Excellence in Flight - Home - Korean Air · PDF file · 2018-03-07KOREAN AIR ANNUAL REPORT 2010 Excellence in Flight 2010 AnnuAl RepoRt + Nagoya + Osaka ... 114 Company Information

KOREAN AIR ANNUAL REPORT 2010

Excellence in Flight2010 AnnuAl RepoRt

+ Nagoya

+ Osaka

+ Incheon

+ Phuket

+ Vienna

+ Weihai

+ Phnom Penh

+ London

+ Toronto

+ San Francisco

+ Prague

+ Zurich

+ Paris

+ Las Vegas

+ Guam

+ Moscow

+ Honolulu

+ New York+ Milano

+ Jinan

+ Madrid

+ Hanoi

+ Cairo

+ Shizuoka

+ Seoul

+ Ho Chi Minh

+ Dalian

+ Shanghai

+ Vladivostok

+ Frankfurt+ Tokyo

+ Beijing

+ Sapporo

+ Atlanta

+ Chicago

+ Dallas

+ Dubai

+ Singapore

+ Hong Kong

+ Manila

+ Auckland

+ Wuhan

20

02 Financial Highlights03 Share Performance04 Message from the Chairman08 Board of Directors09 Corporate Governance10 2010 Highlights

Business Review 14 Business at a Glance16 Passenger Business20 Cargo Business23 Aerospace Business26 Catering & In-Flight Sales Business27 Hotel & Limousine Business

OpeRatiOn Review 30 ERP System31 Maintenance & Engineering32 Safety34 Fuel Management35 SkyTeam Alliance

sustainaBility Review 38 Environmental Responsibility40 Social Contributions42 Human Resources

financial Review45 Management’s Discussion & Analysis56 Independent Auditors’ Report57 Financial Statements & Notes

109 Organization Chart110 Executive Officers112 Route Network114 Domestic / China / Japan Network114 Company Information115 Directory of Regional & District Offices

16 31

tABle oF ContentS

> Passenger Business > Maintenance & Engineering

Cargo Business >>


EnvironmentalResponsibility >>

Safety >

40

3832

> Social Contributions

Since its start in 1969, Korean Air has been the pioneering force behind Korea’s airline industry and has grown to become a major global airline.

The year 2010 was one marked with much success and record-breaking revenues. We carried more than 22 million passengers and over 1.8 million tons of freight to and from destinations around the world, and we are using our accomplishments as a foundation for sustainable growth.

Our goal is to grow with quality. We will continue to develop new routes where we see potential, improve our customer experience and further expand our air cargo network. Our corporate mission of “Excellence in Flight” is supported by our attention to customers’ needs in all areas of our business.

This year has been a remarkable one for Korean Air. We reached new levels in sales and revenues while receiving praise from customers and media alike. Our gains were reflected not only in our balance sheet, but also in our global reputation as an industry leader. These achievements are largely due to a renewed focus on profitability, sustainability, customer service and social responsibility, and we will work attentively to continue our success.

Excellence in Flight

2010 2010 2009 2008 2007 2006

OpeRatinG Results

Operating revenues 10,062.8 11,460.5 9,393.7 10,212.6 8,812.0 8,077.9

Gross profit 2,136.6 2,433.4 1,413.7 1,391.2 2,022.7 1,773.4

Selling, general & administrative expenses 1,162.3 1,323.8 1,280.3 1,490.5 1,385.8 1,276.0

Operating income 974.3 1,109.6 133.4 (99.3) 636.8 497.4

Income before tax 539.0 613.8 (125.4) (2,450.8) 94.4 487.9

Net income 405.4 461.7 (98.9) (1,942.4) 12.9 383.0

financial cOnDitiOn

Total assets 15,641.7 17,814.3 16,919.3 15,867.6 15,143.7 13,584.7

Total liabilities 12,569.4 14,315.3 13,862.2 13,044.2 10,743.7 9,209.3

Total shareholders’ equity 3,072.3 3,499.0 3,057.1 2,823.4 4,400.0 4,375.4

financial RatiOs (%)

Return on average equity 13.2% 13.2% Net loss Net loss 0.3% 8.8%

Return on average assets 2.6% 2.6% Net loss Net loss 0.1% 2.8%

Debt-to-equity ratio 409.1% 409.1% 453.5% 462.0% 244.2% 210.5%

EBITDAR margin 20.1% 20.1% 13.5% 9.9% 20.0% 20.0%

Fixed charge coverage ratio (times) 2.73 2.73 1.50 1.31 2.27 2.06

PBR 134.3% 134.3% 121.3% 90.9% 117.9% 54.2%

peR sHaRe Data

Earnings Per Share (In KRW) USD 6.00 6,837 -1,464 -28,762 180 5,725

FINANCIAL HIGHLIGHTSFinAnCiAl HigHligHtS [In billions of KRW]

2010 2009 2008 2007 2006 Change (%)

Revenue Passenger Carried 22,925,671 20,746,413 21,960,940 22,834,003 22,353,169 10.5 %

Available Seat-Kilometers (million ASK) 79,511 78,941 77,140 76,182 71,894 0.7 %

Revenue Passenger-Kilometers (million RPK) 60,528 55,127 55,054 55,354 52,178 9.8 %

Revenue Freight Tons Carried 1,631,004 1,573,761 1,667,647 1,758,997 1,629,703 3.6 %

Available Freight Ton-Kilometers (million AFTK) 12,666 11,289 12,180 12,992 11,662 12.2 %

Revenue Freight Ton-Kilometers (million FTK) 9,670 8,426 9,005 9,678 8,857 14.8 %

opeRAtionAl ReSultS

[In millions of USD]

opeRAting RevenueS(In billions of KRW)

net inCome(In billions of KRW)

totAl ASSetS(In billions of KRW)

opeRAting inCome(In billions of KRW)

06

8,07

7.9

06

497.

4

06

383.

0

06

13,5

84.7

07

8,81

2.0

07

636.

8

07

12.9

07

15,1

43.7

08

10,2

12.6

08

(99.

3)

08

(1,9

42.4

)

08

15,8

67.6

09

9,39

3.7

09

133.

4

09

(98.

9)

09

16,9

19.3

10

11,4

60.5

10

1,10

9.6

10

461.

7

10

17,8

14.3

2010 2009 2008

Face Value (KRW) 5,000 5,000 5,000

Number of Shares 71,971,631 71,971,631 71,971,631

Total Market Capitalization (In billion of KRW) 5,009 3,951 2,735

Share Price Highest (KRW) 84,100 56,000 80,000

Lowest (KRW) 54,000 29,650 25,550

Foreign Ownership (%) 12.4% 24.2% 7.8%

KoReAn AiR’S StoCK FACtS

Number of Shares Ownership (%)

Cho, Yang Ho & Family 7,738,988 10.8%

Hanjin Co. 7,127,096 9.9%

Inha University Foundation 1,961,764 2.7%

Jungseok Foundation 1,409,485 2.0%

Korea Research Foundation for 21C 237,552 0.3%

Treasury Stock 4,449,196 6.2%

sub total 22,924,081 31.9%

National Pension Fund 5,825,003 8.1%

Korea Investment Management 1,328,781 1.8%

Others 41,893,766 58.2%

total 71,971,631 100.0%

SHARE PERFORMANCE

mAjoR SHAReHoldeRS (AS oF deC 2010)

02 + 03 KOREAN AIR ANNUAL REPORT 2010

2010 KoReAn AiR SHARe peRFoRmAnCe vS KoSpi

KoSpi StoCK pRiCe [KRW]

KoSpi

StoCK pRiCe

2,500

2,000

1,500

1,000

500

0

90,000

80,000

70,000

60,000

50,000

40,000

2010.01 2010.02 2010.03 2010.04 2010.05 2010.06 2010.07 2010.08 2010.09 2010.10 2010.11 2010.12

2010 KoReAn AiR FoReign owneRSHip

30%

25%

20%

15%

10%

5%

0%

2010.01 2010.02 2010.03 2010.04 2010.05 2010.06 2010.07 2010.08 2010.09 2010.10 2010.11 2010.12

message from the Chairman Board of Directors Corporate Governance 2010 Highlights

pRoFile

MESSAGE FROM THE CHAIRMAN

The year 2010 was such a fruitful year reaping more outstanding achievements than in any other year thanks to your support.


dear Shareholders,

The year 2010 was Korean Air’s best ever and we thank you, our shareholders, for your confidence and support. Our strong base built over the past 40+ years, our current talents and technologies, and your steadfast encouragement, are helping us reach and exceed our goals.

