

* Beginning in 2005, Hong Kong was classified as China, which was previously included as part of Southeast Asia, resulting in a decrease in passengers on Southeast Asia routes, while passengers on the China route witnessed a significant jump.

+ REVENUE BREaKDOwN BY ROUTE - CaRGO

* Hong Kong is classified as China.

2. BUsINEss sEGMENT PERFORMaNsE2009 was another difficult year for the airline industry with the economic stagnation as a result of the financial crisis, and the decline in demand that followed. In addition, the increase in foreign currency expenses due to the appreciation of the Krw/US$ FX, and the global expansion of the H1N1 virus, added to difficulty surrounding the airline transportation industry.

Domestic

Japan

china*

Southeast Asia

oceania

North America

Europe / Middle East

Total

2009

1.0

4.1

10.8

11.5

1.3

43.2

28.1

100.0

2008

0.9

4.0

10.2

13.3

1.4

40.7

29.5

100.0

2007

1.0

4.1

8.3

14.0

2.4

41.8

28.4

100.0

2006

1.2

4.7

7.5

16.7

1.3

42.7

25.8

100.0

2005

1.4

5.6

11.8

12.0

1.1

38.1

30.0

100.0

Domestic Passenger

International Passenger

cargo

Aerospace

catering

Hotel/Limousine

others

Total

2009

489.7

4,973.2

2,704.6

251.7

45.5

41.8

887.2

9,393.7

2008

601.5

5,351.8

3,026.8

367.7

58.0

39.7

767.1

10,212.6

2007

585.5

4,631.6

2,533.0

235.1

58.4

35.2

733.2

8,812.0

2006

612.2

4,144.8

2,370.8

211.6

51.3

36.5

650.6

8,077.8

2005

618.5

3,732.5

2,321.7

187.9

49.4

34.6

639.6

7,584.2

(Krw in billions)

Domestic

Japan

china*

Southeast Asia

oceania

North America

Europe / Middle East

Total

2009

9.4

15.2

8.9

12.4

6.3

32.9

14.9

100.0

2008

10.5

13.0

10.0

12.9

6.2

30.2

17.2

100.0

2007

11.2

12.9

10.1

13.0

6.4

29.7

16.7

100.0

2006

12.9

13.4

9.3

12.5

6.4

29.3

16.2

100.0

2005

15.1

14.1

9.6

10.7

6.5

29.1

14.8

100.0

(%)

61

The total number of passengers transported through the Incheon International Airport in 2009 decreased 5%. In the midst of this overall decrease, Korean Air’s annual passenger transport continued to grow starting in July 2009 when its growth turned positive. However, there were concerns due to a momentary slowdown in growth as a result of the H1N1 virus in October, but starting in December, growth showed a swift recovery. This positive shift enabled Korean Air to achieve 20,746,413 in passenger transports. In December alone, Korean Air’s international passenger rPK increased 13.9% compared to the same period in 2008. This increase provides a positive projection for 2010.

+REVENUE-PassENGER-KILOMETERs

+INTERNaTIONaL PassENGER RPK GROwTh RaTE

PassENGER BUsINEss The 2009 global economic stagnation and the decline in airline transportation demand due to the H1N1 virus deteriorated the performance of airlines globally. Looking at the monthly passenger transport performance of major airlines in 2009, Korean Air’s monthly performance showed a faster recovery in comparison to its competitors. To counter the decrease in Korea outbound demand, the Passenger Transportation Business Division flexibly adjusted its routes sales composition reflecting the market and demand conditions and was able to attain a more stable level of traffic compared to other airlines.

45,000

55,000

50,000

60,000

2005 2006 2007 2008 2009

49,0

46

52,1

78

55,3

54

55,0

54

55,1

27

(million rPK)

2007.01 2007.03 2007.05 2007.7 2007.09 2007.11 2008.01 2008.03 2008.05 2008.07 2008.09 2008.11 2009.01 2009.03 2009.05 2009.07 2009.09 2009.11 2009.12

20.0%

15.0%

10.0%

5.0%

0.0%

-5.0%

-10.0%


62

Starting from July 2009, Korean Air’s rPK increase rate realized a turnaround compared to the same period the previous year. In December 2009, rPK increased by 13.9%. Korean Air’s rPK growth rate turned positive within an 11 months period. International passenger transport, which comprised 52.9% of total revenues, decreased by 7.1% to Krw4,973.2 billion in 2009. This was a result of the passenger segment yield being maintained at a low level up to the 4th quarter in preparation of the decrease in demand from the affects of the H1N1 virus, although passenger demand showed a recovery after the 3rd quarter.

CaRGO BUsINEss In 2009, Korean Air’s annual cargo transport also dropped by 5.6% to 1,574 thousand tons. However, cargo transport at Incheon International Airport in December 2009 increased by 36.2% compared to the same period the previous year to 216 thousand tons. Since the growth in cargo transport turned positive to 4.3% in September, cargo transport growth has continued to show a positive for 4 consecutive months. Considering the minus growth rate starting in September 2008 due to the global economic slowdown, in addition to the partial base effect, this positive result is due to the expansion in demand of IT products. Korean Air’s cargo FTK in December increased by 25.2% compared to the same period in 2008.

+CaRGO TRaNsPORT GROwTh RaTE

Korean Air is highly competitive in the international cargo transport segment. Starting in January of 2009, Korean Air’s

monthly cargo FTK trend showed a turned around, resulting in a 75.6% cargo load factor during the 4th quarter 2009.

As a result of the recovery in the global economy and the economic stimulus packages initiated by various countries’

government, the recovery in cargo transport demand showed a recovery starting in Asia during the 4th quarter. The

increased demand in IT products, focused on display products, and industrial products also played a role in this

turnaround. The continuous effects of the global economic slowdown after the 2nd half 2008, resulted in a decrease

of 10.6% yoy to Krw2,704.6 billion.

However, as a result of operating flexibly to manage the changes in cargo transport demand, load factor stood at 75%, a 1%p increase from the previous year. with the recovery trend in cargo transport demand during the 2nd half 2009, there was a significant improvement in performance between October and December, traditionally a peak period for the cargo transportation business. As of the end of 2009, Korean Air’s international cargo transport market share increased by 1.9%p to 50.1%.

30.0%

20.0%

10.0%

0.0%

-10.0%

-20.0%

-30.0%

2007.01 2007.03 2007.05 2007.7 2007.09 2007.11 2008.01 2008.03 2008.05 2008.07 2008.09 2008.11 2009.01 2009.03 2009.05 2009.07 2009.09 2009.11 2009.12

63

+ REVENUE-FREIGhT-TON-KILOMETERs

OThER BUsINEss Other Business, which comprises 13.2% of revenues, includes aerospace, catering/in-flight sales, hotel/limousine businesses.

+ OPERaTING ExPENsEs

Considering that fuel expenses take up 31.7% of total operating expenses, fuel expenses can directly affect profitability for airline companies. Total operating expenses decreased by 10.2% over the previous year to Krw9,260.3 billion as a result of a decrease in fuel expenses stemming from a decline in average unit purchase price, and the decrease in overall expenses. The total fuel consumption in 2009 stood at 1,244 million gallons, a 1.3% decrease over the previous year. As the number of rentals decreased, other rentals declined by 1.7% yoy in 2009, whereas depreciation increased to Krw786.0 billion, a 3.7% increase over the previous year due to 3 new additions to Korean Air’s existing fleet.

NON-OPERaTING INCOME / ExPENsEs Mostly affected by the gain on foreign currency transactions and gain on foreign currency translations, non-operating income showed a significant increase in 2009. Non-operating income in 2009 increased by Krw253.4 billion, a 28.2% increase, to Krw1,150.7 billion. The Krw/US$ increased by Krw319.3 from 938.20/1$ in 2007 to 1,257.50/1$ in 2008.

7,000

9,000

8,000

10,000

2005 2006 2007 2008 2009

8,14

0

8,85

7

9,67

8

9,00

5

8,42

6

(millions FTK)

Jet Fuel

Maintenance

Labor

Ground handling

Landing Fee

Rental

Depreciation

Insurance

others

Total

2009

2,938.7

559.9

1,355.7

357.7

267.8

329.3

786.0

32.8

2,632.4

9,260.3

2008

4,195.1

433.9

1,319.6

334.3

242.4

335.0

758.2

28.4

2,664.9

10,311.9

2007

2,606.4

313.2

1,079.4

293.8

229.0

366.6

696.7

31.4

1,162.6

6,789.3

2006

2,371.0

230.4

1,010.1

278.1

213.2

389.8

675.5

45.7

1,090.7

6,304.5

2005

2,022.3

289.3

949.8

262.5

202.3

357.6

676.5

61.5

1,070.1

5,891.9

change

-29.9%

29.0%

2.7%

7.0%

10.5%

-1.7%

3.7%

15.5%

-1.2%

-10.2%

(Krw in billions)


64

However, the Krw/US$ decreased by Krw89.9 as of the end of 2009 compared to that of 2008 from 1,257.50/1$ to 1,167.6/1$, resulting in gains of foreign currency transaction increasing. Korean Air’s gain on foreign exchange transactions increased by 283.0% to Krw348.3 billion, while loss on foreign exchange transactions recorded a decrease to Krw385.7 billion, a 1.8% decrease. Since the Company’s foreign currency liabilities of Krw6,971.3 billion were greater than its foreign currency assets of Krw995.9 billion, the depreciation of the Korean won positively affected the Company’s performance. Net interest gains decreased to Krw515.0 billion due to an increase in interest expenses stemming from an increase in interest bearing debt.

Non-operating expenses in 2009 decreased by 56.6% from Krw3,248.9 billion in 2008 to Krw1,409.5 billion. Loss on foreign currency translation declined by 94.1% to Krw119.4 billion from Krw2,022.8 billion in 2008 as a result of the Korean won depreciation.

NET INCOME FOR ThE YEaRAs the gain on foreign currency translation improved, net loss before income tax substantially decreased to Krw125.4 billion. The income tax rate in fiscal 2009 was 22%, resulting in an after tax loss of Krw98.9 billion. Net loss after tax in 2008 was Krw1,942.4 billion. As of the end of 2009, earnings per share(EPS) stood at negative Krw1,464.

+NON-OPERaTING INCOME/ExPENsEs

EBITDaREBITDAr is profitability index that shows a company’s currency generation capabilities through business activities. In 2009, Korean Air’s EBITDAr stood at Krw1,265.2 billion, while the EBITDAr margin increased by 3.6%p to 13.5%.

Non-operating Income

Interest Income

Dividend Income

Gain on Foreign Exchange Transaction

Gain on Foreign currency Translation

Gain on Disposal of Property, Plant and Equipment

Gain on Equity-Method

others

Non-operating Expenses

Interest Expense

Loss on Foreign Exchange Transactions

Loss on Foreign currency Translations

Loss on Disposal of Property, Plant and Equipment

Loss on Equity Method

others

Loss before Income Taxes

2009

1,150.7

32.0

1.4

348.3

637.2

1.5

22.8

107.5

1,409.5

547.0

385.7

119.4

143.6

165.1

48.7

-125.4

2008

897.3

46.3

1.8

90.9

471.6

1.9

49.5

235.3

3,248.9

486.3

392.6

2,022.8

166.7

55.4

125.1

-2,450.8

(Krw in billions)

65

+OPERaTING INCOME Vs EBITDaR

OPERaTIONaL PLaN FOR 2010New investments in 2009 increased to 189.9% yoy to Krw1,670.7 billion. Out of the total investments in 2009, 77.5% or Krw1,294.9 billion was invested in aircrafts. In 2010, Korean Air plans to invest Krw1,978.3 billion or 93% of total investment (Krw2,131.3 billion) on aircrafts. The Company plans to acquire 6 new aircrafts in 2010. They include 2 A330-200 from Airbus, 3 B777-300Er and 1 B747-8F from Boeing. Our operational plans assume an oil price of US$80 per barrel based on west Texas Intermediate (wTI), while a foreign exchange of Krw1,200/US$ in 2010.

Korean Air projects its revenues for 2010 at Krw10,558.8 billion. This projection is 12% higher than the revenue of Krw9,393.7 billion realized in 2009. It is also higher than the historical high of Krw10,212.5 billion in 2008.

The Company also projects operating income at over Krw800.0 billion in 2010. Korean Air’s operating income in 2008 was a negative Krw99.3 billion, while it rebounded in 2009 with a Krw133.4 billion operating income. In 2010, operating income is projected to significantly improve. These projections are not only a reflection of Korean Air’s strong commitment to maximize profitability and effectively improve the cost structure through an aggressive sales strategy, but also a result of indications pointing towards an economic recovery, increased demand for travel, and relative positive projections towards oil price and FX.

(Krw in billions)

OPERaTING INCOME

2009 2008

133.

4

-99.

3

0.0

130.0

100.0

160.0

EBITDaR

900.0

1,200.0

1,000.0

1.400.0

2009 2008

1,26

5.2

1,01

1.7

(Krw in billions)


66

III. fINaNcIaL cONDItION

1. assETs

+assETs

Total assets stood at Krw16,919.3 billion as of the end of 2009, a 6.6% increase from the previous year. This increase was mainly due to the increase in non-current assets which comprises 85.2% of total assets. Current assets increased by 26.3% to Krw2,496.1 billion, while non-current assets also increased by 3.8% to Krw14,423.2 billion. Cash & cash equivalents increased to Krw716.0 billion, a 44.8% increase over the previous year, while trade receivables also increased by 28.9% to Krw870.3 billion.

2. FLEETAircraft assets comprise the largest portion of total assets. To modernize and enhance efficiency of its core assets, Korean Air is in the process of acquiring next generation aircrafts from Boeing of the U.S. and Airbus of Europe. Korean Air was the first Asian airline to acquire Boeing’s B747-8. The B747-8 will be adopted steadily between 2013 and 2015. The Company has already placed an order for a B747-8 cargo aircraft. In addition to the 5 B747-8 passenger aircrafts that have already been ordered, a total of 12 B747-8 next generation aircrafts are expected to be added to the fleet.

In addition, the 10 A380 aircrafts to be delivered between 2011 and 2014 are next generation eco-friendly high-tech aircrafts that consume less fuel, with a noise level and exhaust gases reduced compared to other large aircrafts. The reason for acquiring the mega A380 aircrafts is part of Korean Air’s plan to take a leap forward as a prestigious airline leading the global airline industry. The A380s will be assigned to long routes with great demand, such as LA, New York and Paris in order to provide customers with spacious and comfortable services.

Current Assets

cash & cash Equivalents

Trade Receivables

Inventories

other current Assets

Non-current Assets

Investment Assets

Property, Plant & Equipment, net of Accumulated Depreciation

Intangible Assets, net of Accumulated Amortization

other Non-current Assets

Total Assets

2009

2,496.1

716.0

870.3

320.3

589.5

14,423.2

1,554.6

11,681.7

296.7

890.2

16,919.3

2008

1,975.6

494.5

675.3

251.0

554.8

13,892.1

1,580.2

11,285.2

215.9

810.8

15,867.6

change (%)

26.3%

44.8%

28.9%

27.6%

6.3%

3.8%

-1.6%

3.5%

37.4%

9.8%

6.6%

(Krw in billions)

67

+FLEET BY TYPE

3. LIaBILITIEs & EQUITY

+LIaBILITIEs

Total liabilities increased by 6.3% compared to the previous year to Krw13,862.2 billion. Current and non-current liabilities increased by 7.6% and 5.6% to Krw4,614.9 billion and Krw9,247.3 billion, respectively, in 2009. Under current liabilities, short-term borrowings and current portion of long-term liabilities (including lease) both increased by 3.0% and 23.4% to Krw811.9 billion and Krw2,673.4 billion, respectively.

Despite the sharp decrease in foreign currency long-term loans, Korean won long-term loans and bonds, net of discount on bonds showed an increase, causing non-current liabilities to increase by 5.6% to Krw9,247.3 billion. However, obligations under capital leases decreased by 10.8% to Krw2,807.7 billion in 2009.Common stock remained at the same level as the previous year, while accumulated other comprehensive income increased by Krw332.6 billion to Krw761.8 billion in 2009 as a result of the substantial decrease in derivative product valuation losses. As of the end of 2009, total equity increased by 8.3% to Krw3,057.1 billion.

Passenger

cargo

Type

B747-400

B777-200/300

A330-200/300

A300-600

B737-800/900

Sub-total

B747-400F

A300-600RSF

Sub-total

Total

2009

22

25

19

8

31

105

22

0

22

127

2008

22

22

19

8

29

100

22

2

24

124

2007

24

20

19

8

32

103

21

2

23

126

2006

26

16

19

9

31

101

19

1

20

121

2005

24

15

19

10

29

97

19

0

19

116

Current Liabilities

Trade Payables

Short-term Borrowings

current Portion of Long-term Liabilities (incl. lease)

other current Liabilities

Non-current Liabilities

Bonds, net of discount on bonds

obligations under capital Leases

Long-term Borrowings

Long-term obligations under Installment Purchases

others

Total Liabilities

2009

4,614.9

158.2

811.9

2,673.4

971.4

9,247.3

2,801.4

2,807.7

2,075.7

-

1,562.5

13,862.2

2008

4,288.5

96.1

788.2

2,166.4

1,237.8

8,755.7

2,544.7

3,148.4

1,876.5

157.1

1,029.0

13,044.2

change (%)

7.6%

64.6%

3.0%

23.4%

-21.5%

5.6%

10.1%

-10.8%

10.6

n.a

51.8%

6.3%

(Krw in billions)


68

4.Cash FLOw aNaLYsIs Operational activities are the most important source for a company’s cash flow. Korean Air generated approximately Krw489.9 billion cash flow through its business activities. with a sharp increase in investment assets such as financial products and securities, and fixed assets including land and equipment, the cash flow from investing activities in 2009 stood at negative Krw1,636.7 billion. Cash flow from financing activities stood at Krw1,368.3 billion as a result of financial activities such as short-term borrowings, bonds, net of discount on bonds and long-term loans.

Cash inflow from investing activities includes cash from the divestiture of aircrafts and aircraft engines of Krw352.9 billion and withdrawal of guarantees of Krw115.7 billion. Major cash outflow items include the increase in construction in progress assets of Krw1,221.1 billion and acquisition of aircraft and aircraft engine lease assets. In addition, there was a payment outflow of Krw159.3 billion to purchase land.

Cash outflow from financing activities in 2009 increased by Krw1,026.3 billion from Krw2,303.7 billion in 2008 to Krw3,330.0 billion in 2009. The results were from the difference between short-term borrowings that include current portion of long-term liabilities and the withdrawal of lease liabilities in 2009. Korean Air continues to improve its financial structure by reducing the debt ratio from 462.0% in 2008 to 453.5% in 2009 using the cash generated from operating activities. As a result of Korean Air’s effort to establish a sound financial structure, cash was increased by Krw221.5 billion to Krw716.0 billion as of the end of 2009.

CaPExAccording to the public disclosure statement for listed companies on new equipment investments, Korean Air invested Krw3,978.0 billion for purchase of aircrafts. This was the highest amongst listed companies in Korea. Korean Air will continue to develop ways to enhance profitability through establishment of new routes and acquisition of the most up-to-date equipment.

+Cash FLOws

Iv. rISk rEpOrt

Since 2001, Korean Air has been implementing risk management policies in oil prices, FX. risk management can be segmented into Natural Hedging and Active Hedging.

Korean Air’s risk management strategy is based on utilizing the above two methods to minimize market risk factors.

jET FUEL PRICE KAL’s fuel hedging strategy is the use of a mix of basic hedge and additional hedge : it intends to hedge regularly within 25% of its fuel consumption regardless of market condition (“Basic Hedge”). In addition to the Basic Hedge, KAL may enter an additional hedge up to 50% of its fuel consumption if market condition is favorable compared to a historical price level (“Additional Hedge”)

KAL has entered into oil price swap and zero-cost collar based on wTI to fix the prices within a range.

cash Flow from operating Activities

cash Flow from Investing Activities

cash Flow from Financing Activities

Increase (Decrease) in cash

cash and cash Equivalents at Year-end

2009

489.9

(1,636.7)

1,368.3

221.5

716.0

2008

(118.4)

(570.3)

494.7

(194.0)

494.5

(Krw in billions)

69

CURRENCYOver the last few years, KAL tried to eliminate some of its currency risk via natural hedging of the balance sheet. In other words, KAL has increased its won and Yen denominated borrowings instread of dollar denominated financing to match currency cash balance.

v. EmpLOyEES

NUMBER OF EMPLOYEEs As of the end of 2009, the total number of Korean Air’s employees stood at 15,734, with female employees taking up approximately 30% or 5,406 employees. Female administrative employees comprised 36% of total female employees, while male administrative employees stood at 10,328, or 23% of total male employees.

+EMPLOYEEs sTaTUs

VOCaTIONaL aND PROFEssIONaL TRaINING Korean Air enabled each employee to acquire basic capabilities required as an airline employee through an “Airline Transport Basic Course” that deals with common sense on airline transport operations across all areas and work knowledge by business segment. The Company encourages enhancement of work capabilities and strengthening of self-learning through the “Compulsory Completion Program” by job classification. Korean Air operates an Airline Management School (AMS) as a compulsory program for promotion to general manager status by fostering managers equipped in professional knowledge of the airline industry, management mind-set, and administrative capabilities. For executive managers, the “Korean Air Executive Development Program,” an MBA program, was made compulsory. In addition, every year the Company selects 10 or so core employees to attend prestigious MBA programs in Korea and overseas to foster future leaders.

To overcome the difficulties of a group training program within a time shift work system, and to satisfy the training requirements of various job classifications, Korean Air promotes online training. Korean Air developed a job function enhancement course to enhance administrative capabilities and online contents related to airline transportation duties. These courses are operated on a permanent basis.

As a role model leading the airline and service industry, Korean Air strives to standardize service training and provide global customers with the same service standards. Service training is provided to employees that directly provide service to customers and to administrative staff employees to promote uniformity of services provided.

Office Staffs 2,461 Flight / Cabin Crew 2,488 Engineer 5,022 Others 357

Office Staffs 1,958 Flight / Cabin Crew 3,370 Engineer 27 Others 51

Male 10,328 Female 5,406

(Excluding 1,661 overseas regional staff)

0

80

2030

40

5060

70

1090

Male (unit : persons)

0

80

2030

40

5060

70

1090

Female(unit : persons)

0

80

2030

40

5060

70

1090

Male / Female(unit : persons)


70

vI. 2010 OutLOOk

ECONOMIC OUTLOOK The domestic economy in the 1st half of 2010 is expected to grow at 5.8% due to the recovery of demand and base effect. However, the reduced base effect due to the economic slowdown is projected to limit economic growth at the 3% level in the 2nd half of 2010. On average, the domestic growth rate for 2010 is expected to be 4.6%.

As exports and speedy recovery of demand eases in 2010, the overall economic growth rate is expected to be slow. In the midst of global financial market risk factors persisting, the global economy recovery is projected to occur steadily. Although China’s high growth rate may contribute to domestic exports, as the Korean won continues to maintain its strength, export growth is expected to show a slowdown. In addition to the superior supply capabilities and new product introduction capabilities compared to overseas competitors, the demand recovery of major IT products such as semiconductors, LCDs and mobile phones is expected to lead Korea’s exports in 2010.

Despite the global economic crisis, profitability for corporates did not deteriorate substantially. The IT industrial sector, which takes up 30% of total equipment investments, has significantly improved in terms of business performance. However, this year’s investment in equipment cannot be expected to show a V type recovery.

Although the current account balance is expected to maintain a surplus trend in 2010, the surplus amount is expected to be substantially reduced. Import growth in 2010 is projected to increase to over 20% due to the recovery of domestic consumption, strengthened Korean won and increased raw material costs. As overseas travel that slowed down due to the economic stagnation and depreciation of the Korean won steadily recovered, the service balance deficit is expected to increase. The current account balance surplus that was supposed to increase to over US$40 billion in 2009, is projected to decline to below US$20 billion in 2010.

Factors that are enhancing inflationary pressures in 2010 are expenses such as oil and raw material prices, and labor expenses. International oil prices are expected to increase 34.6% over the previous year. This can be a factor in increasing inflation, but the depreciation of the Korean won offset the increasing effects.

The steady depreciation trend of the foreign exchange after the 2nd quarter of 2009, is expected to continue in 2010 at a steady rate. The current account balance is expected to maintain a surplus trend, while net capital inflow is also projected to continue focused on foreign invested capital and portfolio investments.

As the Japanese Yen continued to weaken after the financial crisis, along with the strengthening of the Korean won in 2010, the won/Yen is expected to decrease.

INDUsTRY OUTLOOK The airline industry in 2010 is projected to show an increase in passenger and cargo transport demand as a result of the economic recovery. Airline demand is expected to increase as a result of the economic recovery, depreciation of the won / Dollar exchange rate, elimination of the effects of the H1N1 virus, favorable government policies towards the airlines and slowdown in competitors’ sales.

Macro variables such as FX and oil price are expected to favorably affect the airlines in 2010. with positive expectations on the recovery of the global economy, FX is projected maintain its stability. As for airline fuel, despite the wTI rebounding, there are signs of a limited increase in price. Since the airline fuel price spread is decreasing, the fuel cost burden on airlines is not expected to increase substantially. This is despite the rebound of the wTI.

71

In addition to the rebound in cargo transportation demand, international passenger transport demand has also recently recovered significantly. Favorable airline transport trends are expected to continue as a result of the enhanced purchasing power due to the strengthening of the Korean won, recovery of the economy, and extermination of the effects from the H1N1 virus. In 2010, the recovery of the long distance American route is expected to accelerate since the route provides a high margin.

FUTURE EaRNINGs In addition to the 2009 business performance disclosure, Korean Air announced its 2010 transportation and business objective guidance. Korean Air announced its projections for 2010. revenues and operating income is projected at Krw10,558.8 billion and Krw800.0 billion, respectively. Expenses are also projected to decrease with the strengthening of the Korean won and improving flight efficiencies. Major assumptions to the projection is wTI US$80/barrel and Krw1,200/US$. Korean Air’s 2010 passenger and cargo supply plans include passenger kilometers at 79,426 million and cargo kilometers at 12,505 million tons, while actual transportation targets are 56,936 million km and 9,332 million ton km. Korean Air expects the boarding and embarking rate at 71.7% and 74.6%, respectively. Korean Air’s investment plan for 2010 is Krw2,131.3 billion, while investments in aircrafts are planned at Krw1,978.3 billion.

OPPORTUNITIEs In addition to the increased demand as a result of the economic recovery, there are many factors alluding to the success, including the Shanghai EXPO, the Seoul G20 High Level Conference, and the South African world Cup. Utilizing these opportunities, Korean Air expects to achieve an operating income of Krw800 billion in 2010. In addition to concentrating on financial stabilization and continuous growth, Korean Air will strengthen its ability to voluntarily counter the changes in the business environment by establishing measures to regulate CO2 emissions.

Although expenses are expected to increase as international oil prices rise in 2010, revenues are projected to increase expediently as a result of strengthened demand. In the past, Korean Air’s dependence on domestic passengers was great in terms of profitability. As a result of the effects of the FX and the economy, Korean Air witnessed the effects of these changes. In cases where oil prices increased when domestic demand slows down, profitability sharply decreased. However, the current Korean Air’s profitability structure shows a prominent change. As the financial crisis and the H1N1 virus are coming to an end, in addition to the strengthening of the Korean won, overseas travel is expected to sharply increase. Additionally, Korean Air is projected to establish a stable source of profitability since China is focused on Korean routes, JAL is in the process of restructuring, and Incheon International airport has been elevated as a transit hub. with the recovery of the U.S. and E.U. economies and the increased cargo demand from enhanced IT products, Korean Air believes that this will be an opportunity to enhance profitability to its maximum since the foreign currency crisis.


72

The Board of Directors and Stockholders Korean Air Lines Co., Ltd.

We have audited the accompanying statements of financial position of Korean Air Lines Co., Ltd. (the “Company”) as of December 31, 2008 and 2009, and the related statements of operation, dispositions of accumulated deficit, changes in equity and cash flows for the years then ended, all express in Korean won. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above express in Korean won present fairly, in all material respects, the financial position of Korean Air Lines Co., Ltd. as of December 31, 2008 and 2009, and the results of its operations, its changes in accumulated deficit and equity, and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

We have also reviewed the translation of the 2009 financial statements mentioned above into United States dollar amounts on the basis described in Note 2 to the accompanying financial statements. In our opinion, such statements have been properly translated on such basis.

Accounting principles and auditing standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position, results of operations, changes in accumulated deficit and equity, and cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those who are knowledgeable about Korean accounting principles and auditing standards and their application in practice.

March 5, 2010

This audit report is effective as of March 5, 2010, the independent auditors’ report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors’ report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report.

INDEPENDENT AUDITORS’ REPORT

73

STATEmENTS Of fINANcIAl POSITION

Korean Air Lines Co., Ltd.

Assets

Current assets:

Cash and cash equivalents (Note 4)

Short-term financial instruments (Note 4)

Short-term investment securities (Note 5)

Trade accounts and notes receivable, less allowance for

doubtful accounts of ￦8,151 million as of December 31, 2009

(￦5,928 million as of December 31, 2008) (Note 21)

Other accounts receivable, less allowance for doubtful

accounts of ￦1,756 million as of December 31, 2009

(￦65 million as of December 31, 2008)

Inventories (Note 6)

Advance payments

Prepaid expenses

Accrued income, less allowance for doubtful accounts of￦460 million as of December 31, 2009

(￦682 million as of December 31, 2008)

Short-term derivative instrument assets (Note 14)

Current portion of deferred income tax assets (Note 18)

Total current assets

Non-current assets:

Long-term financial instruments (Note 4)

Long-term investment securities (Notes 7 and 15)

Equity method investments (Notes 8 and 15)

Long-term receivable under capital lease (Note 21)

Long-term loans receivables

Guarantee deposits

Long-term derivative instrument assets (Note 14)

Deferred income tax assets (Note 18)

Property, aircraft and equipment (Notes 9, 15 and 24)

Intangible assets (Notes 10, 15 and 24)

Other non-current assets

Total non-current assets

Total assets

2008

￦ 494,488

16,072

876

675,338

25,617

250,975

87,363

57,057

68,267

88,597

210,921

1,975,571

14

61,520

1,494,814

23,815

3,984

247,272

1,280

340,900

11,285,161

215,910

217,387

13,892,057￦ 15,867,628

2009

￦ 715,956

106,055

151

870,280

64,716

320,265

142,138

78,926

45,492

41,621

110,465

2,496,065

947

89,108

1,443,291

21,266

-

140,663

-

358,608

11,681,659

296,739

390,926

14,423,207￦ 16,919,272

Korean won in millionsUS dollars

in thousands (Note 2)

2009

US$ 613,186

90,832

129

745,358

55,427

274,293

121,735

67,597

38,962

35,647

94,609

2,137,775

811

76,317

1,236,118

18,213

-

120,472

-

307,133

10,004,847

254,144

334,812

12,352,867

US$ 14,490,642

(Continued)See accompanying notes

As of December 31, 2008 and 2009


74


Liabilities and equity

Current liabilities:

Short-term borrowings (Notes 12, 14 and 15)

Trade accounts and notes payable (Note 21)

Other accounts payable (Note 14)

Advance receipts from customers

Withholdings

Accrued expenses

Income taxes payable

Unearned revenues (Note 21)

Current portion of long-term liabilities, net of discount on

bonds and present value discount (Notes 13, 14 and 15)

Current portion of obligations under capital leases

(Notes 13, 14 and 15)

Short-term derivative instrument liabilities (Note 14)

Total current liabilities

Non-current liabilities:

Bonds, net of discount on bonds (Notes 13, 14 and 15)

Long-term borrowings (Notes 13, 14 and 15)

Long-term obligations under installment purchases, net of

present value discount (Notes 13, 14 and 15)

Obligations under capital leases

(Notes 13 and 15)

Guaranteed loans, net of present value discount

(Notes 13, 15 and 21)

Asset-backed securitization loans (Note 13)

Long-term other accounts payable (Note 14)

Long-term withholdings

Long-term advance receipts from custormers

Severance and retirement benefits (Note 16)

Unredeemed mileage liabilities

Total non-current liabilities

Total liabilities

2008

￦ 788,162

96,124

110,629

272,227

72,495

421,074

1,520

2,310

1,490,270

676,153

357,546

4,288,510

2,544,739

1,876,489

157,054

3,148,449

52,845

31,499

188,625

47,315

3,465

469,970

235,275

8,755,725￦ 13,044,235

2009

￦ 811,930

158,160

130,334

492,510

65,304

268,355

-

8,749

1,900,964

772,392

6,232

4,614,930

2,801,423

2,075,735

-

2,807,695

48,236

480,000

175,140

43,794

-

535,424

279,841

9,247,288￦ 13,862,218



2009

US$ 695,384

135,457

111,626

421,814

55,930

229,835

-

7,493

1,628,095

661,521

5,337

3,952,492

2,399,300

1,777,779

-

2,404,672

41,312

411,100

150,000

37,508

-

458,568

239,672

7,919,911

US$ 11,872,403


STATEmENTS Of fINANcIAl POSITIONAs of December 31, 2008 and 2009

75


Liabilities and equity (cont'd)

Equity:

Capital stock (Note 17):

Common stock

Preferred stock

Capital surplus

Paid-in capital in excess of par value

Asset revaluation surplus

Other capital surplus

Capital adjustments:

Treasury stock (Note 17)

Accumulated other comprehensive income:

Gain on valuation of long-term investment securities

(Notes 7 and 19)

Loss on valuation of derivative instruments

(Notes 14 and 19)

Equity adjustment arising from

equity method investments (Notes 8 and 19)

Revaluation surplus arising from

property, aircraft and equipment (Note 19)

Gain on valuation of other non-current assets (Note 19)

Accumulated deficit (Note 17):

Appropriated

Undisposed

Total equity

Total liabilities and equity

2008

￦ 359,858

6,896

366,754

191,077

2,815,926

1,760

3,008,763

(65,399)

(65,399)

4,229

(269,777)

54,052

635,537

5,161

429,202

930,500

(1,846,427)

(915,927)

2,823,393￦ 15,867,628

2009

￦ 359,858

6,896

366,754

191,077

1,915,926

1,724

2,108,727

(65,399)

(65,399)

19,160

(5,373)

112,471

635,537

-

761,795

-

(114,823)

(114,823)

3,057,054￦ 16,919,272



2009

US$ 308,203

5,906

314,109

163,649

1,640,910

1,477

1,806,036

(56,011)

(56,011)

16,410

(4,602)

96,327

544,311

-

652,446

-

(98,341)

(98,341)

2,618,239

US$ 14,490,642



76


Operating revenues (Notes 21, 23 and 24):

Passenger

Cargo

Others-revenues

Operating expenses (Notes 14, 21, 22, 23 and 24):

Flight operations

Maintenance and overhaul

Passenger and cargo services

Station and ground operations

Others-expenses

Gross profit

Selling and administrative expenses (Note 22)

Operating income (loss) (Notes 23 and 24)

Other income (expenses):

Interest income

Dividend income

Interest expense

Bad debt expense

Reversal of allowance for doubtful accounts

Loss on disposal of Long-term investment securities

Loss on foreign exchange transactions, net

Loss on foreign currency translation, net

Equity in loss of equity method investments (Note 8)