To give you some financial highlights: revenues were up 22% with operating income toppling records. These numbers are significant because they reflect revenue growth across all sectors of our business not only in our aviation and transportation business but also aerospace, catering and in-flight sales, and our hotel/limousine enterprises.

Korean Air’s passenger operation, our core business, generated a 16% revenue increase while cargo revenues jumped 40%. In addition to increased income, we fortified our foundation with new flights from Cheongju to Osaka, Hong Kong and Bangkok; introduced a new passenger route between Incheon and Haneda, Japan; and resumed service to St. Petersburg, Russia.

Our cargo operation received support when we opened a new air cargo terminal at Navoi International Airport in Uzbekistan, reinforcing our commitment to create a new cargo hub in central Asia.

These successes enhanced our presence in the global aviation industry. According to the International Air Transport Association (IATA), Korean Air’s international passenger ranking jumped to 13th from 17th, with our cargo business ranking number one for the sixth straight year.

But Korean Air’s focus is not entirely on income and yields. We recognize that, as we celebrate our success, we must also give back to the communities we serve. For example, last year we planted trees in Mongolia, made donation to the Million Trees Los Angeles, and shipped water and emergency supplies to areas in need. Many of our 19,000+ employees are volunteering time outside of work to make this planet a better place to live, work and play. If the reputation of a company is defined by its people, then Korean Air is truly exceptional.

Our success has been noted by media around the world. For the fifth straight year, readers of Business Traveler magazine voted Korean Air best business class to Asia.

04 + 05

pRoFile

They also ranked Korean Air as the best airline in Asia for the fourth straight year and our ad campaign the best for the third year in a row. Our inflight duty-free sales are the “world’s most successful” according to industry media, and our catering operation was tagged best in Asia by the critics of the international travel catering industry. It’s gratifying to know that each year, more and more people around the world are paying attention to our good work.

And there is more to come. Let me brief you on our major business plans for 2011.

The demand for air travel this year is expected to show an upturn, and Korean Air is prepared to meet the needs of this vibrant market. Of note, we will be introducing five jumbo A380s into our fleet, and are one of the first airlines in the world to do so. Our A380s will have the most spacious configuration in the industry, with only 407 seats, and will bring back the joy of flying.

We’ll be introducing a total of 18 new aircraft into our fleet this coming year, including three B777-300ERs and two B747-8F freighters as part of our modernization plan, and to help us evolve into a more fuel efficient and environmentally-compatible airline. These new aircraft not only show our aggressive responses to climatic and social issues, they also support our competitive edge in both passenger and cargo operations.

We are strengthening our overseas marketing staff because we see great growth opportunities in foreign markets. Korean Air is now the largest Asian airline serving the U.S., flying from more cities in the Americas to more cities in Asia, than any other airline in the world. We plan to maintain that lead with effective sales programs, better routing and quicker connections, and unsurpassed customer service. Meanwhile, additional market development is being studied in Africa, South America, India and, of course, China.

Our goal is to be a respected leader in the global airline industry and we will do this by providing products and services people come back to, and by being a company that provides a return on investment not only to our esteemed shareholders, but also to the communities we serve. We will again participate in reforestation projects in Asia and America. We also will continue to encourage employee volunteerism, and conduct activities that support a strong sense of corporate responsibility such as disaster relief, help for the less fortunate, and community renewal and revitalization projects.

message from the Chairman Board of Directors Corporate Governance 2010 Highlights


Our passion to achieve, willingness to support each other, and energy to work hard – combined with the continued support of you, our loyal shareholders – are guiding us to become the leading global company of our aspirations.

Thank you.

Best regards,

To be a respected leader in the world airline industry with products and services that customers trust and return to. We will accomplish this through Excellence in Flight:

March 2011

Cho, Yang HoChairman & CEO

06 + 07

OperatiOnal excellence

A solid infrastructure lays

a strong foundation for sustainable growth

Service excellence

An engaged workforce

encourages impressive service

innOvative excellence

Inventive thinking sharpens

our competitive edge

pRoFile

BOARD OF DIRECTORS

the Korean Air Board of directors is comprised of nine members including experienced leaders in the aviation industry, and five outside directors who have expertise in their respective areas.

Cho, Yang HoChairman & CEO

Chi, Chang HoonPresident & COO

Lee, Tae HeeGeneral Counsel

1

2

3

Suh, Yong WonExecutive Vice PresidentKorean Air Human Resources Division

Park, Oh SooDirectorProfessor Seoul National University

Lee, Sog WooDirectorLawyer Doore Law Firm

4

5

6

Lee, Hee BeomDirectorChairman of STX Energy & Heavy Industries

Lee, Yun WooDirector

Hyun Jung TaikDirectorProfessor Inha University

7

8

9

Message from the Chairman Board of directors Corporate governance 2010 Highlights

4 5 6

1 2 3

7 8 9

KOREAN AIR ANNUAL REPORT 201008 + 09

CORPORATE GOVERNANCE

Korean Air emphasizes ethical and appropriate behavior in all of our employees’ and management activities, knowing that corporate integrity will enhance our company image and strengthen our competitiveness.

Korean Air is fully committed to advancing shareholder value through corporate transparency.

To make sure that corporate transparency is effectively carried out, Korean Air maintains regulatory systems and operational processes, including committees to monitor our corporate behavior.

Since announcing the company’s fair trade policies in 2004, Korean Air has maintained a self-observed educational program to allow fair trade practices to take root and expand, while identifying and discouraging unfair trade practices. Korean Air has strengthened training for senior management through new programs that provide positive reinforcement for ethical choices.

Almost a decade ago, the company introduced standards for good judgment and behavior through a corporate code of ethics, and we continue to teach employees the importance of corporate integrity through recurring training. Since 2005, through mandatory courses at new employee orientation, Korean Air has helped employees make corporate ethics a habit.

In addition, Korean Air operates an internal reporting system to help eliminate solicitations within the organization, unfair or unethical conduct, and irregularities that may occur in transactions with outside parties. Any of the above activities that are reported are fully investigated. We also have established an Internal Accounting Control Team, through which we can regularly monitor the efficiency of our internal accounting management and the operating status of internal controls.

Korean Air is committed to transparent and principled management, and we will continue to act openly and responsibly to earn the trust of our shareholders, customers and public.

pRoFile

2010 HIGHLIGHTS

01 January

06June

09 September

02 February

05 May

06June

cHaiRman yanG HO cHO appOinteD peace anD spORt amBassaDORHanjin Group and Korean Air Chairman, Yang Ho Cho, was appointed an Official Ambassador for the Peace and Sport Foundation, an organization spearheaded by Prince Albert II of Monaco, which promotes peace through sports activities worldwide. Actively involved in sports, Yang Ho Cho is the 10th Ambassador of Peace and Sport, and the first to be appointed from Asia.

KORean aiR expanDs cODesHaRe witH GaRuDaIn February, Korean Air started sharing codes on Garuda-operated flights between Incheon and Jakarta three times a week. This is in addition to the existing codeshare agreement on Korean Air’s daily flights on the same route, increasing the codeshare frequency to 10 weekly flights. With these additional flights, Korean Air passengers are able to enjoy a wider range of options when planning their travel to the Southeast Asian country.

KORean aiR: suppORtinG tHe GlOBal campaiGn tO pROtect tHe enviROnmentIn June, Korean Air aired the World Environmental Day (WED) campaign video produced by the United Nations on all flights lasting more than two hours. The 30-second video clip featured a variety of public figures including United Nations honorary ambassador, Gisele Bündchen, who invited passengers to celebrate WED and join her in protecting the environment.

KORean aiR pResents a new GlOBal aDveRtisinG campaiGn On a “wHOle new scale”In September, Korean Air launched an innovative global advertising campaign to elevate the brand to new heights. The campaign, entitled “For Life On A Whole New Scale”, kicked off globally with a media blitz featuring new commercials in print and on TV, outdoor and digital channels.