Loss on disposal of equity method investments

Gain on valuation of derivative instruments (Note 14)

Gain on settlement of derivative instruments, net (Note 14)

Gain on valuation of interest rate swap contracts (Note 14)

Loss on valuation of long-term obligations under

installment purchases (Notes 13 and 14)

Loss on disposal of property, aircraft and equipment, net

Impairment loss on property, aircraft and equipment

Reversal of impairment loss on property, aircraft and equipment

Gain on disposal of investments

Donations

Others, net

2008

￦5,953,328

3,026,849

1,232,401

10,212,578

5,800,826

647,310

870,737

829,281

673,214

8,821,368

1,391,210

1,490,507

(99,297)

46,312

1,783

(486,349)

-

2,077

-

(301,685)

(1,551,171)

(5,878)

(14,867)

101,990

23,152

4,238

(4,238)

(164,753)

(39,454)

41,495

2,439

(16,827)

10,201￦(2,351,535)

2009

￦5,462,948

2,704,599

1,226,156

9,393,703

4,703,346

757,522

952,584

894,123

672,440

7,980,015

1,413,688

1,280,312

133,376

31,982

1,384

(546,986)

(1,691)

223

(444)

(37,434)

517,776

(142,275)

(10,808)

26,677

40,191

226

(226)

(142,058)

-

-

6,608

(15,740)

13,838￦(258,757)

US dollars in thousands (Note 2)

2009

US$ 4,678,784

2,316,375

1,050,151

8,045,310

4,028,217

648,786

815,848

765,779

575,916

6,834,546

1,210,764

1,096,533

114,231

27,391

1,185

(468,470)

(1,448)

191

(380)

(32,061)

443,453

(121,853)

(9,257)

22,848

34,422

194

(194)

(121,667)

-

-

5,659

(13,481)

11,852

US$ (221,616)

Korean won in millions


For the years ended December 31, 2008 and 2009

STATEmENTS Of OPERATIONS

77


Loss before income taxes

Benefit from income taxes (Note 18)

Net loss (Notes 19 and 23)

Basic loss per share (Notes 20 and 23)

(Korean won and US$ in units)

2008

￦(2,450,832)

508,402

(1,942,430)

￦(28,762)

2009

￦(125,381)

26,485

(98,896)

￦(1,464)


2009

US$ (107,385)

22,683

(84,702)

US$ (1.25)



Financial Section


Retained earnings before appropriations

(accumulated deficit before dispositions):

Unappropriated retained earnings (undisposed accumulated

deficit) carried forward from the prior year

Net loss for the year

Transfer from other reserve

Reserve for foreign currency valuation

Reserve for research and human resources development reserve

Reserve for facility usage

Reserve for improvement of financial position

Legal reserve

Asset revaluation surplus

Uundisposed accumulated deficit carried forward

to the next year

2008

￦ 96,003

(1,942,430)

(1,846,427)

170,000

130,000

620,000

-

10,500

900,000

1,830,500

￦(15,927)

2009

￦(15,927)

(98,896)

(114,823)

-

-

-

-

-

-

-

￦ (114,823)



2009

US$ (13,639)

(84,702)

(98,341)

-

-

-

-

-

-

-

US$ (98,341)




78

STATEmENTS Of DISPOSITIONS Of AccUmUlATED DEfIcIT

STATEmENTS Of chANgES IN EqUITy

Commonstock

￦366,754

-

-

-

-

-

-

-

-

-

-￦ 366,754

￦ 366,754

-

-

-

-

-

-

-￦ 366,754

US$ 314,109

Capitalsurplus

￦3,006,749

1,825

-

-

254

(65)

-

-

-

-

-￦3,008,763

￦3,008,763

(900,000)

-

(36)

-

-

-

-￦ 2,108,727

US$ 1,806,036

Capitaladjustments￦ (65,399)

-

-

-

-

-

-

-

-

-

-￦ (65,399)

￦ (65,399)

-

-

-

-

-

-

-￦(65,399)

US$ (56,011)

Accumulated other

comprehensiveincome (loss)￦46,415

(17,344)

-

-

-

-

(26,937)

(271,098)

61,444

635,537

1,185￦429,202

￦429,202

-

-

-

14,931

264,404

58,419

(5,161)￦761,795

US$ 652,446

Retainedearnings

(accumulateddeficit)

￦ 1,054,230

6,792

(34,519)

(1,942,430)

-

-

-

-

-

-

-￦ (915,927)

￦ (915,927)

900,000

(98,896)

-

-

-

-

-￦(114,823)

US$ (98,341)

Total￦ 4,408,749

(8,727)

(34,519)

(1,942,430)

254

(65)

(26,937)

(271,098)

61,444

635,537

1,185￦ 2,823,393

￦ 2,823,393

-

(98,896)

(36)

14,931

264,404

58,419

(5,161)￦3,057,054

US$ 2,618,239


As of January 1, 2008

Cumulative effect of changes

in accounting policy

Cash dividends


Capital in excess of par value


Loss on valuation of long-term

investment securities

Loss on valuation of derivative instruments


equity method investments, net

Revaluation surplus arising from

property, aircraft and equipment

Gain on valuation of other

non-current assets

As of December 31, 2008

As of January 1, 2009

Disposition of accumulated deficit



Gain on valuation of long-term

investment securities

Gain on valuation of derivative

instruments


equity method investments

Loss on valuation of other

non-current assets







79


80


Cash flow from operating activities:

Net loss

Adjustments to reconcile net loss to net cash provided by

(used in) operating activities:

Depreciation

Amortization

Provision for severance and retirement benefits

Provision for allowance for doubtful accounts

Reversal of allowance for doubtful accounts

Bad debt expense

Mileage expenses

Amortization of present value discounts

Amortization of discounts on bonds

Interest income

Dividend income

Loss (gain) on foreign currency translation, net

Equity in loss of the equity method investments, net

Loss on disposal of equity method investments, net

Gain on valuation of derivative instruments

Gain on valuation of interest rate swap contracts, net

Loss on valuation of long-term obligations under installement

purchases, net

Loss on disposal of property, aircraft and equipment, net

Impairment loss on property, aircraft and equipment

Recovery of impairment loss

Gain on disposal of the investments

Others

Changes in operating assets and liabilities:

Trade accounts and notes receivable

Other accounts receivable

Inventories

Advance payments

Prepaid expenses

Accrued income

Derivative instrument assets

Deferred income tax assets

2008

￦(1,942,430)

758,231

17,778

96,793

-

( 2,077)

-

42,616

47,583

20,135

(36,981)

(65)

1,593,377

5,878

14,867

(101,990)

(4,238)

4,238

164,753

39,454

( 41,495)

(2,439)

(7,009)

207,070

20,427

28,009

20,868

64,484

26,034

40,928￦(516,700)

2009

￦(98,896)

785,986

16,572

104,749

2,223

( 223)

1,691

44,566

19,117

21,515

-

(85)

(518,445)

142,275

10,808

(26,677)

(226)

226

142,058

-

-

(6,164)

(1,286)

(198,352)

(41,115)

(69,290)

(54,775)

(21,870)

23,028

63,272￦(24,892)


2009

US$ (84,700)

673,164

14,193

89,713

1,904

(191)

1,448

38,169

16,373

18,427

-

(73)

(444,026)

121,853

9,257

(22,848)

(194)

194

121,667

-

-

(5,279)

(1,101)

-

(169,881)

(35,214)

(59,344)

(46,912)

(18,731)

19,723

54,190

US$ (21,319)




STATEmENTS Of cASh flOwS

81


Other non-current assets

Trade accounts and notes payable

Other accounts payable

Advance receipts from customers

Withholdings

Accrued expenses

Income taxes payable

Unearned revenues

Derivative instrument liabilities

Long-term withholdings

Long-term advance receipts from customers

Payment of severance and retirement benefits

Deposits for severance and retirement benefits

Withdrawal of severance and retirement benefits

from the Korean National Pension Service

Total adjustments

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Decrease (increase) in short-term financial instruments, net

Decrease in short-term investment securities

Decrease (increase) in long-term investment securities, net

Prcoceeds from disposal of equity method investments

Acquisition of equity method investments

Decrease in long-term loans, net

Decrease (increase) in guarantee deposits, net

Proceeds from disposal of property, aircraft and equipment

Acquisition of property, aircraft and equipment

Acquisition of intangible assets

Dividend income

Decrease in long-term receivable under capital lease

Increase in other assets

Net cash used in investing activities

2008￦15,887

(164,700)

(49,654)

(213,074)

(30,500)

(131,000)

(22,752)

(2,545)

(1)

(4,040)

3,465

(126,175)

46,092

2,533

1,824,065

(118,365)

3,349

268

1,997

139,101

(35,993)

124,128

(30,058)

806,906

(1,595,345)

(1,574)

16,616

290

-￦(570,315)

2009￦8,728

64,525

23,054

272,702

(3,113)

(152,241)

(1,520)

6,439

-

(2,566)

( 3,465)

(42,354)

3,212

677

588,764

489,868

(106,450)

876

(8,956)

-

(34,893)

3,984

98,594

353,726

(1,952,027)

(2,031)

9,649

928

(53)￦(1,636,653)


2009

US$ 7,475

55,263

19,745

233,558

(2,666)

(130,388)

(1,302)

5,514

-

(2,198)

(2,968)

(36,274)

2,751

580

504,252

419,552

(91,170)

750

(7,670)

-

(29,884)

3,412

84,441

302,951

(1,671,829)

(1,739)

8,264

795

(45)

US$ (1,401,724)




82

STATEmENTS Of cASh flOwSFor the years ended December 31, 2008 and 2009


Cash flows from financing activities:

Proceeds from short-term borrowings, net

Proceeds from issuance of bonds

Proceeds from long-term borrowings

Proceeds from obligations under capital leases, net

Repayment of current maturities of long-term liabilities

Repayment of long-term obligation under installment

purchases

Proceeds from asset-backed securitization loans

Payment of dividends

Decrease in deposits paid

Net cash provided by financing activities

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at the beginning of the year

Cash and cash equivalents at the end of the year


2009

US$ 187,285

1,103,137

680,791

35,779

(1,110,874)

(152,497)

428,229

-

-

1,171,850

189,678

423,508

US$ 613,186

2008

￦111,566

1,060,156

483,474

306,687

(1,414,743)

(18,183)

-

( 34,519)

254

494,692

(193,988)

688,476

￦ 494,488

2009

￦218,675

1,288,023

794,892

41,776

(1,297,057)

(178,056)

500,000

-

-

1,368,253

221,468

494,488

￦ 715,956


83

NOTES TO fINANcIAl STATEmENTS1. OrganizatiOn and businessKorean Air Lines Co., Ltd. (the Company) was incorporated on June 19, 1962 under the Commercial Code of the Republic of Korea to engage in domestic and international airline services, manufacture of aircraft parts, maintenance of aircraft, and catering of in-flight meals.

The Company has been a publicly traded company upon listing its common stock on the Korea Stock Exchange since 1966. The total capital stock of the Company as of December 31, 2009 amounted to ￦366,754 million.

The financial statements of the Company as of December 31, 2009 were authorized for issue by the Board of Directors on February 25, 2010 and are subject to the approval of the stockholders at the annual general stockholders’ meeting to be held on March 19, 2010.

2. summary Of significant accOunting pOlicies

basis Of financial statement preparatiOnThe Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea (Korean GAAP). Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. In the event of any differences in interpreting the financial statements or the independent accountants’ report thereon, the Korean version, which is used for regulatory reporting purposes, shall prevail. The accompanying financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language financial statements.

financial statement translatiOnThe accompanying statement of financial position as of December 31, 2009, and the related statements of operations, disposition of accumulated deficit, changes in equity and cash flows for the year then ended are expressed in Korean won and, solely for the convenience of the reader, have been translated into United States dollars (US$) at the rate of ￦1,167.6 to US$1, the exchange rate on December 31, 2009. Such translation should not be construed as a representation that the Korean won amounts can actually be converted into United States dollars at the exchange rate used for the purpose of such translation.

revenue recOgnitiOnRevenue from airline (passenger and cargo) services is recognized upon completion of the services. Revenue from maintaining aircraft and manufacturing aircraft parts in the aerospace business is recognized when the related services are rendered and goods are delivered upon transfer of risk and rewards to the customers.

allOwance fOr dOubtful accOuntsThe Company provides an allowance for doubtful accounts in consideration of the estimated losses that may arise from non-collection of its receivables. The estimate of losses, if any, is based on areview of the aging and current status of the outstanding receivables.


84

2. summary Of significant accOunting pOlicies (cOnt’d)

cash equivalentsHighly liquid deposits and marketable securities with original maturities of three months or less, and which have no significant risk of loss in value by interest rate fluctuations, are considered as cash equivalents.

financial instrumentsFinancial instruments, such as time deposits and restricted bank deposits, which are traded by financial institutions and are held for short-term cash management purposes or which will mature within one year, are accounted for as short-term financial instruments. Financial instruments other than cash equivalents and short-term financial instruments are recorded as long-term financial instruments.

inventOriesInventories are valued at the lower of cost or market, with cost being determined using the movingaverage method for airline service supplies and aerospace raw materials, the specific identification method for materials-in-transit, and the first-in, first-out method for all other inventories.

The Company applies the lower of cost or market method (products, goods, work in-process at net realizable value, materials at current replacement cost) by the individual items of inventories. When the market value of an inventory falls below the carrying amount, a valuation loss on such inventory is recognized as part of operating expenses. In addition, losses from the differences in quantity of inventories between accounting records and physical inventory counts arising from the ordinary course of business are charged to operating expenses. Losses arising from outside the ordinary course of business are charged to non-operating expenses.

investment securitiesInvestments in securities within the scope of SKAS 8 Investments in Securities are classified as either trading, held-to-maturity and available-for-sale securities, as appropriate, and are initially measured at cost, including incidental expenses, with cost being determined using the moving average method. The Company determines the classification of its investments after initial recognition, and, where allowed and appropriate, re-evaluates this designation at each fiscal year end.

Securities that are acquired and held principally for the purpose of selling them in the near term are classified as trading securities. Debt securities which carry fixed or determinable payments and fixed maturity are classified as held-to-maturity if the Company has the positive intention and ability to hold to maturity. Securities that are not classified as either trading or held-to-maturity are classified as available-for-sale securities.

After initial measurement, available-for-sale securities are measured at fair value with unrealized holding gains or losses, net of applicable taxes, included as a component of other comprehensive income in equity. Likewise, trading securities are also measured at fair value after initial measurement, but with unrealized holding gains or losses reported as part of net income. Held-to-maturity securities are measured at amortized cost after initial measurement. The cost is computed as the amount initially recognized minus principal repayments, plus or minus the cumulative amortization using the effective interest method of any difference between the initially recognized amount and the maturity amount.

The fair value of available-for-sale securities that are traded actively in the open market (marketable securities) is measured at the closing price of those securities at the reporting date, except for nonmarketable equity securities which are measured at cost subsequent to initial measurement if their fair values cannot be reliably estimated.

85

Non-marketable debt securities are carried at a value using the present value of future cash flows discounted using an appropriate interest rate which reflects the issuer’s credit rating announced by a public independent credit rating agency.

Available-for-sale and held-to-maturity securities are classified as long-term investments, except if the maturity of the securities falls within one year or are certain to be disposed of within one year from the statement of financial position date are classified as short-term investments.

The Company recognizes an impairment loss on its investments in securities if there is objective evidence that the securities are impaired. The impairment loss is charged to statement of income.

equity methOd investmentsInvestments in entities over which the Company has control or significant influence are accounted for using the equity method.

Under the equity method of accounting, the Company’s initial investment in an investee is recorded at acquisition cost. Subsequently, the carrying amount of the investment is adjusted to reflect the Company’s share of income or loss of the investee in the statement of income and share of changes in equity that have been recognized directly in the equity of the investee in the related equity account of the Company on the statement of financial position. If the Company’s share of losses of the investee equals or exceeds its interest in the investee, it suspends recognizing its share of further losses. However, if the Company has other long-term interests in the investee, it continues recognizing its share of further losses to the extent of the carrying amount of such long-term interests.

At the date of acquisition, the excess of the cost of the investment over the Company’s share of the net fair value of the investee’s identifiable assets and liabilities is accounted for as goodwill which is amortized over its useful life of within 5 years using the straight-line method. Conversely, negative goodwill represents the excess of the Company’s share in the net fair value of the investee’s identifiable assets and liabilities over the cost of the investment. Negative goodwill is recorded to the extent of the fair value of acquired non-monetary assets and recognized as income using the straightline method over the remaining weighted-average useful life of those acquired non-monetary assets. The amount of negative goodwill in excess of the fair value of acquired non-monetary assets is recognized as income immediately.

The Company’s share in the investee’s unrealized profits and losses resulting from transactions between the Company and its investee are eliminated.

In translating the financial statements of foreign entities into Korean won, assets and liabilities are translated at the exchange rate on the statement of financial position date and income and expenses are translated at the weighted-average exchange rate for the period. All resulting exchange differences are recognized as foreign currency translation adjustments in other comprehensive income within equity.

prOperty, aircraft and equipment, and related depreciatiOn Property, aircraft and equipment are stated at cost less accumulated depreciation, except for certain assets which were revalued and are stated at revalued amount less accumulated depreciation.

Maintenance and repairs are expensed in the year in which they are incurred. Expenditures which enhance the value or extend the useful life of the related assets are capitalized.


86

2. summary Of significant accOunting pOlicies (cOnt’d)Depreciation of property, plant and equipment is provided using the straight-line method over the estimated useful life of the assets as follows:

Land that is revalued in accordance with the revised SKAS 5 is measured at fair value and impairment losses recognized after the date of revaluation. Valuation is performed frequently enough to ensure that the fair value of a revalued asset does not differ materially from its carrying amount.