KORean aiR awaRDeD Best fiRst class in asiaIn May, Korean Air added to its collection of awards the ranking of Best First Class Airline in Asia by the UK’s prestigious Business Destinations magazine. The airline also was commended with Best Airline Marketing Campaign. The awards were voted on by magazine readers and a panel of leading UK business leaders.

KORean aiR a330 OpeRatiOn sKills pROven tO Be Best pRacticeEvery 2 years, Airbus honors the best performing airlines that fly A330s and A340s after evaluating overall performances including on-time stats and aircraft utilization. Airbus named Korean Air the airline that best operates A330s overall. The airline is very proud to have its Operational Excellence praised by Airbus, one of the world’s leading aircraft manufacturers.

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Message from the Chairman Board of Directors Corporate Governance 2010 Highlights


03 March

06June

10 October

02 February

06June

12 December

KORean aiR BeGins cODesHaRe witH aiR macaOKorean Air and Air Macao began sharing codes on Air Macao-operated daily flights between Incheon and Macao in February. The new direct flight to Macao adds more flexibility to those planning travel to the area, especially when combined with Korean Air’s 21 weekly flights to Hong Kong. Hong Kong and Macao are linked within an hour by boat, so travelers can enjoy a wide range of scheduling options by using Korean Air to both destinations.

KORean aiR lOunGe at incHeOn RanKeD nO.1 By uK’s pRiORity passIn March, Korean Air’s lounge at Incheon International Airport Concourse A was named “Priority Pass Lounge of the Year 2010” in the Asia Pacific region by Priority Pass, a UK-based company that provides worldwide airline airport lounge access. Korean Air’s Incheon lounge was voted No.1 among 109 candidates in the Asia Pacific region in a survey of Priority Pass’ one million-plus members worldwide.

KORean aiR ceO Re-electeD tO iata BOaRD Of GOveRnORsIn June, Korean Air Chairman & CEO Yang Ho Cho was re-elected to the International Air Transport Association (IATA) Board of Governors for a three-year term. This is Mr. Cho’s sixth election to the Board since 1996. In total, this year will be Mr. Cho’s eleventh year of membership on the IATA Board of Governors. Working in the airline industry for more than 30 years, Mr. Cho was named Korean Air’s Chairman and CEO in April 1999.

KORean aiR Opens new eRa in aiR tRavel witH a380 aiRcRaftKorean Air unveiled the production line of its first four A380 aircraft at Airbus headquarters in Toulouse, France, in October. Korean Air has placed an order for ten A380s to provide a unique travel experience for passengers worldwide and to further strengthen its position as a leading global carrier. Its first A380 is scheduled to be delivered in May 2011.

KORean aiR wins tHRee Business tRaveleR awaRDsFor the fifth consecutive year, Korean Air was rated as having the best business class to Asia by readers of Business Traveler magazine, the global magazine brand for the road warrior. The magazine's readers also ranked Korean Air as the best airline in Asia for the fourth straight year. And for the third year in a row, the magazine's readers rated Korean Air's advertising campaign the best in the business.

KORean aiR - numBeR One GlOBal caRGO aiRline six yeaRs in a ROwIn June, IATA statistics showed that Korean Air improved its traffic records in 2009 despite challenges affecting the global airline industry. Korean Air topped the worldwide rankings for commercial airline cargo operations for the sixth consecutive year, and ranked 13th for commercial airline international passenger operations.

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10 + 11

Korean Air Travel Photo Contest GalleryMeritorious PrizeTae Jung KimGolden Gate Bridge In The Fog

BUSINESSREVIEW

>>> >

14 Business at a Glance16 Passenger Business20 Cargo Business23 Aerospace Business26 Catering & In-Flight Sales Business27 Hotel & Limousine Business

Boarding Pass

name

from

to

flight

Korean airSeoULSan FranciScoKe 023 y 17aUg11

Korean air

Ke 023 17aUg11

16:05

name

flight

DeP time

San FranciSco

to

boarDing 15:35 gate a01

180 8610708936c2 /002014/l/40j/sfon5

seat 43a

Be amazed and amused by discovering America's hidden charms beyond the coastal metro areas and cities like San Francisco, Dallas and Atlanta with Korean Air.

EMBRACE THE ENERGY OF THE BIG LAND, tHe united StAteS.

Korean Air Travel Photo Contest GalleryMeritorious PrizeTae Jung KimGolden Gate Bridge In The Fog

BUSINESSREVIEW

14 Business at a Glance16 Passenger Business20 Cargo Business23 Aerospace Business26 Catering & In-Flight Sales Business27 Hotel & Limousine Business

>>> >

Destinations in USPASSENGER & CARGO

CARGO

BUSINESS AT A GLANCE

By increasing profitable daily flight and operating high yield charter flight, our cargo business in 2010 generated record-breaking numbers with dramatic year-on-year increases.

Korean Air’s Aerospace Division, with its proven skills, technology and experience, now supplies heavy maintenance work for United Airlines’ 747-400s and others. It has become an expert in working with composite materials and has added drone aircraft development contracts to its list of projects.

Korean Air’s catering business produces and serves thousands of meals each day that satisfy a broad array of air travelers’ tastes. Korean Air creates menus based on customer preferences and prepares them at production centers in Seoul and Incheon. Meanwhile, the airline has been acclaimed as the world’s most successful inflight retailer by global inflight retailing authorities.

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 in Los Angeles]. Through the company’s hotel business, Korean Air not only provides customers with quality services, but also creates important synergies for the traveler with air, hotel and transfer operations at one place.

The airline’s passenger business division concentrated on profitable route management, intensified sales activities, and effective marketing campaigns resulting in the highest revenue and profit since Korean Air’s founding.

pASSengeR BuSineSS

CARgo BuSineSS

AeRoSpACe BuSineSS

CAteRing & in-FligHt SAleS BuSineSS

Hotel & limouSine BuSineSS

Business at a glance Passenger Business Cargo Business Aerospace Business Catering & In-Flight Sales Business Hotel & Limousine Business

BuSineSS Review


6,343.1

(In billions of KRW)

3,788.6

342.9

280.9

40.4

opeRAting RevenueS

opeRAting RevenueS

opeRAting RevenueS

opeRAting RevenueS

opeRAting RevenueS

14 + 15

2010

2010

2010

2010

2010

2009

2009

2009

2009

2009

2008

2008

2008

2008

2008

2,704.6

5,462.9

251.7

235.1

41.8

3,026.8

5,953.3

367.7

257.9

39.7

6,343.1

3,788.6

342.9

280.9

40.4

PASSENGER BUSINESS

Business Review in 2010In 2010, the world’s airline industry experienced a significant rebound in passenger demand driven by a rapid economic recovery. In particular, the Korean home market enjoyed exceptionally strong growth, a 33% jump in outbound travelers, based on a strong Korean Won and increased consumer confidence. Korean Air experienced a 10% increase in demand for our products overseas as well, with China, Southeast Asia and the North America region contributing to robust growth.

Our passenger business division concentrated on profitable route management, strong sales programs and effective marketing activities to accomplish the highest revenue and profit in our 40+ year history.

Revenue enHancementWe continued to develop new overseas markets as growth engines. In October 2010, Korean Air opened up a new Incheon-Haneda, (Tokyo) route, with a daily schedule to meet the demand of travelers departing from Japan early in the morning. In addition, we started flights to Osaka, Hong Kong and Bangkok from Cheongju, a regional airport near Seoul, to stimulate travel potential in this rural market near the Capital.

Korean Air also sought to create awareness and increase travel to new tourist markets with charter flight

Korean Air’s passenger business is setting a strong foundation to serve the dynamic Asia Pacific region as well as Europe and America. Through enhanced marketing and sales activities, the airline plans to extend exposure of its highly competitive product to travelers around the world.

passenGeR Revenue

6,343.1

Revenue passenGeR caRRieD

22.7


(million)

(%)Revenue cOmpOsitiOn By class types

First Class 2% Business Class 19% Economy Class 79%

Business at a Glance passenger Business Cargo Business Aerospace Business Catering & In-Flight Sales Business Hotel & Limousine Business

BuSineSS Review


operations to areas like the Maldive Islands in the Indian Ocean, and Zhangjiajie, a UNESCO World Heritage site in China.