If an asset’s carrying amount is increased as a result of a revaluation, the increase shall be credited directly to other comprehensive income. However, the increase shall be recognized in the statement of income to the extent that it reverses a revaluation decrease of the same asset previously recognized in the statement of income.

If an asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in the statement of income. However, the decrease shall be debited directly to other comprehensive income to the extent of any credit balance existing in the revaluation surplus with respect to that asset.

intangible assetsIntangible assets of the Company consist of facility usage rights, development costs and other intangible assets, which are stated at cost less accumulated amortization. Amortization is recognized as an expense based on the straight-line method over the estimated useful life of 10 to 30 years for facility usage right, 5 to 16 years for development costs and 6 to 20 years for all other intangible assets.

discOunt On bOndsDiscount on bonds including bond issuance costs is presented as a direct deduction from the nominal value of the bonds and is amortized using the effective-interest-rate method over the life of the bonds.

severance and retirement benefitsIn accordance with the Employee Retirement Benefit Security Act (“ERBSA”) and the Company’s employee benefits policy, employees terminating their employment with at least one year of service are entitled to severance and retirement benefits based on the rates of pay in effect at the time of termination, years of service and certain other factors. The provision is determined based on the amount that would be payable assuming all employees were to terminate their employment as of the reporting date.The Company’s severance and retirement benefits are partly funded through an insurance plan. Up to March 1999, the Company had previously prepaid a portion of its severance and retirement benefits obligation to the National Pension Service (“NPS”). The insurance deposits and prepayments are presented as a deduction from the provision for severance and retirement benefits.

leasesThe Company accounts for leases that transfer substantially all the risks and rewards incidental to ownership of assets as capital leases and leases other than capital leases as operating leases.

BuildingsAircraft and engineLeased aircraft and engineOther aircraft partsVehiclesOthers

Years40202015

66 - 15

87

Rental expenses for operating leases, which are expensed on a straight-line basis over the lease term, are charged to current operations as they become payable. The Company recognizes a capital lease as an asset and a liability in the statement of financial position at an amount equal to the fair value of the leased asset or, if lower, the present value of the minimum lease payments at the inception of the lease. In calculating the present value of the minimum lease payments, any residual value guarantee is excluded and the interest rate implicit in the lease is used as the discount rate. Leased assets are depreciated in the same manner as other assets through purchases. Minimum lease payments are apportioned between the financecharges and the reduction of the lease liability. The finance charges are allocated to each period by the effective interest rate method and recognized as an interest expense.

incOme taxesCurrent income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the tax authorities. Deferred income taxes are provided using the liability method for the tax effect of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. Deferred income tax assets and liabilities are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse, and are classified as current or non-current, respectively, based on the classification of the related asset or liability in the statement of financial position. In addition, current tax and deferred tax are charged or credited directly to equity if the tax relates to items that are credited or charged directly to equity.

fOreign currency translatiOnTransactions involving foreign currencies are recorded at the exchange rates prevailing at the time the transactions are made. Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the appropriate exchange rates on the statement of financial position dates. Theresulting unrealized foreign currency translation gains or losses are credited or charged to current operations.

valuatiOn Of lOng-term receivables (payables) at present valueReceivables (payables) arising from long-term installment transactions are stated at present value. The difference between the carrying amount of these receivables (payables) and their present value is amortized using the effective-interest-rate method and the amortization is credited (charged) to current operations over the installment period. derivative financial instrumentsDerivative instruments are presented as assets or liabilities valued principally at the fair value of rights or obligations associated with the derivative contracts. The unrealized gain or loss from a derivative transaction with the purpose of hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment is recognized in current operations. Derivative instrument with the purpose of hedging the exposure to the variability of cash flows of a recognized asset, liability or a forecasted transaction, where the hedge-effective portion of the derivative’s gain or loss is deferred as other comprehensive income, a component of equity. The ineffective portion of the gain or loss is charged or credited to current operations. Derivative instrument that does not meet the criteria for hedge accounting is measured at fair value with unrealized gain or loss reported in current operations.

frequent-flyer prOgramThe Company operates a frequent-flyer program to award its members based on accumulated mileage credits. The estimated incremental costs of providing travel awards under the frequent-flyer program are accrued as unredeemed mileage liabilities.


88

2. summary Of significant accOunting pOlicies (cOnt’d)

prOvisiOns and cOntingent liabilitiesProvisions are recognized when the Company has a present obligation (legal or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The provision is used only for expenditures for which the provision was originally recognized. If the effect of the time value of money is material, provisions are stated at present value.

A contingent liability is disclosed, but not recognized when it is not probable that an outflow of resources embodying economic benefits will be required to settle the obligation or the amount of the obligation cannot be measured with sufficient reliability.

per share amOuntsBasic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the year plus the weighted average number of common shares that would have been outstanding assuming the conversion of all dilutive potential common shares.

use Of estimatesThe preparation of financial statements in accordance with Korean GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. effect On adOptiOn Of KOrea internatiOnal financing repOrting standards [“K-ifrs”]

preparatiOn plan and implementatiOn status Of K-ifrsAs all listed companies are required to adopt K-IFRS for the financial period beginning on or after 1 January 2011, the Company is currently preparing for the implementation of K-IFRS. As part of the implementation plan, the Company organized a Task Force Team (TFT) to manage all matters concerning K-IFRS. The TFT had completed the analysis of key accounting principal differences between Korean GAAP and K-IFRS and is currently in the process of remapping its accounting information system to capture and generate information under K-IFRS. In addition, the TFT regularly conducts internal trainings and reports the status of K-IFRS implementation to management.

+details Of preparatiOn and develOpment Of K-ifrs implementatiOn are as fOllOws:Key action

Establishment of KIFRS

TFT and assessment of the

impact of K-IFRS adoption

Realignment of accounting

information system

K-IFRS training for

personnel

Preparation plans

Establishment of K-IFRS TFT to assess the overall

impact of K-IFRS adoption and to successfully

implement and complete the K-IFRS

conversion by the end of 2009

Accounting system to be realigned for K-IFRS

adoption by the end of 2009

Trainings and education courses for accounting

and finance personnel on K-IFRS technical

knowledge to be completed by the end of 2009

Implementation status as of Dec. 31, 2009

K-IFRS TFT was formed in August 2007 and

assessment of the impact of K-IFRS adoption

was commissioned to an accounting firm in

November 2007

Assessment of the scope of system changes has

been completed and development of new system is

still in progress

K-IFRS training for the accounting and finance

personnel has been implemented by the end of 2009

89

differences between KOrean gaap and K-ifrsThe table below summarizes the expected differences between Korean GAAP and K-IFRS. The summary does not include all differences and is subject to change as the Company’s implementation project progresses. At present, the Company is in the process of determining the final effects of the differences identified on the Company’s financial statements.

4. cash and cash equivalents and financial instrumentsCash and cash equivalents and financial instruments as of December 31, 2008 and 2009 consist of the following:

Cash on hand

Checking and passbook accounts

Money market funds

Other deposits

Foreign currency deposits

Guarantee deposits for the maintenance

of checking accounts

Less:

Short-term financial instruments

Long-term financial instruments

Cash and cash equivalents

2008￦ 723

10,940

179,144

12,368

307,384

14

510,573

(16,071)

(14)￦ 494,488

2009￦ 323

2,671

549,695

13,265

256,990

14

822,958

(106,055)

(947)￦ 715,956


2009

US$ 277

2,288

470,790

11,361

220,101

12

704,829

(90,832)

(811)

US$ 613,186


Subject

Revenue recognition

for mileage credits

Valuation of

severance and

retirement benefits

Borrowing cost attributable

to acquisition

Component

accounting for aircraft

K-IFRS

Deferred revenue method

The liability for severance and retirement benefits

is estimated based on actuarial assumptions and

on a discounted basis

Capitalized

Aircraft is divided into parts where each part with

a significant unit cost is depreciated separately

according to the expected useful life, and the

expected useful life is reviewed at the end of

each reporting period

IKorean GAAP

Incremental cost method

The liability for severance and retirement benefits

is determined by assuming that all employees

will resign from an entity at each reporting period

Expensed

Aircraft is divided into fuselage and engine.

The useful life applied for depreciation does not

change overtime and is not reviewed at the end of

each reporting period


90

5. shOrt-term investment securitiesShort-term investment securities as of December 31, 2008 and 2009 are entirely consisted of government and public bonds.

6. inventOriesInventories as of December 31, 2008 and 2009 consist of the following:

7. lOng-term investment securitiesLong-term investment securities as of December 31, 2008 and 2009 consist of the following:

Merchandise

Raw materials

Supplies

Materials-in-transit

2008￦ 20,526

56,776

160,872

12,801￦ 250,975

2009￦ 13,333

72,556

230,874

3,502￦ 320,265


2009

US$ 11,419

62,141

197,733

3,000

US$ 274,293


Available-for-sale securities

Held-to-maturity securities

2008￦ 58,739

2,781￦ 61,520

2009￦ 77,124

11,984￦ 89,108


2009

US$ 66,053

10,264

US$ 76,317


91

Available-for-sale securities as of December 31, 2008 and 2009 consist of the following:

Equityownership (%)

0.11

3.70

0.96

4.50

0.08

0.05

0.05

3.10

1.72

0.52

0.40

6.25

0.33

0.85

2.41

65.00

25.00

55.00

25.00

-

31.50

Acquisitioncost

￦1,602

10,229

3,283

20,226

399

148

35,887

145

6,967

500

700

81

1,000

100

406

500

10,399

650

250

394

32

-

64

1,390

3,000

1,884￦52,560

US$ 45,015

Bookvalue

￦7,682

22,440

3,186

25,343

919

171

59,741

145

7,677

500

700

81

1,000

100

406

500

11,109

650

250

394

32

-

64

1,390

3,000

1,884￦77,124

US$ 66,053

Fair valueor net-asset

value

￦7,682

22,440

3,186

25,343

919

171

59,741

59

7,677

645

583

78

1,696

14

1,927

406

13,085

1,938

250

1,965

(3)

-

296

4,446

3,000

1,884￦82,156

US$ 70,363

Equityownership (%)

0.11

3.70

0.96

4.50

0.08

0.05

0.05

3.10

1.72

0.52

0.40

6.25

0.33

0.85

2.84

65.00

-

55.00

25.00

33.33

31.50

Book value

￦ 4,552

18,281

2,305

14,134

1,150

176

40,598

145

7,678

500

700

81

1,000

100

406

500

11,110

650

-

394

32

1,092

64

2,232

3,000

1,799￦58,739

Marketable securities1:

Hana Financial Group Inc.

Hanil Cement Co., Ltd.

Meritz Securities Co., Ltd.

GS Home Shopping Inc.

Hanjin Heavy Industries Co., Ltd.

Hanjin Heavy Industries &

Construction Holdings Co., Ltd.

Non-marketable securities1:

The Korea Economic Daily Co., Ltd.

Daehan Oil Pipeline Corporation

Kihyup Finance Co., Ltd.

Cheju Convention Center, Ltd.

Korea Tourist Supply Center Inc.

Entob Co., Ltd.

Incheon United Football Club

Sita Inc.

Seoul Tourism Marketing Co., Ltd.

Investments in affiliated companies2:

Korea Global Logistics

System Co., Ltd.

Hanjin GT&S Co., Ltd.

Hanjin International Japan

Terminal One Management Inc.

US Cargo Sales Joint Venture, Inc.

Global Logistics System

Asia Pacific Co., Ltd.

Bond

Investments in other equity securities

Total



2009 2008


92

7. lOng-term investment securities (cOnt’d)

The details of changes in fair value adjustments of long-term investment securities recorded in accumulated other comprehensive income for the year ended December 31, 2009 are as follows:

Held-to-maturity securities are entirely comprised of government and public bonds whose annual maturities as of December 31, 2008 and 2009 are as follows:

Hana Financial Group Inc.

Hanil Cement Co., Ltd.

Meritz Securities Co., Ltd.

GS Home Shopping Inc.

Hanjin Heavy Industries Co., Ltd.

Hanjin Heavy Industries &

Construction Holdings Co., Ltd.

Daehan Oil Pipeline Corporation

Total

Tax effect

Net total


January 1 2009￦ 2,951

8,052

(977)

(6,093)

751

28

710

5,422

(1,193)￦ 4,229

US$ 3,622

Net changes￦ 3,128

4,159

881

11,209

(230)

(5)

-

19,142

(4,211)￦ 14,931

US$ 12,788

December 31 2009

6,079

12,211

(96)

5,116

521

23

710

24,564

(5,404)￦ 19,160

US$ 16,410


More than 1 year to 5 years

More than 5 years to 10 years

2008￦ 2,770

10￦ 2,780

2009￦ 11,976

8￦ 11,984


2009

US$ 10,257

7

US$ 10,264


Marketable equity securities were valued at quoted market value at the reporting date, while nonmarketable equity securities whose fair values could not be reliably measured due to the lack of reliable information on the future cash flows of the investees were stated at acquisition cost. The investment in non-marketable equity securities of Daehan Oil Pipeline Corporation, was recorded at fair value according to [2006-5] “Accounting for Valuation on Non-listed Equity Securities” and the difference between acquisition cost and fair value is accounted for as other comprehensive income.

The Company’s equity interests in these investees are 20% or more with significant influence orcontrol. However, the Company did not apply the equity method in accounting for these investees since the impact of using the equity method is not material to the Company on the valuation of the investments.

1

2

93

8. equity methOd investmentsEquity method investments as of December 31, 2008 and 2009 are as follows:

Equityownership (%)

2009

59.54

99.35

67.35

100.00

55.82

100.00

24.54

100.00

82.52

25.00

100.00

100.00

100.00

-

5.53

5.55

46.97

2009￦ 93,320

15,111

731

99,900

27,788

2,000

54,328

14,000

854,821

17,413

27,288

7,035

204,008

-

8,408

101,435

6,473￦1,534,059

US$1,313,857

Acquisition cost Book valueProportionate

Net asset value

2008￦ 93,320

15,111

731

99,900

27,788

2,000

54,328

14,000

854,821

10,923

20,288

7,035

189,078

891

60,468

-

-￦ 1,450,682

2009￦ 145,351

30,076

22,024

51,510

51,692

3,816

75,273

26,597

866,328

10,085

2,179

4,687

33,834

-

16,072

98,636

5,131￦1,443,291

US$1,236,118

2008￦ 154,874

26,054

19,806

49,188

42,195

3,465

77,738

26,547

869,500

9,207

7,852

6,792

23,026

6,462

172,108

-

-￦1,494,814

2009￦ 145,351

30,076

22,024

51,510

51,692

3,816

75,273

26,597

864,160

7,307

2,002

4,687

33,834

-

16,072

105,476

5,131￦1,445,008

US$1,237,588

2008￦ 154,874

26,054

19,806

49,188

42,195

3,465

76,349

26,547

866,367

6,100

7,617

6,792

23,026

2,638

178,684

-

-￦1,489,702

Korea Airport Service Co., Ltd.

Hanjin Information Systems &

Telecommunication Co., Ltd.

Topas Co., Ltd.

KAL Hotel Network Co., Ltd.

Hanjin Travel Service Co., Ltd.

Air Total Service Co., Ltd.

Jungseok Enterprise Co., Ltd.

Jedong Leisure Co., Ltd.

Hanjin Energy Co., Ltd.

Grandstar Cargo Int’l

Airlines Co., Ltd. (GCIA)

Jin Air Co., Ltd.

Homeo Therapy Co., Ltd.

Hanjin International Corporation

Korean Air Lease & Finance

Co., Ltd. (KALF)

Hanjin Shipping Holdings Co., Ltd.1

Hanjin Shipping Co., Ltd.1

Tianjin Hanjin-Sino Trans Air Cargo

Terminal Co., Ltd (Tianjin Cargo

Terminal)



Although the Company’s equity ownerships on the investees are less than 20%, the investments are classified as equity method investments, given the Company’s significant influence on the investees.

1


94

8. equity methOd investments (cOnt’d)The changes in carrying amount of equity method investments for the year ended December 31, 2009 are as follows:

Market values of marketable equity method investments as of December 31, 2008 and 2009 are as follows:

Jan. 1￦ 154,874

26,054

19,806

49,188

42,195

3,465

77,738

26,547

869,500

9,207

7,852

6,792

23,026

6,462

Ltd. 172,108

-

-￦ 1,494,814￦ 1,556,259

Increase(Decrease)￦ -

-

-

-

-

-

-

-

-

6,490

7,000

-

14,930

(14,632)

(101,435)

101,435

6,473￦ 20,261￦ (117,975)

Dividends￦ (943)

(487)

(5,388)

-

(142)

-

(244)

-

-

-

-

-

-

-

(2,445)

-

-￦ (9,649)￦ (16,617)

Equity inearnings

(loss)of investee￦ (17,854)

4,791

7,606

2,322

7,346

351

311

50

(40,045)

(4,574)

(12,572)

(2,135)

(7,109)

(2,638)

(72,923)

(4,553)

(649)￦ (142,275)￦ (5,878)

Otherchanges

￦ 720

180

-

-

1,957

-

(1,119)

(3)

(421)

(198)

-

30

(219)

-

359

-

-￦ 1,286￦ 7,888

Capital Surplus /comprehensiveincome

￦ 8,554

(462)

-

-

336

-

(1,413)

3

37,294

(840)

(101)

-

3,206

10,808

20,408

1,754

(693)￦ 78,854￦ 71,137

Dec. 31￦ 145,351

30,076

22,024

51,510

51,692

3,816

75,273

26,597

866,328

10,085

2,179

4,687

33,834

-

16,072

98,636

5,131￦ 1,443,291￦ 1,494,814




Topas Co., Ltd.







GCIA

Jin Air Co., Ltd.


Hanjin International Corporation

KALF

Hanjin Shipping Holdings Co., Ltd.

Hanjin Shipping Co., Ltd.

Tianjin Cargo Terminal

2009

2008


2008



Number of shares

1,885,134

4,890,802

Korean wonin units

Market value per share

￦ 26,750

18,100

Korean wonin millions

Marketcapitalization

￦ 50,427

88,524

2009

Korea Airport Service Co., Ltd.Hanjin Shipping Holdings Co., Ltd.Hanjin Shipping Co., Ltd.

Number of shares1,885,134

790,5294,100,271

Korean wonin units

Market value per share

￦ 32,50013,700

￦ 20,700

Korean wonin millions

Marketcapitalization

￦ 61,26710,830

￦ 84,876

95

Changes in the goodwill (negative goodwill) for the year ended December 31, 2008 and 2009 are as follows:

Unrealized loss arising from aircraft purchasing transactions with KALF amounting to ￦3,824 million as of December 31, 2008 has been realized as of December 31, 2009 and unrealized loss arising from aircraft selling transactions with GCIA amounted to ￦2,777 million as of December 31, 2009 (￦3,107 million as of December 31, 2008).

The details of changes in share of the accumulated other comprehensive income of investees arising from equity method of accounting for the years ended December 31, 2008 and 2009 are as follows:




Jin Air Co., Ltd.

Hanjin Shipping

Holdings Co., Ltd.

Hanjin Shipping Co., Ltd.1

2009

2008

Amortization￦1,389

964

57

247

19￦2,676￦2,675

Net changed￦-

-

-

6,822

(6,822)￦-￦288

January 1￦1,389

3,133

235

(6,575)

-￦(1,818)￦569

December 31￦ -

2,169

178

-

(6,841)￦ (4,494)￦ (1,818)

The balance as of December 31, 2009 is composed of goodwill and negative goodwill amounting to ￦2,689 million and ￦9,530 million, respectively.

1

January 1Net changesDecember 31


2008 2009 2009Gain

￦32,93949,280

￦82,219

Loss￦(40,331)

12,164￦ (28,167)

Gain￦82,219

34,410￦ 116,629

Loss￦ (28,167)

24,009￦ (4,158)

Gain￦70,417

29,471￦99,888

Loss￦ (24,124)

20,563￦ (3,561)



96

8. equity methOd investments (cOnt’d)The summary of financial position of the equity method investees as of December 31, 2009 and the results of their operations for the year then ended based on the investees’ latest available unaudited financial statements are as follows:

The summarized financial information of the above investees are not audited. T he Company obtained the financial statements signed by the investees’ management and internal auditors to assess the reliability of those unaudited financial statements.

In applying the equity method, the investees’ net assets were adjusted by using uniform accounting policies to those of the company. The details of such adjustments are as follows:





Topas Co., Ltd.







GCIA

Jin Air Co., Ltd.


Hanjin International Corp.

Hanjin Shipping Holdings Co., Ltd

Hanjin Shipping Co., Ltd


Assets￦349,975

55,663

41,488

149,668

124,293

7,390

360,014

14,274

2,073,646

119,103

39,535

4,750

92,793

377,584

7,908,267￦12,197

Liabilities￦118,507

24,593

8,788

95,072

31,041

3,573

63,329

6

1,026,488

89,875

37,533

64

65,495

87,199

6,007,130￦6

Equity￦231,468

31,070

32,700

54,596

93,252

3,817

296,685

14,268

1,047,158

29,228

2,002

4,686

27,298

290,385

1,901,137￦12,191

Sales￦316,002

100,751

47,999

46,298

22,130

26,478

33,080

-

(3,984)

63,836

60,888

-

42,563

6,457,216

668,257￦-

Net income (loss)￦(29,845)

4,996

11,294

2,230

13,160

351

6,966

50

(47,356)

(16,978)

(12,514)

(2,135)

(7,109)

(1,313,161)

(86,494)￦-

Korea Airport Service

Co., Ltd.

HIST1

KAL Hotel Network

Co., Ltd.

Hanjin Travel Service

Co., Ltd.

Jungseok Enterprise

Co., Ltd.


Hanjin Int’l Corp


Adjustment accounts

Investments in equity

securities and other


securities

Capitalization

borrowing costs





Revaluation for land

Revaluation for land

Intangible assets

Net asset beforeadjustment

￦231,468

31,070

54,596

93,252

296,685

14,268

27,298￦12,191

Adjustmentamounts

￦12,672

(1,297)

(3,086)

(11,254)

11,747

12,329

6,534￦(1,266)

Net asset afteradjustment

￦244,140

29,773

51,510

81,998

308,432

26,597

33,832￦10,925

Hanjin Information Systems & Telecommunication Co., Ltd.1

97

9. prOperty, aircraft and equipmentCost of property, aircraft and equipment and related accumulated depreciation as of December 31, 2008 and 2009 consist of the following:

Changes in net book value of property, aircraft and equipment for the years ended December 31, 2008 and 2009 are as follows:

LandBuildingsAircraftEnginesLeased aircraftLeased enginesConstruction in-progressOther

Less accumulated depreciation

2008￦ 1,410,447

863,9724,430,5291,271,7605,773,0491,328,806

502,704856,455

16,437,722(5,152,562)

￦ 11,285,160


2009￦1,714,745

871,5143,758,9961,208,7576,386,6061,542,642

986,560862,066

17,331,886(5,650,227)

￦11,681,659

US dollars in thousands (Note 2)2009

US$ 1,468,607746,415

3,219,4211,035,2495,469,8581,321,208

844,947738,322

14,844,027(4,839,180)

US$ 10,004,847

Korean won in millions2008

LandBuildingAircraftEnginesLeased aircraftLeased enginesConstruction-

In-progressOthers

January 1

￦ 593,574661,229

3,051,469791,960

3,894,962950,320

595,452330,720

￦ 10,869,686

Additions

￦ 42,00715,606

274,59567,911

319,53065,544

724,96485,188

￦ 1,595,345

Disposals/ transfers

￦ (471)(1,424)

(568,286)(116,795)

293,51414,826

(817,712)(42,123)

￦ (1,238,471)

Revaluation

￦ 814,791-----

--

￦ 814,791

Impairmentloss (reversal)

￦ (39,454)-

41,495---

--

￦ 2,041

Depreciation

￦ -(21,848)

(288,023)(81,303)

(260,740)(60,170)

-(46,147)

￦ (758,231)

December 31

￦ 1,410,447653,563

2,511,250661,773

4,247,266970,520

502,704327,638

￦ 11,285,161


LandBuildingAircraftEnginesLeased aircraftLeased enginesConstruction-

In-progressOthersUS dollars in thousands (Note 2)

January 1

￦ 1,410,447653,563

2,511,250661,773

4,247,266970,520502,704327,638

￦ 11,285,161

US$ 9,665,263

Additions

￦ 159,329630

48,58347,308

317,87543,360

1,221,136113,806

￦ 1,952,027

US$ 1,671,829

Disposals

￦ (126)(132)

(519,857)(72,181)

---

(85,699)￦ (677,995)

US$ (580,674)

Transfers

￦ 145,0957,069

18,02912,314

295,682165,729

(737,280)1,814

￦ (91,548)

US$ (78,407)

Depreciation

￦ -(22,038)

(264,178)(75,197)

(309,068)(70,691)

-(44,814)

￦ (785,986)

US$ (673,164)

December 31

￦ 1,714,745639,092

1,793,827574,017

4,551,7551,108,918

986,560312,745

￦ 11,681,659

US$(10,004,847)


98

9. prOperty, aircraft and equipment (cOnt’d)As of December 31, 2009, the value of the Company’s land, determined by the Government of the Republic of Korea for tax administration purposes, amounted to ￦980,723 million (US$839,948 thousand).

The Company engaged Pacific Appraisal Co., Ltd., an accredited independent valuer, to determine the fair value of its land. Fair value is determined by reference to market-based evidence. This means that valuation performed by the valuer is based on active market prices, adjusted for any difference in the nature, location or condition of the specific property. The date of the valuation was December 31, 2008.

If the land was measured using the cost model, the carrying amounts as of December 31, 2008 and 2009 would be amounted to ￦635,110 million (US$543,945 thousand) and ￦939,408 million (US$804,563 thousand) respectively.

As of December 31, 2008 and 2009, the Company’s insurance policies to cover losses from fire and other casualty losses are as follows:

10. intangible assetsChanges in net book value of intangible assets for the years ended December 31, 2008 and 2009 are as follows:

Research and development costs incurred in connection with the development of aircraft parts and new routes that were charged to selling and administrative expenses amounting to ￦3,236 million (￦8,961 million for the year ended December 31, 2008) and operating expenses amounting to ￦663 million (￦13,394 million for the year ended December 31, 2008) for the year ended December 31, 2009.

Aircraft and enginesBuildings and machineryCash and investmentsNational propertiesOthers

2008US$ 9,227,341￦ 1,452,273￦ 11,501￦ 475,991￦ 72,110

2009US$ 9,305,477￦ 1,904,419￦ 8,078￦ 541,960￦ 64,990

Korean won in millions and US dollars in thousands


Facility usage rightsDevelopment costsOthers


Amortization￦ (11,020)

(4,041)(1,511)

￦(16,572)US$ (14,193)

Additions￦ -

3,65493,748

￦ 97,402US$ 83,421

January 1￦ 179,944

34,4241,541

￦ 215,909US$ 184,917

December 31￦ 168,924

34,03793,778

￦296,739US$ 254,144

2008

Facility usage rightsDevelopment costsOthers


Amortization￦(11,410)

(4,966)(1,402)

￦ (17,778)

Additions￦161

1,191222

￦ 1,574

January 1￦ 191,193

38,1992,721

￦232,113

December 31￦179,944

34,4241,541

￦215,909

99

11. fOreign currency denOminated mOnetary assets and liabilitiesForeign currency denominated monetary assets and liabilities as of December 31, 2008 and 2009 are as follows:

Assets

Liabilities

2008

Korean wonequivalent in

millions￦808,807

161,41926,419

2,6698,312

10,28251,52483,41169,600

￦ 1,222,443

￦ 7,191,021538,061

3,6715

1,3292,038

152,42510,37410,649

￦ 7,909,573

Foreign currencyin thousands

US$ 643,186JPY 11,580,443HKD 162,830TWD 69,538SGD 9,494GBP 5,657EUR 29,008CNY 453,097Other -

US$ 5,718,506JPY 38,601,408HKD 22,623TWD 123SGD 1,518GBP 1,122EUR 85,815CNY 56,351Other -

2009

Foreign currencyin thousands

US$ 469,636JPY 10,689,482HKD 282,553TWD 120,615SGD 8,506GBP 4,698EUR 27,265CNY 557,405Other -

US$ 5,526,366JPY 29,421,687HKD 19,682TWD 8,089SGD 896GBP 2,431EUR 76,677CNY 20,574Other -

Korean wonequivalent in

millions￦548,347

134,98942,541

4,3777,0708,822

45,65095,350

108,755￦995,901

￦6,452,585371,543

2,963294745

4,565128,378

3,5196,732

￦6,971,324


100

12. shOrt-term bOrrOwingsShort-term borrowings as of December 31, 2008 and 2009 are as follows:

Korea Development BankThe Export-Import Bank of KoreaNational Agricultural Cooperative FederationKorea Exchange Bank

1234

Borrowings from:KDB1

-Singapore branch-KoreaEIBK2

Kookmin BankHana Bank

NACF3

Mirae Asset Life InsuranceCo., Ltd.

KEB4

Bank ofCommunications

Kwangju BankWoori Bank

Annual interest rate in 2009

3M Libor+4.50%3M Libor+4.30%,3M Libor+3.80%3M Libor+4.50%3M CD Rate+2.80%3M Libor+6.20%3M CD Rate+3.60%Base rates+1.26%3M CD Rate+3.14%

5.90%3M Libor+4.55%

3M Libor+2.80%3M CD Rate +2.80%3M Libor+6.40%


2009

US$ 15,000100,000

100,00059,952

124,786

114,258

25,69450,000

50,00025,69430,000

US$ 695,384

2008

￦ 22,635136,882

-192,997

151,143

118,695

30,00062,875

35,210-

37,725￦ 788,162

2009

￦ 17,514116,760

116,76070,000

145,700

133,408

30,00058,380

58,38030,00035,028

￦ 811,930


101

13. lOng-term liabilities

bOndsThe non-guaranteed bonds issued and outstanding as of December 31, 2008 and 2009 are as follows:

Series

19-2nd

23-1st

23-2nd

24-1st

24-2nd

25-1st

25-2nd

26-1st

26-2nd

27-1st

27-2nd

28th

29-1st

29-2nd

30-1st

30-2nd

31-1st

31-2nd

31-3rd

32th

33th

34-1st

34-2nd

34-3st

35th

36-1st

36-2nd

36-3rd

37-1st

37-2nd

Issuing date

04.11.12

06.04.17

06.04.17

06.09.25

06.09.25

07.02.08

07.02.08

07.05.25

07.05.25

07.09.17

07.09.17

07.10.31

07.11.12

07.11.12

08.03.06

08.03.06

08.05.14

08.05.14

08.05.14

08.09.01

08.11.14

09.02.12

09.02.12

09.02.12

09.04.09

09.08.06

09.08.06

09.08.06

09.10.29

09.10.29

Maturity

09.11.12

09.04.17

11.04.17

09.09.25

11.09.25

10.02.08

12.02.08

10.05.25

12.05.25

10.09.17

12.09.17

10.10.31

10.11.12

12.11.12

11.03.06

13.03.06

11.05.14

13.05.14

11.05.14

11.09.01

11.11.14

10.02.12

10.08.12

12.02.12

12.04.09

12.08.06

14.08.06

12.08.06

12.10.29

14.10.29

2008￦120,000

150,000

150,000

150,000

250,000

200,000

100,000

100,000

100,000

150,000

50,000

200,000

140,000

40,000

200,000

100,000

220,000

80,000

113,176

300,000

100,000

-

-

-

-

-

-

-

-

-

3,013,176

(51,597)

2,961,579

(416,840)￦2,544,739

Annual interest ratein 2008

-

-

5.00%

-

4.00%

5.00%

5.00%

5.00%

5.00%

5.00%

5.00%

6.01%

5.00%

5.00%

5.00%

5.00%

5.00%

5.00%

3M Libor+1.90%

7.00%

8.00%

5.80%

6.60%

7.40%

6.63%

6.50%

7.20%

6M Libor+6.80%

6.10%

7.10%

2009￦-

-

150,000

-

250,000

200,000

100,000

100,000

100,000

150,000

50,000

200,000

140,000

40,000

200,000

100,000

220,000

80,000

105,084

300,000

100,000

150,000

100,000

250,000

200,000

230,000

70,000

87,570

100,000

100,000

3,872,654

(33,924)

3,838,730

(1,037,307)￦2,801,423


2009

US$ -

-

128,468

-

214,114

171,292

85,646

85,646

85,646

128,468

42,823

171,292

119,904

34,258

171,292

85,646

188,421

68,516

90,000

256,937

85,646

128,468

85,646

214,114

171,292

196,985

59,952

75,000

85,646

85,646

3,316,764

(29,054)

3,287,710

(888,410)

US$ 2,399,300


Less discount on bonds

Less current portion of bonds, net of discount on bonds


102

13. lOng-term liabilities (cOnt’d)

lOng-term bOrrOwingsLong-term borrowings as of December 31, 2008 and 2009 are as follows:

KDB

IBK1

Hana Bank

Kookmin Bank

Shinhan BankKyobo Life Insurance

Co., Ltd.NACF

Korea Life InsuranceCo., Ltd.

Samsung Life InsuranceCo., Ltd.

SCFBK2

Longboat QuayAviation Ltd.

EIBKKEBNHIS3

Washington MutualUT Finance Corp.Bank of Communication

Less current portion

Annual interest rate in 20094.15%~4.69%,3M CD Rate+1.06%3M Libor+0.57~2.90%KDB Bond+0.77~2.84%4.35%3M Libor+0.60%CD Rate+1.53%3M Libor+0.48~0.58%3.00%6M Libor+5.75%

6.90%3M Libor+0.39~2.00%3M CD Rate+2.00~4.00%

5.40%, 6.90%

5.50%3M JPY Libor+3.00%

3M Libor+1.30%3M Libor+1.65~7.20%3M Libor+2.80%6M JPY Libor+5.30%6M Libor+5.45%Federal Housing Int.6M Libor+5.75%3M Libor+3.95%

2008

￦ 1,448,1514,000

88,142

14,444-

30,000

648,038

40,000

40,00054,362

35,747170,422

12,575

-69

--

2,585,950(709,461)

￦ 1,876,489

2009

￦ 1,139,0104,000

69,222

91,68229,116

30,000

601,722

40,000

40,00045,556

6,763273,439

11,676

243,04252

78,58540,866

2,744,731(668,996)

￦ 2,075,735


2009

US$ 975,5143,426

59,286

78,52224,937

25,694

515,349

34,258

34,25839,017

5,792234,189

10,000

208,15545

67,30435,000

2,350,746(572,967)

US$ 1,777,779


Industrial Bank of Korea Standard Chartered First Bank Korea LimitedNH Investment and Securities Co., Ltd.

123

103

lOng-term ObligatiOns under installment purchasesLong-term obligations under installment purchases related to aircraft and engines as of December 31, 2008 and 2009 are as follows:

The Company received payment guarantees amounting to US$36 million from KDB related to the above long-term obligations under installment purchases as of December 31, 2009.

The amounts as of December 31, 2008 and 2009 represent the cumulative losses on valuation of interest rate swap for the purpose of hedging the exposure to changes in the fair value of the longterm obligations under installment purchases.