High demand routes, such as New York, Los Angeles, Washington DC, Seattle, Ho Chi Minh City and Jakarta were equipped with flat sleeper beds in premium classes and enhancements throughout the aircraft.

In addition, Korean Air created and participated in co-marketing activities with the Incheon Airport Authority and the City of Metropolitan Seoul to attract more tourists to Korea and Seoul.

OpeRatiOnal excellence By ROuteKorean Air’s China routes experienced the highest growth system wide. Demand from Korea to China and back increased 37% and 21%, respectively. The strength of the Chinese Yuan and an overall improvement in the Chinese economy encouraged Chinese travelers to venture to new destinations. Chinese travelers, transiting through Incheon, increased 32%. More Chinese travelers than ever were flying to Japan, Southeast Asia and North America, helping to contribute to Korean Air’s strong performance.

Demand from Korea to Japan rose significantly by 56% due to the strength of the Korean Won and the preference of many Koreans to take short trips. Travel in the opposite direction, from Japan to Korea, increased 1%. Overall,

travel between the two countries increased by 17%.

For Southeast Asia destinations, travel from Korea increased by 19% due to the rapid recovery of Korea’s leisure fliers. Demand from Southeast Asia to Korea increased by 20% while overall demand on this route grew by 19%.

Our Oceania routes also grew. The number of passengers from Korea increased by 17% due to increased Korean travelers to Australia and New Zealand. Tourist demand from the region fell by 1%, but overall demand for flights to this region improved by 8%.

The inclusion of Korea in the U.S Visa Waiver Program and Canada's Open Skies agreement have helped stimulate growth of our passenger operations on our North American routes. The number of travelers from Korea to North America grew by 26%, with a 19% growth rate in the opposite direction. Overall, demand between Korea and North America increased by 21%. In particular, the leisure markets of Las Vegas and Hawaii gained an additional 15% of travelers due largely to the Visa Waiver.

Our European operations also showed an increase in demand in travelers, supported by the strength of the Korean Won. Travel on our European routes from Korea grew by 17% with demand from Europe jumping 12%. The continuous effort to attract travelers for off-peak travel and weekday flights helped grow this region’s overall demand 14%.

Our passenger business division concentrated on profitable route management, strong sales programs and effective marketing activities to accomplish the highest revenue and profit in our 40+ year history.

16 + 17

COST SAVING ACTIVITIESKorean Air's Passenger Business Division continued to improve productivity throughout the organization and reduce unnecessary costs.

We regularly adjusted capacity based on demand forecasting, and continuously audit the operation’s profitability. We lowered costs through increasing aircraft utilization by improving flight connectivity, and arranging more charter flights using standby aircraft at night. We also are increasing sales through the Internet, thereby lowering facility charges and reducing expenses at reservations centers.

IT-BASED SERVICEAt Korean Air, we develop high technology-based programs aimed at providing a better and more convenient experience for our customers, while maximizing our internal work efficiencies.

In July 2010, the airline's Internet check-in was expanded worldwide wide – for all domestic and international flights. We also improved customer service on the Internet and mobile devices. By year’s end, we launched smart phone apps that offer information on flights and departure/arrival schedules, arrange reservations and provide mobile check-in.

BUSINESS REVIEW

INTERNATIONAL PASSENGERMARKET SHARE

(Korea in/out bound No. of Passengers)

2010

2009 40%

2008 37%

2007 37%

2006 38%

39%

Business at a Glance Passenger Business Cargo Business Aerospace Business Catering & In-Flight Sales Business Hotel & Limousine Business


We also expanded our customer KIOSK systems for international flight check-in at overseas airports, facilitating speedy ticketing and check-in at our international locations.

custOmeR seRvicesKorean Air continued to introduce new aircraft equipped with full flat sleeper seats in premium classes and state of the art inflight entertainment to provide our customers with a quality travel experience they will want to repeat.

We also improved our SKYPASS frequent flyer program to widen its benefit for members. For example, miles are now valid for 10 years (increased from five) and award tickets are now valid and can be changed up to a year.

Korean Air became the first Asian airline to launch a collaborative private jet product targeting premium travel between North America and Asia. Korean Air’s ‘Flexjet Connect’ provides a private jet travel network within North America to any of Korean Air’s 10 gateways to Seoul and beyond. This unique partnership is designed to further enhance Korean Air’s competitiveness as a leading global carrier in the premium travel market.

awaRDsKorean Air was selected as the best airline in Asia for the fourth successive year and best business class flights to Asia for the fifth consecutive year by Business Traveler magazine readers. The magazine also awarded the airline for the 'Best Airline Advertising Campaign' for two years in a row.

In addition, readers of Global Traveler chose Korean Air as having the best business class seat design and best airport staff/gate agent for the second consecutive year. The airline also was named Asia's leading airline for First Class at the World Travel Awards.

Korean Air has invested in China and media has taken note. We operate a China express check-in desk at Incheon International Airport, deploy more Chinese flight attendants on our China routes, and make social contributions such as tree plantings and book donations to needy schools. As the result of this focus, Korean Air received back-to-back awards from Chinese travel magazines. Korean Air was named 'Best Overseas Airline' for the second straight year by the Global Times and chosen the 'Most

Favorable Overseas Airline' for two consecutive years by Travel+Leisure magazine.

GOinG fORwaRDThe Passenger Business Division will solidify its position as a leading global carrier with a focus on sustainable growth and greater profitability. To achieve this, we will enhance our global network, complete our aircraft enhancement program and strengthen our marketing capabilities overseas.

To attain sustainable growth, we will reinforce our competence in responding to the risks occurring from the home market such as currency rate fluctuation and North Korea political issues while expanding our overseas capabilities.

We also will intensify our premium positioning by marketing and promoting our A380 superjumbo aircraft into primary business routes such as New York and Los Angeles, and operating our 65 upgraded long and medium-haul aircraft on profitable routes.

Finally, we will be strengthening our foothold as one of top airlines in the world with sales teams that know how to win business in a highly competitive market.

The Passenger Business Division will solidify its position as a leading global carrier with a focus on sustainable growth and greater profitability. To achieve this, we will enhance our global network, complete our aircraft enhancement program and strengthen our marketing capabilities overseas.

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CARGOBUSINESS


BUSINESS REVIEW IN 2010Since the upswing in air cargo that started in the latter half of 2009, we have been increasing scheduled flight frequencies and expanding our charter flight operations. As a result, our cargo business in 2010 generated a record-high performance with dramatic year-on-year increases in cargo revenue and yield: In 2010 we recorded revenues of KRW 3.79 trillion, up 40% from the previous year.

Performance by RouteMost of our routes, including key routes to the Americas/Europe, generated dramatic year-on-year growth. The revenues from all the routes shot up 43% and the transportation performance rose by 15%. Load factors increased 2% due to flexible supply management in response to market fluctuations. Most of our routes were productive throughout the year and there has been momentum built for continued growth.

These achievements were attributable to the synergies offered through better flight schedules and connectivity, flexible route operations that address changing markets, and improved customer service through investment in cargo terminals and cutting edge IT.

Korean Air’s cargo business will see sustainable growth and improved performance by creating new demand through more diverse routes, backed by industry expertise and quality service.

BUSINESS REVIEW

CARGO REVENUE

3,788.6

REVENUE CARGO CARRIED

1.8


(million ton)

INTERNATIONAL CARGO MARKET SHARE

(Korea in/out bound No. of tons)

2010

2009 40%

37%

2008 37%

2007 37%

2006 38%


maRKet DevelOpinG activitiesWe strive to pioneer new markets and activate demand to create sustainable growth.

Last year, we opened routes that better connect China to the Americas/Europe, leveraging the International Air Transport Agreement (or the "Five Freedoms Agreement") with China. Driven by our 40+ years of experience and expertise in the logistics industry, Korean Air developed customized products to suit customers with special cargo needs from medical products, to perishables, to precious cargo and oversized shipments.

We also completed construction of a new freight terminal at Navoi International Airport in Uzbekistan that can handle 100,000 tons per year, supporting our goal to create a new cargo hub for a network linking Europe, Southeast and Central Asia, and the Middle East.

We also currently are adding new routes using Cheongju International Airport as a new logistical hub to create a network in the mid-and-southern part of Korea.

actiOns taKen tO incRease pROfitaBilityWe achieved a dramatic growth of 28% in air cargo last year. In order to maximize our revenues, we increased the number of daily flights that are profitable and operated charter flights that attracted high-yield freight.

20 + 21

As a result, our cargo business in 2010 generated a record-high performance with dramatic year-on-year increases in cargo revenue and yield: In 2010 we recorded revenues of KRW 3.79 trillion, up 40% from the previous year.

Our growth momentum turned sluggish in the third quarter of 2010 when inventory traditionally falls in multinational companies. But we maximized our profitability through flexible supply management and, as a result, our transportation records grew 13% compared to the previous year, even with the conventional off seasons in the freight business.

GOinG fORwaRDAccording to the International Air Transport Association (IATA), the demand for international air cargo is expected to increase by 4.3% on a yearly basis for the next five years. But 2011 is expected to see a slowdown in the annual growth rate because of external threats such as uncertainties in the global economy, fiercer competition in supply growth, volatile oil prices and currency fluctuations.

In the first quarter of 2011, we expect to see demand for Korea’s major selling items like LCDs, mobile phones and memory chips take an upturn along with a higher trade volume driven by the Korea-U.S. and Korea-EU free trade agreements. These will, no doubt, boost our cargo business performance.

In 2011, our cargo business will aim at establishing a sustainable growth and improved performance by creating new demand through more diverse routes, backed by industry expertise and quality transportation services. To this end, we will conduct the following strategies.

First, stronger profitability and expansion of growth engines.

While we increase profitability by operating on routes from Asia where demand is estimated to grow substantially, we also are planning to develop more high-yield demand from the Americas/Europe. We are working to improve directional imbalances on our major routes, like the routes connecting the Americas/Europe and are taking measures to offset seasonal price drops by strengthening our price management systems.

Second, exploration of new and expansion of existing demand.

We plan to target Central Asia by using Navoi International Airport to explore new markets, with new routes in St. Petersburg, Russia; and others in Spain, China and Latin America. We also are focusing on route sales using the Five Freedoms Agreement to create higher volume in Asia. Moreover, we are customizing products for cargo categories such as medical products, perishables, oversized shipments and precious cargo.

In 2011, our cargo business will aim at establishing a sustainable growth and improved performance by creating new demand through more diverse routes, backed by industry expertise and quality transportation services.

BuSineSS Review


AEROSPACEBUSINESS


The Aerospace Division is expanding its business to design and develop military aircraft for the Korean Government. We also are increasing our capabilities in working with advanced composites for future international partnering programs.

aeROspace Revenue

342.9


Revenue (cOmmeRcial) (In billions of KRW)

Revenue (militaRy) (In billions of KRW)

2010

2010

2009 102

2009 150

205

138

2008 122

2008 245

2007 77

2007 158

2006 86

2006 126

intRODuctiOn The Korean aerospace industry started with Korean Air’s production of the 500MD helicopter at 1976. Since then, Korean Air’s Aerospace Division has built a well-respected reputation within the global aerospace industry.

We are part of the production team for the F-5 fighter (Jegong-ho); the UH-60 helicopter; and the development of Chang-Gong 91, the first indigenous commercial aircraft in Korean aerospace history. With our vast experience, the Aerospace Division has been expanding its capabilities to commercial aircraft manufacturing; Unmanned Aerial Vehicles (UAV); satellites; space launch vehicles; military and commercial aircraft MRO (Maintenance, Repair & Overhaul); and other endeavors that optimize our business structure.

The Aerospace Division also participated in the joint development of the KT-1 trainer, KF-16 fighter jets and the Korean utility helicopter, SURION. The Aerospace Division is a leader in UAV development with advanced knowledge gained through joint projects with the world’s major aircraft manufacturers.

The Division’s main plant, called the Tech Center, is located in Busan and features assembly/maintenance hangars, painting and electronic component overhaul facilities, and parts fabrication facilities. The Division also operates the R&D Center in Daeduck Science Town, working on state-of-the-art technology in aircraft, UAVs, satellites and launch vehicles.

The Tech Center has performed heavy maintenance on over 3,500 military aircraft and 2,000 commercial aircraft, and these capabilities have made it one of the best MRO centers in the Asia – Pacific region. With its vast experience, it now provides logistic support for the F-4 fighter; P-3C anti-submarine patrol aircraft; 500MD; UH-60; CH-47; Lynx; ALT-III helicopters for 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.

The Aerospace Division serves not only Korean Air’s fleet, but also other airlines including United Airlines, Grand Star, Southern Air and others. It provides heavy maintenance services for over 120 aircraft every year with a staff of over 1,000 experienced technicians. It also is performing in-flight entertainment system modifications and cabin upgrades for Boeing 747-400s and 777s, and passenger-to-freighter conversion of Boeing 747-400s.

Korean Air’s Aerospace Division performs quality maintenance work with over 15,000 components every year, using high technology and avionics skills for communication & navigation systems, power systems and display units. Every year, the Division manufactures and repairs over 11,000 parts for mechanical components like fuel systems, pneumatic valves, and hydraulic components. The Tech Center has certification from foreign authorities such as FAA, EASA and CAAC that allows us to expand our third-party business.

Business Review in 2010

mRo(maintenance, Repair & overhaul) BusinessThe Aerospace Division Successfully completed United Airlines' 747-400 heavy maintenance program and delivered the final upgrade for F-16 Fighter with the U.S. Air force. Meanwhile, the Division signed a new five-year contract with the U.S. Air Force for the KC-130J Planned Maintenance Interval (PMI) program.

government development BusinessThe Division succeeded in developing a close-range surveillance UAV named KUS-7 in 2007 and completed the first-flight of KUS-9, known as the tactical close-range UAV, in 2009. With that experience, the Aerospace Division added several UAV development program contracts such as one for a divisional surveillance UAV for the Korean government. The Division is gaining necessary technical knowledge in the areas of systems integration, embedded software development, and composite manufacturing of fuselages and wings, to be in a favorable position for follow-on the UAV program.

Commercial Structure BusinessKorean Air’s Aerospace Division has designed and manufactured wing and fuselage structures for the Boeing 737, 747, 777, Airbus A330 and A380 since the 1980s. The Aerospace Division has been working with Boeing and Airbus for several years to develop major composite structures for the Boeing 787 Dreamliner and A350 XWB,

Korean Air’s Aerospace Division performs quality maintenance work with over 15,000 components every year, using high technology and avionics skills for communication & navigation systems, power systems and display units.

BuSineSS Review Business at a Glance Passenger Business Cargo Business Aerospace Business Catering & In-Flight Sales Business Hotel & Limousine Business


and is now playing a leading role in the joint development and manufacturing of both aircraft. Korean Air is one of seven international partners working on the 787.

The Aerospace Division has invested time, developed new equipment and created facilities to manufacture advanced composite products for the 787 and A350. Participation in these programs, combined with teaming with major aerospace manufacturers around the world, is allowing Korean Air to realize a turning point in its history in becoming a more technology-oriented company, and a world leader in aircraft design, development and manufacturing.

The Aerospace Division has been recognized as a “best partner” of both Boeing and Airbus in new aircraft development, and is a partner in designing and producing the A350 XWB cargo door and the A320 wing sharklet for Airbus.

Satellite/Space launch vehicle Business The Aerospace Division is constantly expanding its stake in the space business sector, including the system integration portion of Korea’s Space Launch Vehicle (KSLV-I).

GOinG fORwaRDBased on the success of the Division’s 787 design, and on-time performance from manufacturing through delivery, the Aerospace Division has started developing additional composite structures for 787 derivatives, plus

the Airbus A350 extra-wide body and A320 series. In 2011, the Aerospace Division will actively expand its position in development of new aircraft such as the B787-9, A350 extra-wide body, and succeeding models of B737s and A320s and will align available resources and capacity to ramp up production capabilities.

The Aerospace Division is expanding its business to design and develop military aircraft for the Korean government such as the Korean Attack Helicopter (KAH) and Korean Fighter Program (KFX) and will continue to reinforce its knowledge of advanced composite structures for future international partnering programs with major aircraft manufacturers like Boeing and Airbus. We also will pursue operational excellence in our heavy maintenance, modifications, cabin upgrades and component overhaul programs.