1

Installment purchasesfrom:Wilmington

KE Apollo

Accumulated losses onvaluation of fixed liabilities1

Less present value discounts

Less current portion,net of present value discounts


1Y Libor+0.75%4.37%-

2008

￦ 325,00513,286

338,291

9,452347,743(24,388)323,355

(166,301)￦ 157,054

2009

￦ 147,467-

147,467

1,415148,882(12,689)136,193

(136,193)￦ -


2009

US$ 126,299-

126,299

1,212127,511(10,868)116,643

(116,643)US$ -



104


ObligatiOns under capital leasesLong-term borrowings as of December 31, 2008 and 2009 are as follows:

Aircraft/Engines:KE Cayman

Leasing Ltd.Kaleca03

Aviation Ltd.KE Export Leasing

2009 Ltd.KE August Ltd.KE Octavius Ltd.KE Jumbos V Ltd.Arirang Ltd.KE U Simjo Ltd.Constitution Aircraft

Leasing 3 Ltd.Sumisho Aircraft Asset

Management B. V.KE Atomos Ltd.KE Celtics Ltd.KE Evergreen Ltd.Mugungwha Ltd.Brooklyn Leasing Ltd.Sejong Aviation Ltd.Andros Aviation Ltd.Millenium KAL Ltd.KALeidos

Aviation Ltd.KALeidos Two

Aviation Ltd.KALeidos Three

Aviation Ltd.KAL-ECA 2001

Aviation Ltd.Duria Aviation Ltd.KE innisfree Ltd.KE Harmony Ltd.Peninsula

Aviation Ltd.



3M JPY Libor+1.39~2.20%

3M JPY Libor+0.15%4.55%~8.45%3M Libor+1.80~5.00%3M Libor+0.44%~0.54%3M Libor+0.44%~0.70%3M Libor+1.10%~2.00%3M Libor+1.05%~1.75%3M Libor+0.90%

9.57%

5.73%3M Libor+1.50%3M Libor+4.75%3M Libor+4.41%6M Libor+3.60%6.84%~7.29%-3M Libor+0.60%4.97%~6.93%

6M Libor+1.60%, 6.68%

6M Libor+1.60%, 6.68%

6M Libor+1.75%, 6.68%

3M Libor+0.77%3M Libor+0.99%~2.60%3M Libor+1.64%~2.80%3M Euribor+1.35%

3M Libor+3.60%

2008

￦ 129,988

79,317

1,427,222175,692355,199193,648196,631

68,555

30,175

30,001147,756

---

247,82118,700

109,553159,004

31,611

38,119

40,677

73,53355,68969,919

145,792

-3,824,602(676,153)

￦ 3,148,449

2009

￦ 88,462

62,084

1,508,357142,836290,095157,940161,694

50,465

26,477

24,696119,679

64,51084,06777,872

143,634-

68,375112,335

18,059

24,233

25,458

46,93644,32452,458

114,985

70,0563,580,087(772,392)

￦ 2,807,695


2009

US$ 75,764

53,172

1,291,844122,333248,454135,269138,484

43,221

22,676

21,151102,500

55,25072,00066,694

123,016-

58,56096,210

15,467

20,755

21,804

40,19937,96244,92898,480

60,0003,066,193(661,521)

US$ 2,404,672


105

The Company has guaranteed the amounts of US$59 million to Kookmin Bank on behalf of Andros Aviation Ltd. in connection with capital lease agreements as of December 31, 2009.

The Company received payment guarantees amounting to US$1,595 million from Export-Import Bank of the United States and others related to the obligation under capital lease as of December 31, 2009.

Minimum lease payments and present value of long-term obligations under installment purchases and capital leases as of December 31, 2009 are as follows:

guaranteed lOansPursuant to the Government Guidelines for the Rationalization of the Marine Industry, the Company has agreed to assume certain guaranteed loans of Hanjin Shipping Co., Ltd. with KEB and other financial institutions. The guaranteed loans assumed are allocated to the Company by a series of 20 equal installments over the period of 20 years commencing in 1988. The guaranteed loans accrue no interest, and are payable in equal installments over 15 years with a grace period of 15 years. In accordance with the repayment schedule, the Company made its first installment payment in 2003 and final installment will be due in 2017. The outstanding balance of guaranteed loans as of December 31, 2008 and 2009 are as follows:

Guaranteed loans from:

KDB

Woori Bank

Korea Asset Management Corp.

Hanshin Federation of Savings Bank

Kookmin Bank

Shinhan Bank

Daegu Bank

KEB

TongYang Life Insurance Co., Ltd.

Lotte Insurance Co., Ltd

2009￦ 20,928

13,711

882

1,057

789

3,521

2,590

34,079

7,017

725￦ 85,299

2008￦ 23,545

15,424

992

1,188

887

3,961

2,913

38,341

7,894

816￦ 95,961


2009

US$ 17,924

11,743

755

905

676

3,016

2,218

29,187

6,010

621￦ 73,055



Less than 1 year

More than 1 year to 5 years

More than 5 years

Present value

Total￦ 1,332,170

2,525,609

813,414￦ 4,671,193￦ 3,716,281

Obligationsunder

capital leases￦ 1,183,288

2,525,609

813,414￦ 4,522,311￦ 3,580,087

Long-termobligations

under installmentpurchases

￦ 148,882

-

-￦ 148,882￦ 136,193


Total

US$ 1,140,948

2,163,077

696,655

US$ 4,000,680

US$ 3,182,837


106


guaranteed lOans (cOnt’d)Long-term borrowings as of December 31, 2008 and 2009 are as follows:

asset-bacKed securitizatiOn lOansThe asset-backed securitization (ABS) loans of the Company are obtained from various special purpose entities, which entailed the sales of the beneficial rights of receiving a certain amount of cash flows from the future receivables of the Company to several financial institutions. Details of the ABS loans as of December 31, 2008 and 2009 are as follows:

the maturity Of lOng-term liabilitiesThe maturity of long-term liabilities as of December 31, 2009 is as follows:

Less present value discounts

Less current portion,net of present value discounts

2008￦ (33,186)

62,775

(9,930)￦ 52,845


2009￦ (27,133)

58,166

(9,930)￦ 48,236

US dollars in thousands (Note 2)2009

￦ (23,238)49,817

(8,505)US$ 41,312

KAL- 3rd ABSKAL- 4th ABS


Annual interest rate in 20091.20%4.75%, 4.98%, 5.20%

2008￦ 219,236

-219,236

(187,737)￦ 31,499

2009￦ 28,537

500,000528,537(48,537)

￦ 480,000


2009US$ 24,441

428,229452,670(41,570)

US$ 411,100


Maturity year

Dec 31, 2010

Dec 31, 2011

Dec 31, 2012

Dec 31, 2013

Dec 31, 2014

Jan 1, 2015

and thereafter

Bonds￦ 1,040,000

1,325,084

1,157,570

180,000

170,000

-￦ 3,872,654

Long-termborrowings￦ 668,996

1,190,519

371,931

154,065

219,996

139,224￦ 2,744,731

Long-termobligations

underinstallmentpurchases¹￦ 147,467

-

-

-

-

-￦ 147,467

Obligationsunder capital

leases￦ 772,392

626,248

587,091

513,546

326,304

754,506￦ 3,580,087

Guaranteedloans

￦ 10,662

10,662

10,662

10,662

10,662

31,989￦85,299

Asset-backedsecuritization

loans￦48,537

120,000

120,000

120,000

120,000

-￦ 528,537

Total￦ 2,688,054

3,272,513

2,247,254

978,273

846,962

925,719￦10,958,775


Accumulated losses on valuation of fixed liabilities related to the interest rate swap contracts amounting to ￦1,416 million were excluded.1

107

14. cOmmitments and cOntingencies

guarantees receivedAs of December 31, 2009, Seoul Guarantee Insurance Company has provided guarantees of ￦16,447 million on the behalf the Company for compliance with various contracts, bidding and warranties.

agreements fOr banK Overdraft, letters Of credit and credit lines As of December 31, 2009, the Company has a bank overdraft agreement with Woori Bank for up to ￦5,000 million, and opening of letters of credit for up to US$5 million. The Company has also other credit line agreements for up to ￦240,000 million with Kookmin Bank and others and US$130 million with Woori Bank and others as of December 31, 2009.

As of December 31, 2009, the Company has two outstanding promissory notes pledged as collateral to creditors and guarantors. In addition, the Company has B2B marketplace agreements for up to ￦30,000 million with Woori Bank as of December 31, 2008 has closed in 2009.

pending litigatiOnsAs of December 31, 2009, various claims, lawsuits and complaints, arising from airline services operations are pending against the Company. Management believes that the Company has adequate insurance coverage against these claims and that the ultimate outcome of these cases will not have a material adverse effect on the financial performance and position of the Company.

For an anti-trust violation relating to the Company and other parties colluding on the price fixing of air-cargo services, the Company was investigated by the United States Department of Justice. As a result, the Company made a plea to the United States Department of Justice on August 2007 for the payment of fines totaling US$300,000 thousand. In accordance with the agreed payment schedule, the Company paid one-sixth of the fines on September 21, 2007 and the remaining balance of the fines are payable in equal installments over 5 years from 2007 with interest rate of 4.30% per annum. In July 2009, the U.S. court of relevant jurisdiction approved a one year extension for each of the remaining four-sixths of the fines in consideration of the economic situation. Therefore, as of December 31, 2009, the outstanding balance of fines of ￦233,520 million (US$200,000 thousand) was accounted for as a current liability (other account payable) amounting to ￦58,380 million (US$50,000 thousand) and non-current liability (other accounts payable) amounting to ￦175,140 million (US$150,000 thousand).

In connection with the above anti-trust violation, various other parties also filed lawsuits against the Company claiming damages at the United States District Court for the Eastern District of New York which are still pending. In addition, the Company is currently under investigation by the European Commission, Australian Competition and Consumer Commission, New Zealand Commerce Commission, Korea Fair Trade Commission and others for allegedly colluding on price fixing. As of December 31, 2009, the ultimate outcome of this investigation cannot be presently determined.

new aircraft purchase cOmmitmentsThe Company has entered into various aircraft purchase contracts with aircraft manufacturers, including the Boeing Company. The amount of such contracts is approximately US$8,647 million as of December 31, 2009.


108

14. cOmmitments and cOntingencies (cOnt’d)

interest rate swap cOntractsThe Company has entered into interest rate swap contracts with Woori Bank in order to hedge against interest rate fluctuation related to long-term obligations under installment purchases of B747-400 aircraft. The details of the contracts outstanding as of December 31, 2009 are as follows:

Notional amount : US$97,234 thousandTerms : Pay floating interest rate of Libor+0.75% and receive fixed interest rate of 8.00% Swap contract period : October 10, 1996 to January 15, 2010

Interest expense from the long-term obligations amounting to ￦9,058 million for the year ended December 31, 2009 has been offset against the gain on settlement of interest rate swap contracts. Gain on valuation of interest rate swap contracts and loss on valuation of long-term obligations under installment purchases, each amounting to ￦226 million, were recognized as non-operating income and non-operating expense, respectively, for the year ended December 31, 2009.

fOreign currency OptiOn cOntractsThere is no unsettled currency option contract as of December 31, 2009. And in accordance with the foreign currency option contracts settled during the year, the Company has recognized a gain and a loss from settlement of foreign currency option contracts amounting to ￦12,489 million (US$10,696 thousand) and ￦3,877 million (US$3,320 thousand), respectively, for the year ended December 31, 2009.

crOss currency interest rate swap cOntractsIn order to hedge against interest rate fluctuation and changes in exchange rate related to foreign currency denominated bonds, the Company has entered into cross currency interest rate swap contracts with Hong Kong & Shanghai Banking Corp. (HSBC). The details of the contracts outstanding as of December 31, 2009 are as follows:

Notional amount : US$90,000 thousandTerms : Pay fixed interest rate of 5.60 % on a quarterly basis and notional amount at the date of maturity in KRW at the rate of ￦1,045 to US$1 Receive floating interest rate of 3M Libor + 1.90 % on a quarterly basis and notional amount in US$ at the date of maturitySwap contract period : May 2008 to May 2011

The Company recognized unrealized valuation loss amounting to ￦5,115 million for the year ended December 31, 2009.

Oil-price OptiOnIn order to hedge the exposure to changes in oil prices related to purchase of aircraft fuel, the Company has entered into oil price zero-cost collar option contracts, which consist of call-options in long positions and put-options in short positions and oil price swap contracts that are based on West Texas Intermediate.

The unsettled quantity of the oil price option contracts as of December 31, 2009 is 2,200,000 BBL which will be last settled in September 2010. The unsettled quantity of the oil price swap contracts as of December 31, 2009 is 2,260,000 BBL which will be last settled in December 2010.

The Company accounts for its fuel derivative instruments as cash flow hedges in cases where the derivative instruments meet the requirements of Korea Accounting Standards 53-70 Accounting for Derivative Instruments.

109

The unsettled oil price option and oil price swap contracts as of December 31, 2009 all qualified for cash flow hedge accounting treatment and the unrealized amount of fair value adjustment on the unsettled oil price option and oil price swap contracts were recorded in other comprehensive income. The hedge ineffectiveness portion amounting to ￦31,792 million were recognized as non-operating income for the year ended December 31, 2009.

In relation to oil price option and oil price swap contracts that qualified for cash flow hedge accounting treatment, unrealized other comprehensive income amounting to ￦7,089 million as of December 31, 2009 is expected to be realized and transferred to cost of sales within one year from the reporting date. The Company recorded a loss of ￦7,628 million from the settlement of the oil price option contracts which has been added to operating expense and a loss of ￦230,131 million from the settlement of the oil price swap contracts which has been added to operating expense for the year ended December 31, 2009. The hedge ineffectiveness portion amounting to ￦33,496 million resulting from settlement of oil price option were recognized as gain on settlement of derivative instruments and ￦1,917 million resulting from settlement of oil price option were recognize as loss on settlement of derivative instruments.

Operating lease cOntractsThe Company has entered into operating lease agreements to lease 27 aircrafts and certain aircraft parts from BCC Bolongo, Gecas Technical Services Ltd. and other lessors. The Company has also entered into an operating lease agreement for using the cargo terminal at JFK international airport in the United States with New York City Industrial Development Agency (IDA). As of December 31, 2009, the schedule lease payments on these agreements are summarized as follows:

KDB has provided a guarantee of US$25 million on behalf of the Company for the aircraft operating lease agreements as of December 31, 2009. In addition, the Company has opened letters of credit at HSBC in the aggregate amount of US$76 million in connection with the operating lease agreement for using the cargo terminal at JFK international airport in the United States with IDA as of December 31, 2009, and KDB has provide a guarantee of US$76 million to HSBC on behalf of the Company.

The Company has entered into an operating lease agreement with Jin Air Co., Ltd and leased 3 aircrafts and relevant components to Jin Air Co., Ltd. As of December 31, 2009, the schedule of collection on this agreement is summarized as follows:

January 1, 2010 ~ December 31, 2010January 1, 2011 ~ December 31, 2011January 1, 2012 ~ December 31, 2012January 1, 2013 ~ December 31, 2013January 1, 2014 ~ December 31, 2014January 1, 2015 and thereafter

US dollars in thousandsUS$ 152,574 133,882 96,676 75,682 69,843

253,773US$ 782,430

Korean won equivalentin millions

￦ 178,145 156,321 112,879 88,366 81,549

296,305￦ 913,565

January 1, 2010 ~ December 31, 2010January 1, 2011 ~ December 31, 2011January 1, 2012 ~ December 31, 2012January 1, 2013 ~ December 31, 2013January 1, 2014 ~ December 31, 2014January 1, 2015 and thereafter

US dollars in thousandsUS$ 11,172 11,172 11,172 11,172 8,276 13,430 US$ 66,394

Korean won equivalentin millions

￦ 13,045 13,045 13,045 13,044 9,663 15,680￦ 77,522


110

Operating lease cOntracts (cOnt’d)The Company, including Air France KLM and other users of the JFK Airport in New York (collectively the JFK Users), has provided a joint guarantee of US$345 million to IDA for the industrial revenue bonds (IR Bonds) issued by the IDA. The IR Bonds were issued for the purpose of financing the construction of the new terminal one of JFK Airport (Terminal One). In return, IDA will redeem its IR Bonds through the collection of lease payments from the JFK Users. Terminal One Group Association (TOGA) was established by the JFK Users to operate and administer the Terminal One, including collection of the above mentioned lease payments and making schedule repayment to IDA in respect of the IR Bonds. In accordance to an Association Agreement entered into between TOGA and the JFK Users, TOGA has been granted the right to collect additional lease payments from the JFK Users, in the event of a shortage of funds after making such schedule repayment to IDA, to cover its operating expenses.

On November 5, 2009, the Company has entered into a Memorandum of Understanding with its creditors, including KDB, to improve the Company’s financial structure mainly by sale and leaseback of the Company’s aircraft.

15. pledged assetsA substantial portion of the property, aircraft and equipment as of December 31, 2009, has been pledged as collateral for certain borrowings from banks and other financial institutions as follows:

As of December 31, 2009, the following investment securities and equity method investments are pledged as collateral (Korean won in millions):

Held-to maturity securities:National housing bonds

National housing bonds

Equity method investments:Hanjin Shipping Co., Ltd.Hanjin Shipping Holdings Co., Ltd.Hanjin Energy Co., Ltd.