The Aerospace Division plans also to expand its outer space business with continued research on liquid rocket engine system integration and additional focus on the Unmanned Aerial System (UAS) for defense and civilian use.

The Aerospace Division has plans targeting a revenue of ￦ 467 billion ($406 million) in 2011 and ￦1.2 trillion ($1.1 billion) in 2015. To achieve $1.1 billion in revenue, the Aerospace Division has been developing its new vision focusing on Excellence in Technology, Quality, and Competitiveness.

Be the world Best enterprise in Aerospace and defense industry

REVENUE OF $1.1 BILLION IN 2015

• Total Solution Provider• Specialty in Composite Technology• UAV & Satellite Launcher Technology• Sustainable Green Technology

• Customer Satisfaction with Zero Defects• World’s Best MRO Service• Global Level Management

- Quality (AS 9100)- Environment (ISO 14001)- MRO Certification (FAA, EASA)

• Optimized Business Operation System• Globalized, Specialized Employees• Best Business Partner• Global Supply Chain

• Change with Innovation• Creativity through Challenge• Professionalism

EXCELLENCE IN

TECHNOLOGY

EXCELLENCE IN

QUALITY

EXCELLENCE IN

COMPETITIVENESS

innOvativeexcellence

CATERING &IN-FLIGHT SALESBUSINESS

cateRinGKorean Air’s airline menus are based on customer preferences and are initially prepared at production centers in Seoul and Incheon, according to flight plans. In flight, cabin attendants prepare the meals in the airplane’s kitchens, and then serve them to passengers with Korean Air’s trademark attentiveness.

Korean Air’s catering center has raised the bar on food hygiene and quality by acquiring advanced certification from the Korean Food & Drug Administration and creating a Food Safety Research Center attached to Inha University.

The airline has developed a variety of new menus in line with fleet upgrades and is now offering travelers some of the best meal service in the sky. Because of this professionalism, we received praises from PAX International magazine readers for the sixth year in a row, acknowledging the excellence of our in-flight meals. PAX International is the recognized authority in the global travel catering industry.

Our goal is to please our customers with service they’ll remember and food they’ll never forget, and we take great pride in offering a choice of traditional Korean cuisine or more Western fare on our Korean Air flights.

in-fliGHt salesKorean Air’s inflight retailing operation is the most successful in the world according to industry watchers. The airline has become an elite shopping mall in the sky, with an unparalleled duty free shopping guide at each seat offering hundreds of items for beauty, health, children, gifts and pure enjoyment. We are constantly looking for trends and items that will appeal to our passengers and so far, we’re exceeding all expectations. Our goal is to continue to serve our customers well with products they appreciate.

Korean Air’s catering business aims to provide travelers with a memorable inflight experience, plus fulfill its responsibilities by offering tasty, nutritious and appealing meals. We accomplish this by promoting the excellence of traditional Korean cuisine and by creating new menus that are sensitive to regional and route-based preferences.

cateRinG & in-fliGHt sales Revenue

280.9


Business at a Glance Passenger Business Cargo Business Aerospace Business Catering & in-Flight Sales Business Hotel & limousine Business

BuSineSS Review


HOTEL & LIMOUSINE BUSINESSKorean Air not only maximizes customer service and shareholder satisfaction by providing quality passenger and cargo services, but it also creates important synergies through its hotel business.

HOtel & limOusine Revenue

40.4(In billions of KRW)

KORean aiR HOtels Korean Air operates three hotels in Korea [Jeju KAL Hotel, Seogwipo KAL Hotel and Hyatt Regency Incheon] and one in the United States [Wilshire Grand Hotel & Center in Los Angeles]. Through our hotel business, Korean Air creates some valuable synergies for our customers and company.

Despite stiff competition in the hotel business, the Hyatt Regency Incheon and KAL Hotels recorded an increase in revenue of 6.7% and 6.8%, respectively, as they promoted their specialized strengths.

jeju KAl HotelFor business or pleasure on Jeju Island, Jeju KAL Hotel is a great location and place to rest, entertain or conduct a successful business meeting, with 282 guest rooms including suites, in an 18-story modern structure.

Seogwipo KAl HotelCoupled with the breath-taking scenery and romantic views, Seogwipo KAL Hotel boasts a nine-story building that includes sea-side rooms with spectacular ocean panoramas.

Hyatt Regency incheon HotelIdeally located adjacent to Incheon International Airport, the Hyatt Regency Incheon is setting the pace as a premier venue for corporate meetings and conferences. Cleverly combining its contemporary designs and state-of –the-art technology with culinary expertise and classic standards of service excellence, it brings to its guests world-class luxury, innovative dining and engaging entertainment.

wilshire grand HotelThe Wilshire Grand is one of the closest major hotels to the Los Angeles Convention Center and STAPLES Center, and is surrounded by some of the city’s finest dining and entertainment facilities, covering all aspects of the multi-cultural life that makes L.A so unique. With 900 guest rooms and 50,000-square-foot meeting and ballroom level, the Wilshire Grand provides guests with convenience and comfort in the heart of downtown Los Angeles.

limOusine BusThe easiest way to get to downtown Seoul from Incheon International Airport is on the Korean Air-operated KAL Limousine bus system that provides service from the airport to most major hotels. Limousine buses run between Gimpo and Incheon airports and Gimpo/Jamsil as well. With 66 new vehicles, Korean Air provides the most comfortable and safest rides. Revenues from the service posted a 9.3% increase from 2009 to KRW 19.7 billion.

26 + 27

Despite stiff competition in the hotel business, the Hyatt Regency Incheon and KAL Hotels recorded an increase in revenue of 6.7% and 6.8%, respectively, as they promoted their specialized strengths.


OPERATIONREVIEW

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30 ERP System31 Maintenance & Engineering32 Safety34 Fuel Management35 SkyTeam Alliance

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Explore the wide diversity of culture and hidden attractions throughout Europe including Czech Republic, Turkey, and Austria with Korean Air's far reaching route network.

INDULGING MOMENTS IN euRope;EXPERIENCE IT WITH YOUR HEART.


OPERATIONREVIEW

30 ERP System31 Maintenance & Engineering32 Safety34 Fuel Management35 SkyTeam Alliance

Destinations in Europe

>>> >

PASSENGER & CARGO

CARGO

opeRAtion Review

ERP SYSTEM

Korean Air undertook ERP implementation in October 2007 with the target of building an integrated framework to support timely management decisions. ERP was sequentially launched in Financial Accounting, Procurement, Aerospace & Defense, Catering, Revenue Accounting, Managerial Accounting, and finally, in our MRO (Airplane Maintenance) operation.

m&e eRp - successful launcH On JanuaRy 1st, 2011In January 2011, Korean Air’s three-year long ERP project was completed with the successful launch of M&E ERP. Due to the ERP system benefits, accounting closing became possible from end to end, combining and standardizing the works of finance, material, facilities and maintenance into a single system. Planning for materials, equipment and human resources has improved significantly by a digital support system that shares maintenance documents anytime and anywhere. Meanwhile, engine removal forecasting was constructed based on statistical methods, thereby improving the accuracy of maintenance planning. As a result, maintenance data has become transparent and real time monitoring is possible, creating an environment for continuous maintenance management improvements.

2011 plan - eRp OutcOmes will Be acHieveDThe ERP Division is planning to stabilize Korean Air’s ERP system within six months and maximize its effects through efficient data utilization. Practical use of real time and historical data will allow us to reach our goals of prompt decision-making, innovation, high productivity and reduced operating costs.

Meanwhile, we have launched the Aviation Industry Strategic Council (AISC) in collaboration with Oracle’s Global Development Team to continue to enhance ERP.

Korean Air undertook ERP implementation in October 2007 with the target of building an integrated framework to support timely management decisions.

On January 1st, 2011 with the inclusion of our MRO operation, Korean Air wrote the final chapter to a three-year long journey of implementing Enterprise Resource Planning (ERP) that integrates internal and external management information across the entire organization.

eRp System maintenance & engineering Safety Fuel Management SkyTeam Alliance


MAINTENANCE & ENGINEERINGOur Maintenance & Engineering Division performs all areas of commercial aircraft maintenance including airframe, engine and component maintenance. With the highly reliable technical excellence, we continue to improve customer satisfaction with shorter turn-around times and high-quality maintenance services.

of fuselages because of its increased satisfaction with Korean Air’s heavy maintenance work on UA aircraft. Furthermore, Korean Air has been contracted by Thai Airways for heavy maintenance on aircraft engines since 2008. Korean Air continues to improve customer satisfaction with shorter turn-around times and high-quality maintenance services. In the past seven 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 cabin IFE (In-Flight Entertainment) systems with new seats in its Boeing B777 & Airbus A330 aircraft to provide a more enjoyable and comfortable inflight experience. The cabin upgrades for 13 Boeing B777-200s and B777-300s, and 10 Airbus A330-200s and A330-300s were completed by 2010. The remaining upgrades for nine Airbus A330-300s will be completed by 2011. (Newly delivered aircraft such as B777-300ERs and enhanced A330-200s include the enhanced cabin IFE systems and seats.) 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. And the new ERP system, launched in January 2011, will help increase Korean Air’s reliability and competitiveness.

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 June 2010, Korean Air was awarded the ‘A330 Operational Excellence Award’ (and the ‘A300-600 Operational Excellence Award’ in November 2009) 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 operational 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. (Gimhae maintenance base also is operated for commercial aircraft maintenance by Korean Air’s Aerospace Division.) Our employees have specialized knowledge and are highly skilled in maintenance techniques.

In 2004, Korean Air started its aircraft and engine MRO 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 arrange contracts with global customers. For example, United Airlines (UA) selected Korean Air to perform aircraft cabin upgrade modifications and painting

30 + 31

In June 2010, Korean Air was awarded the ‘A330 Operational Excellence Award’ (and the ‘A300-600 Operational Excellence Award’ in November 2009) from Airbus.

opeRAtion Review ERP System Maintenance & Engineering Safety Fuel Management SkyTeam Alliance

SAFETY

Korean Air’s safety, security, and quality standards consistently meet and in many cases exceed global standards. Korean Air continues to be ranked among the world’s leading airlines, and validation and recognition of this excellence continued in 2010. Safety and security have always been a top priority and core value at Korean Air and our corporation will continuously strive to improve its operational results and be recognized as one of the world’s safest and most secure airlines.

Korean Air celebrated some very important milestones in 2010: the success of its 18th Session Safety Performance Incentive Program (SPIP) that rewarded every employee for the company’s overall safety and security performance in 2010; the upgrade of Korean Air’s Flight Data Management Software; the receipt of a first prize award in the U.S. for innovative excellence in Safety Management System (SMS) IT Systems; the accomplishment of a fourth consecutive zero-finding IATA Operational Safety Audit (IOSA) result; the Safety & Security Goals pertaining to Incidents, Aircraft Un-stabilized Approaches, Aircraft Ground Damage Events, and Security Events were all achieved by a wide margin in 2010 (and many of these for the fourth year in a row).

All these achievements were the result of the collaborative efforts of Korean Air management and employees. Korean Air has implemented a world-class Safety Management System (SMS) and Security Management System (SeMS) and will continue to address human factors (unsafe acts, preconditions, supervision and organizational influences)

associated with safety and security related occurrences.

In support of Safety Management System (SMS) and Security Management System (SeMS) at Korean Air, the Safety, Security and Compliance Department:

• Continues to provide the corporation with an invaluable source of expertise in the fields of safety, security, and quality assurance;

• Anticipates and identifies systemic trends and coordinates / applies scientifically-based countermeasures targeted at mitigating and wherever possible eliminating these errors; and

• Ensures that positive management control exists over of all critical processes (i.e., those processes relevant to the safety, security, and quality of Korean Air products & services).

Korean Air continues to be a member of the Association of Asia Pacific Airlines (AAPA) and a member of the International Air Transport Association (IATA) with representation on the Board of Governors, the Operations Planning Committee, the IOSA Oversight Committee (IOC) and the IATA Safety Audit for Ground Operations (ISAGO) Committee. Korean Air also takes a proactive role in the SkyTeam Safety Security and Quality Functional Executive (SSQFE) Group and its related Working Groups with members dedicated to the improvement of the overall safety, security and quality standards within the alliance.

Safety and security are a priority and core value at Korean Air. We constantly strive to improve our Operational Excellence and to be recognized as one of the world’s safest and most secure airlines.


This year’s Safety & Security Strategy theme is “With A Global Mindset – Enhance The Korean Air SMS And Continuously Improving The Safety 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 will continue to advance its safety culture, invest in the training of employees, and identify additional partnership opportunities with all divisions and departments. Korean Air also will continue to build trust and work collaboratively with domestic and international governmental agencies such as the Ministry of Land Transportation and Maritime Affairs (MLTM); the Korean National Intelligence Service (NIS); the International Civil Aviation Organization (ICAO); the U.S. Department of Homeland Security (DHS); the U.S. Transportation Security Administration (TSA); the U.S. Federal Aviation Administration (FAA); the European Aviation Safety Agency (EASA); and the U.S. Department of Defense.

This year’s Safety & Security Strategytheme is “With A Global Mindset – Enhance The Korean Air SMS And Continuously Improving The Safety Culture At Korean Air.”

32 + 33

Korean Air understands that in order to be successful in today’s aviation industry it is imperative to lead through innovation, communication and technology, and motivate to be the very best in customer service, operations and, most importantly, in safety and security.

All management and employees in Korean Air are re-dedicating themselves to continued operational excellence in safety, security and quality in 2011.

FUELMANAGEMENT

ERP System Maintenance & Engineering Safety Fuel management Skyteam Alliance

International oil prices kept stable at about $80 per barrel in 2010. Nevertheless, aircraft fuel costs, standing at about KRW 3.4 trillion, were the highest burden, taking up 32.6% of total costs of running the airline. Moreover, the importance of fuel management goes well beyond economics with acknowledgement of severe natural disasters like abnormal weather patterns resulting from global warming. We are striving for more efficient fuel management because we fully recognize the impact of efficient fuel management on our corporate success as well as the health of the Earth.

We achieved a fuel reduction of approximately 58,500 tons in 2010 through 32 tasks that require constant monitoring and 10 newly developed tasks.

For example, we modified our flight plans for more economical operations by shortening our routes in Oceania. Meanwhile, we are applying economical flight tactics wherever we can, in which flight safety and passenger services are not hampered. For instance, landing procedures were modified so that engine thrust reverses used upon landing are not used unnecessarily, achieving both cost-effective flights and a more pleasant in-flight experience.

We will be deploying more fuel efficient aircraft with state-of-the-art technologies to unfold new opportunities for us to advance our environmental stewardship, customer service and economic flight operations.

We continue to improve fuel efficiency, fully recognizing the impact of efficient fuel management on corporate success.

We also will prepare ourselves for the upcoming EU-ETS(Emission Trading Scheme)1), by establishing a system that will continuously improve fuel efficiency, thus minimizing our environmental footprint.

We achieved a fuel reduction of approxi-mately 58,500 tons in 2010 through 32 tasks that require constant monitoring and 10 newly developed tasks.

1) EU-ETS: It is a system introduced by the EU in 2005 to reduce carbon emissions whereby each corporate entity is granted emission rights according to their business scale, and can trade excesses/shortages in their emission rights in the carbon market. The scheme will be applied in the aviation sector from 2012 to all air carriers entering the EU.

opeRAtion Review


SKYTEAMALLIANCE

Setting the goal as the alliance dedicated to customer service, Korean Air founded SkyTeam with Delta Airlines, Air France and Aero Mexico in June 2000. Since its launch, SkyTeam has grown into a leading global airline alliance, extending its partnerships to Aeroflot, Air Europa, Alitalia, China Southern Airlines, CSA Czech Airlines, Kenya Airways, KLM Royal Dutch Airlines, Vietnam Airlines and Tarom Romanian Transport.

In 2010, SkyTeam celebrated its 10th anniversary and its remarkable growth. From its foundation, SkyTeam has more than tripled its membership, doubled flights and nearly doubled the number of global destinations to offer customers easier connections across all continents. SkyTeam grew to 13 members in 2010, with the addition of Vietnam Airlines and Tarom Romanian Transport. SkyTeam members offer approximately 13,000 daily flights to 898 destinations in 169 countries, a great leap from the initial 6,402 daily flights to 451 destinations in 98 countries.