Number of shares

-

-

263,20450,74534,000

Book value

￦ 450

1,184

6,3321,031

866,329￦ 875,326

Financial institution

Defense Procurement Agency

Incheon AirportCustoms

KEBKEB

Woori bank and Others

Purpo

Contract guarantee

Import customsclearance guarantee

Guaranteed loansGuaranteed loans

Borrowing guarantee

KDB

KEBKookmin BankEIBKNACF

Hana Bank SCFBK

Aircraft and engines

AmountUS$ 1,767,085NLG 1,143￦ 1,080,900￦ 73,000￦ 20,544US$ 354,559￦ 576,401US$ 185,280US$ 96,850￦ 45,500JPY 5,070,000Bank of Communication

CollateralLand, building, aircraft and enginesLand and buildingLand, building and facility usage rightLand and buildingLand and buildingAircraft and enginesLand, aircraft and enginesAircraft and enginesAircraft and enginesFacility usage rightsAircraft and enginesUS$ 53,500

Korean won in millions, US$, JPY and NLG in thousands

111

16. severance and retirement benefitsChanges in severance and retirement benefits for the years ended December 31, 2008 and 2009 are summarized as follows:

17. equity

cOmmOn stOcKThere is no change in common stock of the Company during the year ended December 31, 2009. The Company is authorized to issue 250,000,000 shares at par value of ￦5,000 per share and , 71,971,631 shares were issued as of December 31, 2009.

preferred stOcKThere is no change in preferred stock of the Company during the year ended December 31, 2009. As of December 31, 2009, the Company has 1,379,177 shares of preferred stock issued at par value ￦5,000 per share. The preferred stock is non-participating, non-cumulative and non-voting shares, which is entitled to receive cash dividend equal to that declared for common stock plus an additional one percent.

treasury stOcKAs of December 31, 2009, the Company has 4,437,327 shares of common stock and 11,869 shares of preferred stock that were repurchased and held as treasury stock with carrying value of ￦65,264 million and ￦135 million, respectively.

accumulated deficitAccumulated deficit as of December 31, 2008 and 2009 consist of the following:

Beginning balanceProvisionsTransfer from(to) affiliatesPayments

Deposits for severance and retirements benefitsAccumulated prepayment to KNPCNet balance

2008￦ 777,337

96,7931,047

(126,175)749,002

(267,501)(11,531)

￦ 469,970

2009￦ 749,002

104,749(831)

(42,354)810,566

(264,289)(10,853)

￦ 535,424


2009US$ 641,488

89,713(712)

(36,274)694,215

(226,352)(9,295)

US$ 458,568


Appropriated retained earnings:Legal reserveReserve for foreign currency fluctuationReserve for research and manpower developmentReserve for facility usage

Unappropriated retained earnings (deficit)

2008

￦ 10,500170,000130,000620,000930,500

(1,846,427)￦ (915,927)

2009

￦ - ----

(114,823)￦ (114,823)


2009

US$ -----

(98,341)US$ (98,341)



112

18. incOme taxesFor the year ended December 31, 2009, the Company is subject to corporate income taxes, including resident surtax, at the aggregate rates of 12.1% (11% from 2010 and thereafter) on taxable income of up to ￦200,000 thousand and 24.2.% (22% from 2012 and thereafter) on taxable income in excess of ￦200,000 thousand.

A reconciliation of benefit from income taxes applicable to loss before income taxes at the Korea statutory tax rate to benefit from income taxes at the effective income tax rate of the Company is as follows:

Loss before income taxesIncome tax at income tax rate of 24.2% (2009) and 27.5% (2008)Adjustments:

Expenses not deductible for tax purposeDeferred tax assets not recognizedChanges in temporary differences resulting from the prior year tax reconciliationEffects of changes in tax rate, etc.Additional payment of income taxes (income tax refunds)

Tax creditBenefit from income taxes

2008￦ (2,450,832)

(673,979)

14,0583,1723,172

154,7231,067

(4,285)￦ (508,402)

2009￦ (125,381)

(30,342 )

8,4865,301

631(6,292)(1,593)(2,676)

￦ (26,485)


113

Significant changes in cumulative temporary differences and deferred income tax assets and liabilities for the year ended December 31, 2009 are as follows:

Increase

￦46,68247,500

--

44,566--

11,416

-

-140,545290,709

--

-

(19,142)--

-(15)

(19,157)

￦

Ending balance

￦ 326,948161,101

3,736-

279,84154,322

896,46251,316

39,454

7,089155,765

1,976,034

(4)(27,020)

-

(24,564)(26,678)

(814,790)

-(102,115)(995,171)

980,863206,900)

1,232,5002,006,463

24.2%6,961

￦ 469,073

Beginning balance

￦ 280,266113,601

14,159198,131235,27554,322

1,551,17139,900

39,454

355,90615,220

2,897,405

(21)(33,186)

(45,700)

(5,422)(101,990)(814,790)

(6,617)(102,100)

(1,109,826)1,787,579(184,996)

797,4052,399,988

27.5%4,285

￦ 551,821

Decrease

￦ --

(10,423)(198,131)

--

(654,709)-

-

(348,817)-

(1,212,080)

176,166

45,700

-75,312

-

6,617-

133,812

￦


Deductible temporary differences:Accrued severance and retirement benefitsDepreciationForeign currency translation

adjustment debitDiscount in aircraft purchasedUnredeemed mileage liabilitiesGain from assets contributedLoss on foreign currency translation, netEquity method investmentsImpairment loss on property

aircraft and equipment, netLoss on valuation of derivatives

(other comprehensive income)Others

Taxable temporary differences:Provision for temporary depreciationPresent value discount on guaranteed loanReserve for research and

human developmentGain on valuation of long-term

investment securitiesGain on valuation of derivativesRevaluation surplusGain on valuation of other

non-current assetsOthers

TotalTemporary difference unrecognized 1

Tax loss carry forwardTemporary difference recognizedTax rateTax creditDeferred income tax asset, net


114

18. incOme taxes (cOnt’d)

Details of gross deferred income tax assets and liabilities as of December 31, 2009 are as follows:

The major components of benefit from income taxes December 31, 2008 and 2009 are as follows:

Temporary difference:Accrued severance and retirement benefitsDepreciationForeign currency translation adjustment debitUnredeemed mileage liabilitiesLoss on foreign currency translation, netProvision for temporary depreciationPresent value discount on guaranteed loanGain on valuation of long-term investment

securitiesEquity method investmentsGain on valuation of derivativesLoss on valuation of derivatives

(other comprehensive income)Revaluation surplusImpairment loss on property, aircraft

and equipment, netOthersTax loss carry forwardTax credit

Deferred income tax assetsDeferred income tax liabilitiesDeferred income tax assets, netUS dollars in thousands (Note 2)

Temporary differences

￦ 326,948161,100

3,736279,841896,462(3,785)

(27,020)

(24,564)(203,378)(26,677)

7,089(814,791)

39,454155,765

1,232,500

Current

￦ -------

--

(6,456)

1,716-

-(17)

115,222-

116,938(6,473)

￦ 110,465US$ 94,609

Non-current

￦ 71,92935,442

82261,565

197,222(1)

(5,944)

(5,404)(44,743)

-

-(179,254)

8,67934,284

177,0506,961

593,954(235,346)

￦ 358,608US$ 307,133

Korean won in millionsDeferred income tax assets(liabilities)

The Company did not recognize deferred income tax assets for deductible temporary differences, arising from equity method

investments amounting to ￦254,694 million and gain from assets contributed amounting to ￦54,322 million, in consideration of the

uncertainty in realizing those deductible temporary differences in the future. In addition, the Company did not recognize deferred

income tax liabilities for taxable temporary differences arising from the revaluation of land amounting to ￦102,116 million, in

consideration that the Company has no firm commitment to dispose of the land in the foreseeable future.

1

Current income taxesChanges in deferred income tax

arising from temporary differencesAdditional payment of income taxes (Income tax refunds)Deferred income tax which is charged directly to equityBenefit from income taxes


2009US$ -

70,870(1,364)

(92,189)US$ (22,683)

2008￦7,231

(424,998)1,066

(91,701)￦ (508,402)

2009￦-

82,748(1,593)

(107,640)￦ (26,485)


115

Deferred income tax which is charged (credited) directly to equity December 31, 2008 and 2009 are as follows:

19. cOmprehensive incOme (lOss)The Company’s comprehensive income (loss) December 31, 2008 and 2009 are computed as follows:

20. per share amOuntsThe Company’s per share amounts December 31, 2008 and 2009 are computed as follows:

The weighted-average number of shares of common stock outstanding December 31, 2008 and 2009 has been calculated by deducting treasury stock. There are no outstanding convertible bonds or other dilutive securities as of December 31, 2008 and 2009 that have a dilutive effect on the Company’s per share amounts.

Net lossOther comprehensive income (loss), net of taxes:

Gain (loss) on valuation of long-term investment securities (Note 7)

Gain (loss) on valuation of derivative instrumentsEquity adjustment arising from

equity method investments (Note 8)Revaluation surplusGain (loss) on valuation of other non-current assets

Comprehensive income (loss)


2009US$ (84,702)

12,788226,450

50,033-

(4,420)284,851

US$ 200,151

2008￦(1,942,430)

(26,937)(271,098)

61,444635,537

1,186400,132

￦ (1,542,298)

2009￦ (98,896)

14,931264,403

58,419-

(5,161)332,592

￦ 233,696


Gain (loss) on valuation of long-term investment securitiesEquity adjustment arising from equity method investmentsGain (loss) on valuation of derivative instrumentsRevaluation surplusGain on valuation of other non-current assetsTotalIncome tax rateCharged directly to equity


2009US$ 16,394

78,768298,747

-(5,667)

388,24222% (24.2%)

US$ (92,189)

2008￦(37,565)

47,387(357,728)

814,7911,134

468,60322% (24.2%)

￦ (91,701)

2009￦ 19,142

91,970348,817

-(6,617)

453,31222% (24.2%)

￦ (107,640)


Net lossPreferred stock dividendsNet loss attributable to common stockWeighted-average number of shares of

common stock outstanding (in units)Basic loss per share (Korean won and US$ in units)


2009US$ (84,702)

-(84,700)

67,534,304US$ (1.25)

2008￦(1,942,430)

-(1,942,430)

67,534,304￦ (28,762)

2009￦(98,896)

-(98,896)

67,534,304￦ (1,464)



116

21. related party disclOsuresThe Company is the ultimate holding company for the following list of subsidiaries as of December 31, 2009.1. Korea Airport Service Co., Ltd.2. Hanjin Travel Service Co., Ltd.3. Jungseok Enterprise Co., Ltd.4. Hanjin Information Systems & Telecommunication Co., Ltd.5. Topas Co., Ltd.6. In-cheon International Airport Oiling Facility7. KAL Hotel Network Co., Ltd.8. Air Total Service Co., Ltd.9. Tianjin Hanjin-Sino Trans Air Cargo Terminal Co., Ltd.10. Hanjin Int’l Corp.11. Waikiki Resort Hotel, Inc.12. Jedong Leisure Co., Ltd.13. Hanjin Energy Co., Ltd.14. Jin Air Co., Ltd.15. Homeo Therapy Co., Ltd.

Significant transactions which occurred in the ordinary course of business with related companies December 31, 2008 and 2009 are summarized as follows:

The expense amount related to Korea Airport Service Co., Ltd. and S-Oil Corporation consists of mainly charges incurred from aircraft refueling services. The revenue and other income related to Jin Air Co., Ltd consist of mainly revenues incurred from leasing of aircraft and building. The revenue and other income related to GCIA arose from aircraft maintenance. Related party incomes and expenses from/to other than Korean Airport Service Co., Ltd., S-Oil Corporation, GCIA and Jin Air Co., Ltd. mainly incurred in operations.

Expense￦12,512

252,73915,854

983

32,62423,25926,721

-90,423

393,64513,19939,255

￦901,214

Revenue /other income

￦1,670467210

-

24022,022

17,2783,715

27-

877￦36,507

2008

Expense￦14,729

243,38217,374

909

37,29223,54326,478

5-

273,170-

44,879￦681,761

Revenue /other income

￦1,883570186

-

43921,999

-29,865

--

4,6505,859

￦65,451

2009

Hanjin Transportation Co., Ltd.Korean Airport Service Co., Ltd.Hanjin Travel Service Co., Ltd.Jungseok Enterprise Co., Ltd.Hanjin Information Systems

& Telecommunication Co., Ltd.Topas Co., Ltd.Air Total Service Co., Ltd.Jin Air Co., LtdKALFS-Oil CorporationGCIAOthersTotal

117

The related account balances outstanding with related parties as of December 31, 2008 and 2009 are summarized as follows:

Payables to Korean Airport Service Co., Ltd. and S-Oil Corporation are trade in nature. Receivables from Jin Air Co., Ltd. mainly arose from aircraft lease and payables to Jin Air Co., Ltd. mainly consist of unearned revenues generated from aircraft maintenance. Related party receivables and payables from/to other than Korean Airport Service Co., Ltd., S-Oil Corporation and Jin Air Co., Ltd. are mainly trade in nature.

The Company has guaranteed the repayment of various obligations of the following affiliated companies of the Hanjin Group as of December 31, 2009 as follows:

Payable￦ 2,896

49,7792,423

-

5,5704,1504,2075,976

16,519-

2,712￦ 94,232

Payable￦ 2,588

56,3863,464

6

6,9144,5395,916

12,18112,629

-3,677

￦ 108,300

Receivable￦ 53

452185421

754,505

-25,096

--

136￦30,923

Receivable￦ 231

52733

428

653,696

-22,846

-4,8681,496

￦ 34,190

2008 2009

Hanjin Transportation Co., Ltd.Korean Airport Service Co., Ltd.Hanjin Travel Service Co., Ltd.Jungseok Enterprise Co., Ltd.Hanjin Information Systems

& Telecommunication Co., Ltd.Topas Co., Ltd.Air Total Service Co., Ltd.Jin Air Co., LtdS-Oil CorporationGCIAOthersTotal


Hanjin Transportation Co., Ltd.



GrandStar

Others

Total

Guaranteed amounts

￦ 22,156￦ 13,608￦ 16,687￦ 16,613￦ 10,206￦ 13,482￦ 27,031

US$ 347,647

US$ 32,943

US$ 50,000￦ 119,783

Financial institutions

KEB

KDB

Woori Bank and others

KEB

KDB

Woori Bank and others

KEB and others

KSH INTL S.A. and others

Bank of China

Hana Bank

Korean won in millions and US$ in thousands

US$ 430,590


118

21. related party disclOsures (cOnt’d)In addition to the above guarantees provided on the behalf of related companies, the Company has provided guarantees to KDB and other financial institutions to the extent of ￦17,255 million on behalf of Hanjin Heavy Industries & Construction Holdings Co., Ltd. The Company made a commitment to 10 institutional creditors (the Creditors) of Hanjin Energy Co., Ltd. (HJE) including Hana Bank, to secure the repayment for the principals and interests of HJE’s borrowings from the Creditors by means of participation in paid-in capital increases of HJE, lending subordinated loans to HJE, or other means in case HJE has insufficient funds to repay its debt.

The Company made a commitment to GoodNest LLC to secure the repayment for the principals and interests of KAL Hotel Network Co., Ltd. (KHN)’s borrowings from GoodNest LLC by lending loans to KHN in case KHN has insufficient funds to repay its debt.

The outstanding repayment guarantees provided by affiliated companies to other third parties for the Company’s obligations as of December 31, 2009 are as follows:

In addition to the above guarantees received from affiliated companies, the Company has received a guarantee from Hanjin Heavy Industries & Construction Holdings Co., Ltd. related to guaranteed loans from KEB and other financial institutions to the extent of ￦107,417 million.

Payroll and severance and retirement benefits paid to major executives who have the authority and responsibility on the Company’s business decision making for the year ended December 31, 2009, amounted to ￦2,583 million and ￦742 million, respectively.

22. value added infOrmatiOnThe accounts and amounts which are required to be disclosed in connection with the calculation of the added value of the Company’s operations December 31, 2008 and 2009 are as follows:

Hanjin Transportation Co., Ltd.




Total

Guaranteed amounts

￦ 44,30427,20635,90744,30427,20635,90744,304 27,206 36,632 44,303

27,206 35,907

￦ 430,392

Financial institutionsKEBKDBWoori Bank and othersKEBKDBWoori Bank and othersKEBKDBWoori Bank and othersKEBKDBWoori Bank and others


Operatingexpenses

￦851,11989,043

774,136309,359150,979

19,049￦2,193,685

US$ 1,878,798

Total￦1,051,400

104,749785,986329,306199,590

33,690￦2,504,721

US$ 2,145,187

Total￦1,036,056

96,793758 ,231335,009186,767

33,920￦2,446,776

US$ 2,095,560

Selling andadministrative

expenses￦200,281

15,70611,85019,94748,61114,641

￦311,036US$ 266,389

Salaries and wagesSeverance and retirement benefitsDepreciationRentEmployee fringe benefitsTaxes and dues

USD in thousands (Note 2)

2008 2009


119

23. Operating result fOr the fOrth quarter (unaudited)The Company’s operating result (unaudited) for the three-month periods ended December 31, 2008 and 2009 are summarized as follows:

24. segment infOrmatiOnThe Company defines its business segments by the nature of services and products as follows:

The following tables present the segment information of business segments and geographical segments as of December 31, 2008 and 2009:

+business segments

2008￦2,711,797

2,295,75022,623

(644,003)

￦ (9,536)

2009￦ 2,578,255

2,101,494154,028

84,887

￦ 1,257


2009US$ 2,208,165

1,799,841131,918

72,702

US$ 1.08


Unaudited

Operating revenuesOperating expensesOperating incomeEarnings (loss)Income (loss) per share

(Korean won and US dollars in units)

Airline customersAerospace

In-flight mealsHotel and limousine

Products or servicesTransporting passengers and cargosMaintaining aircraft and manufacturing aircraft parts

Catering for in-flight mealsLand transport, accommodations and others

Major customersIndividual & corporate, GovernmentBoeing Commercial, defenseprocurement agency, and othersSingapore Airlines Ltd. and 27 other foreign airlinesIndividual customers

Operating revenues:External revenuesInter-segment revenuesDecember 31, 2009External revenuesInter-segment revenuesDecember 31, 2008

Operating income (loss):December 31, 2009December 31, 2008

Property, aircraft and equipment, andintangible assets:

December 31, 2009December 31, 2008

Depreciation and amortization:December 31, 2009December 31, 2008

Aerospace

￦ 251,66075,278326,938367,712

9,894377,606

10,20828,377

548,754532,603

17,861￦ 13,816

Airline

￦ 9,054,8187,5789,062,3969,747,1037,3199,754,422

37,400(136,365)

11,250,10310,784,331

775,579￦753,233

In-flightmeals

￦45,457109,372

154,82958,030

103,269161,299

87,89013,925

49,83654,515

6,035￦6,088

Hotel andlimousine

￦41,7686,725

48,49339,733

4,98744,720

(2,122)(5,234)

129,705129,621

3,082￦2,871

Total

￦9,393,703198,953

9,592,65610,212,578

125,46910,338,047

133,376(99,297)

11,978,39811,501,070

802,557￦776,008



120

24. segment infOrmatiOn (cOnt’d)

+geOgraphical segments

25. supplementary cash flOw infOrmatiOnSignificant non-cash investing and financing activities December 31, 2008 and 2009 are as follows:

Domestic

￦1,272,525

107,71145,45741,768

￦1,467,461￦1,489,915

Asia

￦2,795,92112,325

--

￦2,808,246￦3,037,608

America

￦2,974,36196,212

--

￦3,070,573￦3,222,616

Middle east/ Europe

￦2,974,36196,212

--

￦3,070,573￦3,222,616

Oceania

￦ 404,296---

￦404,296￦452,773

Total

￦ 9,054,819251,659

45,45741,768

￦9,393,703￦10,212,578

Operating revenues:AirlineAerospaceIn-flight mealsHotel and limousine

December 31, 2009December 31, 2008


Transfer of construction-in-progress to property, aircraft, equipment and intangible assets

Transfer of leased aircraft to receivable under capital leaseReclassification of current portion of bondsReclassification of current portion of Korean Won

denominated long-term loansReclassification of current portion of foreign currency

enominated long-term loansReclassification of current portion of obligations under

installment purchasesReclassification of current portion of obligations

under capital leasesReclassification of guaranteed loansReclassification of current portion of ABS loans

2008

￦484,40922,184

420,000

87,467

682,133

149,493

648,38310,662

￦150,211

2009

￦737,280-

1,040,000

321,524

346,329

147,467

772,39210,662

￦48,537


2009

US$ 631,449-

890,716

275,372

296,616

126,299

661,5219,132

US$ 41,570


121

INTERNAl cONTROl OvER fINANcIAl REPORTINg REvIEw REPORT

Representative Director Korean Air Lines Co., Ltd.

We have reviewed the accompanying management’s report on the operations of the internal control over financial reporting (ICFR) of Korean Air Lines Co., Ltd. (the Company) as of December 31, 2009. The Company’s management is responsible for the design and operation of its ICFR, including the reporting of its operation. Our responsibility is to review management’s ICFR report and issue a report based on our review. Management’s report on the operations of the ICFR of the Company states that “Based on the assessment of the operations of the ICFR as of December 31, 2009, the Company’s ICFR has been effectively designed and has operated as of December 31, 2009, in all material respects, in accordance with the ICFR standard.”

We conducted our review in accordance with the ICFR review standards established by the Korean Institute of Certified Public Accountants. These standards require that we plan and perform our review to obtain less assurance than an audit as to management’s report on the operations of the ICFR. A review includes the procedures of obtaining an understanding of the ICFR, inquiring as to management’s report on the operations of the ICFR and performing a review of related documentation within limited scope, if necessary.

A company’s ICFR consists of an establishment of related policies and organization to ensure that it is designed to provide reasonable assurance on the reliability of financial reporting and the preparation of financial statements for external financial reporting purposes in accordance with accounting principles generally accepted in the Republic of Korea. However, because of its inherent limitations, the ICFR may not prevent or detect material misstatements of the financial statements. Also, projections of any assessment of the ICFR on future periods are subject to the risk that ICFR may become inadequate due to the changes in conditions, or that the degree of compliance with the policies or procedures may be significantly reduced.

Based on our review of management’s report on the operations of the ICFR, nothing has come to our attention that causes us to believe that management’s report referred to above is not presented fairly, in all material respects, in accordance with the ICFR standards.

We conducted our review of the ICFR in existence as of December 31, 2009, and we did not review the ICFR subsequent to December 31, 2009. This report has been prepared for Korean regulatory purposes pursuant to the Act on External Audit for Stock Companies, and may not be appropriate for other purposes or for other users.

March 5, 2010

This audit report is effective as of March 5, 2010, the independent auditors’ report date. Accordingly, certain material subsequent events or circumstances may have occurred during the period from the auditors’ report date to the time this audit report is used. Such events and circumstances could significantly affect the accompanying financial statements and may result in modifications to this report.


122Financial SectionKOREAN AIR

ANNUAL REPORT 2009

REPORT ON THE OPERATIONS OF THE INTERNAL ACCOUNTING CONTROL SYSTEM

123

ORGANIZATION CHART

Passenger Business Planning & Administration Flight Operations Planning

Maintenance Planning

Passenger Network Management

Flight OperationsTechnical Support

Engineering

Passenger Revenue Management Line Operations

Material Supply

Flight Standards

Maintenance QualityAssurance

Flight OperationsQuality Assurance

Maintenance TrainingCenter

Planning & Administration

Marketing & Contract

Quality Management

R&D Center

Cargo Business Planning &Administration

Cargo Network & RevenueManagement

Cargo Strategy &Development

Cargo Logistics & Service

Defense & AircraftModification Plant

Commercial AircraftManufacturing Plant

Commercial Aircraft Heavy Maintenance Operations

Avionics & Component Maintenance Operation

MUAVDevelopment Center

Passenger Business IT

Airport Customer Service

Passenger Marketing

Passenger Service Center, Korea

Flight Crew Training Center

Line & Base MaintenanceCenter

Powerplant Maintenance CenterCabin Crew Operations

PASSENGER BUSINESS DIV.

Cabin Crew OperationsPlanning

Cabin Crew Training Center

CATERING & IN-FLIGHT SALES BUSINESS DIV.

HOTEL BUSINESS DIV.

CABIN SERVICE DIV.

AEROSPACE BUSINESS DIV.

REGIONAL H/QINCHEON INT’L AIRPORT

MAINTENANCE &ENGINEERING DIV.

CARGO BUSINESS DIV. FLIGHT OPERATIONS DIV.

Internal Auditing

International Affairs

Legal Affairs

Facilities & Environment

Corporate Safety, Security & Compliance

Procurement

Information Technology

Corporate Communications

Employee Relations

Human ResourcesDevelopment Center

Human Resources

General Affairs

Finance Affairs

CORPORATE STRATEGY &PLANNING DIV.

HUMAN RESOURCES DIV.

CORPORATE FINANCE DIV.

Revenue Accounting

Finance

Accounting

Scheduling

Operations Control

OPERATIONS CONTROL DIV.

Customer Relations

PRESIDENT & COO

CHAIRMAN & CEO


124

EXECUTIVE OFFICERS


Chi,ChangHoonPresident & COO

COMPANY HEADQUARTERS

Chang,KyungHwanExecutive Vice President

Hwang,SooYoungManaging Vice President

Shin,HyunOhManaging Vice President

CORPORATE STRATEGY &PLANNING DIVISION

Kim,YunHwiVice President

Bang,SunOhManaging Vice President

CUSTOMER RELATIONS

Jeon,SangKiVice President

INTERNAL AUDITING

Kim,SeTaiManaging Vice President

LEGAL AFFAIRS

BlakePeterJohnSenior Vice President

Ban,SeungEumVice President

CORPORATE SAFETY, SECURITY & COMPLIANCE

Park,YongSoonSenior Vice President

Han,KiDooManaging Vice President

INTERNATIONAL AFFAIRS

Yoo,JongSeokManaging Vice President

PROCUREMENT

Lee,SangManManaging Vice President

Kim,ChulWooManaging Vice President

INFORMATION TECHNOLOGY

FACILITIES & ENVIRONMENT

Lee,SooKeunManaging Vice President

ERP PROJECT

Lee,SangManManaging Vice President

Kang,SungMinVice President

Kim,NamSunManaging Vice President

HOTEL BUSINESS DIVISION

Kim,RealVice President

HANJIN GROUP CORPORATE MANAGEMENT

Lee,HwaSeokManaging Vice President

Suh,KangYoonManaging Vice President

Shin,MuCholVice President

Lee,KiKwangVice President

CORPORATE COMMUNICATIONS

Lee,SangKyoonExecutive Vice President

Hur,YoungJinManaging Vice President

Kim,JoonSukManaging Vice President

CORPORATE FINANCE DIVISION

Kim,DaeWon Vice President

Kim,HyunSeokVice President

Kim,HeungSikSenior Vice President

Moon,KapSuckManaging Vice President

OPERATIONS CONTROL DIVISION

Suh,YongWonExecutive Vice President

Kim,YongSoonManaging Vice President

Lee,YouSungManaging Vice President

Lee,KwangSooManaging Vice President

Kim,TaiWonManaging Vice President

Jung,JiYoungManaging Vice President

HUMAN RESOURCES DIVISION

Cho,WonTaeSenior Vice President

LeeJinKulManaging Vice President

Park,HakJinManaging Vice President

Lee,JongSukVice President

PASSENGER BUSINESS DIVISION

Cho,HyunAhSenior Vice President

Cho,ByungTaekManaging Vice President

Chung,JinHongManaging Vice President

CATERING & IN-FLIGHT SALESBUSINESS DIVISION

Yang,JuneYongVice President

Jung,YoonDongVice President

Rhee,SongJongVice President

Kwon,ByungChanVice President

Park,InChaiVice President

Kim,SukWanVice President

Choi,EunJooVice President

Han,DaiHangManaging Vice President

Lee,WooPyungManaging Vice President

Choung,DoKunManaging Vice President

CARGO BUSINESS DIVISION

125

REGIONAL HEADQUARTERS

Lee,NaeKyuManaging Vice President

JAPAN

Woo,KeeHongManaging Vice President

Kim,JongCheolVice President

Park,ByungRyoolVice President

Ma,WonVice President

AMERICAS

Kim,JongHaVice President

Kim,InHwaVice President

Kim,JongNamManaging Vice President

Jung,WooJinManaging Vice President

Kim,KieSickManaging Vice President

Nam,SukWoo Vice President

Kim,WonKyu Vice President

Kwon,HyukMinManaging Vice President

Yeo,WoonJinVice President

CABIN SERVICE DIVISION

Lee,SeungBumManaging Vice President

CHINA

Lee,SoonYoungManaging Vice President

SOUTHEAST ASIA

Kim,JaeHoManaging Vice President

EUROPE & MIDDLE EAST

Kang,KyooWonManaging Vice President

UZBEKISTAN

Hwang,MyungSunManaging Vice President

Kang,KyungBooManaging Vice President

Park,WoonHoVice President

Lee,HyungHoManaging Vice President

Kim,JongDaeManaging Vice President

Lee,HyungKeunVice President

Park,HyungSoonVice President

Kim,EuiHoVice President

Kim,YongChulVice President

KOREA

Lee,YoungDuckSenior Vice President

Kim,KyuHwanManaging Vice President

Ahn,SangHoonManaging Vice President

Lee,SangChelManaging Vice President

FLIGHT OPERATIONS DIVISION

Kang,YoungSikExecutive Vice President

Kim,MaengGonManaging Vice President

Jang,WanSooManaging Vice President

Cho,KyooBinManaging Vice President

Kwon,YoungHwanManaging Vice President

Kim,SungGabVice President

Lee,HakJaeVice President

MAINTENANCE & ENGINEERING DIVISION

Cho,HangJinExecutive Vice President

Kim,SeHanSenior Vice President

Choi,JuneChulManaging Vice President

Yoon,ShinManaging Vice President

Lee,ChangHyoManaging Vice President

Jang,KwangSooManaging Vice President

Do,HyunJunManaging Vice President

Ham,MyungRaeManaging Vice President

Choi,TaiJungVice President

AEROSPACE BUSINESS DIVISION


126

ROUTE NETWORKPASSENGER & CARGO

PASSENGER

CARGO


128

DOMESTIC / CHINA / JAPAN NETWORK

PASSENGER & CARGO

PASSENGER

CARGO

DOMESTIC / CHINA / JAPAN NETWORK

DIRECTORY OF REGIONAL / DISTRICT OFFICES

COMPANY INFORMATION

KOREAReservation Center_ 1588-2001Seoul Passenger Sales_ 1588-2001Busan Passenger Sales_ (051) 461-7113Cheongwon Sales_ (055) 296-2006Gangwon Sales_ (033) 253-5561Suwon Sales_ (031) 239-3539Incheon Sales_ (032) 882-5627Gwangju Sales_ (062) 384-9660Daegu Sales_ (053) 606-2055Daejeon Sales_ (042) 862-2001Jeju Sales_ (064) 750-8333Seoul Cargo Sales_ (02) 751-7200Busan Cargo Sales_ (051) 461-7113Gwangju Passenger Service_ (062) 942-0111Gunsan Passenger Service_ (063) 471-5001Gimpo Passenger Service_ (02) 2656-5005Daegu Passenger Service_ (053) 984-0111Busan Passenger Service_ (051) 970-3312Yeosu Passenger Service_ (061) 683-7502Wonju Passenger Service_ (033) 344-2000Ulsan Passenger Service_ (052) 288-0111Incheon Passenger Service_ (032) 742-5152Jeju Passenger Service_ (064) 713-9104Jinju Passenger Service_ (055) 852-3374Chongju Passenger Service_ (043) 213-2107Pohang Passenger Service_ (054) 284-0111Incheon Cargo Service_ (032) 742-5790

JAPANReservation Center_ 0088-21-2001Tokyo Passenger Sales_ (813) 5443-3311Tokyo Airport_ (81476) 32-7561Tokyo Cargo Sales_ (813) 5443-3388Kagoshima Airport_ (8199) 558-3768Komatsu Sales_ (8176) 261-3311Nagasaki Airport_ (8195) 824-3188Nagoya Airport_ (8156) 938-0750Nagoya Sales_ (8152) 586-3311Nagata Airport_ (8125) 271-5541Nagata Sales_ (8166) 264-3311Sapporo Sales_ (8111) 210-3311Shizuoka Sales_ (8154) 829-2650Aomori Airport_ (8117) 729-0511Akita Airport_ (8118) 886-8188Osaka Airport_ (8172) 456-5111Osaka Passenger Sales_ (8166) 264-3311Osaka Cargo Sales_ (8166) 263-8896Oita Airport_ (8197) 537-3316Okayama Sales_ (8186) 294-4951Haneda Airport_ (8135) 756-4808Hakodate Airport_ (8113) 859-3323Fukuoka Airport_ (8192) 477-7561Fukuoka Sales_ (8166) 264-3311

AMERICARReservation Center_ (1) 800-438-5000Los Angeles Passenger Sales_ (1213) 484-5700Los Angeles Airport_ (1310) 646-3033Los Angeles Cargo Sales_ (1310) 410-2000New York Airport_ (1718) 751-2000New York Passenger Sales_ (1213) 484-1900New York Cargo Sales_ (1718) 632-5555Dallas Airport_ (1972) 973-7051Dallas Sales_ (1972) 973-4134Las Vegas Airport_ (1702) 261-6071Vancouver Airport_ (1604) 276-9535Vancouver Sales_ (1604) 248-1146Sao Paulo Airport_ (15511) 2445-4805Sao Paulo Sales_ (15511) 3525-6700San Francisco Airport_ (1650) 821-0600San Francisco Sales_ (1650) 821-0603Seattle Airport_ (1206) 241-1576Seattle Sales_ (1206) 241-1576Chicago Airport_ (1773) 686-2730Chicago Sales_ (1773) 686 2730Atlanta Airport_ (1404) 761-7691Atlanta Sales_ (1404) 761-7691Anchorage Sales_ (1907) 243-3329Washington Airport_ (1703) 572-2420Washington Sales_ (1703) 572-2430Toronto Airport_ (1905) 676-8440Toronto Sales_ (1905) 676-8440Honolulu Aiport_ (1808) 836-1711Honolulu Sales_ (1808) 926-8000Miami Sales_ (1305) 357-5395

EUROPEParis Sales_ (331) 4297 - 3080Paris Airport_ (331) 4862 - 6161Dubai Sales_ (9714) 3377 - 003London Airport_ (020) 8897 - 0030London Sales_ (4420) 7495 - 8641Rome Sales_ (3906) 6595 - 5952Madrid Sales_ (3491) 542 - 5700Milano Sales_ (3902) 7209 - 5654Brussels Sales_ (353) 1799 - 7990Vienna Sales_ (431) 7007 - 32515Stockholm Sales_ (468) 593 - 78861Amsterdam Sales_ (3120) 655 - 6333Oslo Sales_ (47) 6482 - 1932Istanbul Sales_ (90212) 465 - 2650Zurich Sales_ (4143) 443 - 6061Cairo Sales_ (202) 2576 - 8255Copenhagen Sales_ (45) 3251 - 2095Praha Sales_ (420) 22011 - 6827Frankfurt Airport_ (4969) 697 - 64610Frankfurt Sales_ (49180) 500 - 9800Tel Aviv Sales _ (9987) 9770 - 3811

Date of Establishment _June 19, 1962 | Privatized on March 1, 1969

Head Office _1370 Gonghang-dong, Gangseo-gu, Seoul, Korea

Website _ www.koreanair.com

Listing _ The stock was listed on Korean Stock Exchange in March 1966

Paid-in Capital _ KRW 360 billion

Common Stock _ 71,971,631 shares

Preferred Stock _ 1,379,177 shares

General Shareholders’ Meeting _ March 19, 2010

For More Information _e-mail : [email protected]

1370, Gonghang-dong, Gangseo-gu, Seoul, Korea · 1370, Gonghang-dong, Gangseo-gu, Seoul, Korea...

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