In addition, the signing of preliminary contracts for SkyTeam membership with a number of carriers in 2010 made SkyTeam’s 10th anniversary even more special. In 2010, China Eastern Airlines, China Airlines, Aerolineas Argentina and Garuda Indonesia signed an adherence agreement with SkyTeam, and one by one will officially join SkyTeam between 2011 and 2012. Saudi Arabian Airlines and Middle East Airlines also have confirmed their desire to join SkyTeam and SkyTeam should grow to 19 members by 2012 with the

In 2010, SkyTeam celebrated its 10th anniversary and its remarkable growth. From its founding, SkyTeam has more than tripled its membership, doubled flights and nearly doubled the number of global destinations to offer customers easier connections across all continents.

range of its network reaching even further around the world. Through SkyTeam’s extended network, passengers enjoy more choices of flights as well as improved benefits such as access to worldwide lounges and the same quality service at all members’ counters.

As expressed in its slogan, “Caring more about you,” SkyTeam has been continuing to develop new benefits, consistent services, and products that improve our customers’ experiences. In addition, each SkyTeam member is carrying out eco-friendly business activities, based on SkyTeam’s “Corporate Social Responsibility Statement,” a commitment to promote social responsibility.

As expressed in its slogan, “Caring more about you,” SkyTeam has been continuing to develop new benefits, consistent services, and products that improve our customers’ experiences.

34 + 35

Korean Air Travel Photo Contest GalleryAccepted PrizeBan Youn HuiThe Jinsanring Wall


SUSTAINABILITYREVIEW

38 Environmenal Responsibility40 Social Contributions42 Human Resources

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Find the unique beauty of China, home of many World Wonders. Korean Air serves 19 cities throughout China including Beijing, Shanghai, and Qingtao with convenient schedules.

FIND YOUR DEFINITION OF LIFE IN CHinA.

Korean Air Travel Photo Contest GalleryAccepted PrizeBan Youn HuiThe Jinsanring Wall


SUSTAINABILITYREVIEW

38 Environmenal Responsibility40 Social Contributions42 Human Resources

Destinations in China

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PASSENGER & CARGO

CARGO

ReDucinG cO2 emissiOns By RaisinG fuel efficiencyDemand for air travel in Korea has risen significantly. Consequently, greenhouse gas emissions also continued to rise in 2010. At the same time, the growth rate of CO2 emissions has been relatively slow in comparison to the pace of demand for air transport. From 2000 to 2010, Korean Air's revenue ton kilometer (RTK) increased by 77.5%, while the growth of CO2 emissions peaked at 54.5% over the same period, translating into 23% growth in transport over and above the environmental impact of CO2 emissions.

eu emissiOns tRaDinG scHemeAll airlines, including Korean Air, that fly in and out of Europe are subject to regulations that limit CO2 emissions beginning in 2012 (average CO2 emissions from 2004 to 2006 are the baseline). Airlines will be required to purchase credits for their CO2 emissions in excess of the regulatory standards through the emissions trading scheme. According to the regulation, Korean Air has submitted an MRV (Monitoring, Reporting and Verifying) plan to EU in 2009, and it is in the validating process with a third party verifier. Faced with the challenge of climate change, we continue to push for collective responses to limit CO2 emissions and play our role in this joint effort by modernizing our fleet, optimizing fuel consumption and improving flight procedures.

environmental Responsibility Social Contributions Human Resources

SuStAinABility Review

ENVIRONMENTAL RESPONSIBILITY

Under the vision of "Improving the Value of Life through Harmony of Aviation and the Environment," Korean Air seeks to fulfill its corporate responsibility of preserving the environment by reducing the environmental footprint of its operations. Indeed, we are actively involved in worldwide endeavors to make flying environmentally friendly by adopting management practices and setting mid-to-long-term environmental goals. Korean Air will continue to take a proactive approach to realize environmentally and economically sustainable growth.

aGainst climate cHanGeCO2 emissions from flight operations account for approximately 2% of all CO2 emissions around the globe, but are constantly increasing due to higher demands for air travel. Korean Air has set ambitious goals with IATA (International Air Transport Association) to reduce CO2 emissions as much as possible while meeting the increasing demands for air travel. Our goals are to reduce the increase rate of CO2 emissions to zero by 2020, and to lower CO2 emissions to 50% against the 2005 level by 2050. To achieve these goals, Korean Air is using four ‘Pillar Strategies’ to combat climate change: developing technology; improving infrastructure; enhancing operational efficiency; and utilizing economic measures.

Korean Air seeks to fulfill its corporate responsibility of preserving the environment by reducing the environmental footprint of its operations.


90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

-20%

-10%

a GReenHOuse Gas anD eneRGy taRGet manaGement systemKorean Air is preparing to deal with the Korean Ministry of Environment’s “Greenhouse Gas and Energy Target Management System” that has a target for greenhouse gas reduction of 30% by 2020. By September 2011, businesses that are subject to governmental control concerning emission of greenhouse gases and consumption of energy must establish medium and long term plans to reduce greenhouse gas emissions, with phased countermeasures. Korean Air will actively participate and initiate green management, reduce emissions of greenhouse gases and pollutants in our business activities and fulfill our environmental responsibilities.

GlOBal plantinG pROJectKorean Air has been building forests in the deserts of Mongolia since 2004 and China since 2007 to combat deforestation of these regions, major origins of the yellow dust storms that sweep across Asia. A total of 46,500 trees are growing in Mongolia’s “Korean Air Forest in Mongolia” and the program has been expanded to include Korean Air’s “Botanical Garden,” in China’s Kubuchi Desert, where Korean Air’s upper management has been planting trees annually. As of 2010, hundreds of Korean Air employees have planted almost 80,000 trees with a goal to plant a total of 1.8 million trees by the end of 2011. In addition, Korean Air

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donates to the Million Trees Los Angeles (MTLA) program, sponsoring a tree planting campaign in Los Angeles as part of that city’s urban forestation project.

ecO Office effORtsKorean Air initiated “Eco Office Activities” in December 2009 to raise awareness of the significance of global environmental issues and to fulfill our responsibility as an environmental steward. All employees signed the Eco-Doing pledge and are participating in the “No Driving One Day of the Week” policy, the “Two Wheels Movement,” saving energy at home, and other activities to reduce CO2 emissions. When employees reduce CO2 emissions, they are given Eco Points for the reduced amount, which are accumulated for the year and then donated to environmental NGOs. In addition, we have initiated the Save the Paper Competition among departments, and other environmental activities that can easily be worked into our everyday lives. Korean Air plans to further develop “Eco Office Activities” as a key environmental platform of the company.

GReen teacHeR GReen tOuRBelieving that education is a plan which spans a hundred years, Korean Air has supported its Green Teacher Green Tour program with Korean Ministry of Environment. The program was designed for environment teachers to travel abroad and explore environmental best practices and bring back their experiences to their students. Thirteen teachers in five teams were selected through the contest and made a trip around the world. After the trip, teachers presented essays and eco-school ideas discovered from various places. The essays and ideas were published and distributed as a booklet and students from schools where the teachers were affiliated were given the opportunity to plant trees in Mongolia.

Korean Air will continue to take a proactive approach to realize environmentally and economically sustainable growth.

CHAngeS in Co2 emiSSionS CompARed to tRAnSpoRt peRFoRmAnCe (%)

RTK Growth Rate

77.5%

54.5%

Improved Fuel Efficiency

CO2 Emissions Growth Rate

SuStAinABility Review Environmental Responsibility Social Contributions Human Resources

SOCIAL CONTRIBUTIONSWe will do our best to be a respected member in the communities we serve and help create a society where individual happiness is guaranteed.

Korean Air’s “sharing management” is practiced worldwide beyond each community under the slogan of “Wings of Love, Wings of Hope.” Our social contributions take place in various fields under our chairman Yang Ho Cho’s belief, “The spirit of sharing is the light that guides us on our way to fulfill our responsibilities as a community partner.”

With a focus on sharing, Korean Air is engaged in charity work in diverse fields encompassing the environment, culture, youth development, sports and medicine as well as volunteering for the socially defenseless.

Currently, 20 in-house organizations actively volunteer their time not only in Korea but also abroad. They visit

Korean Air is engaged in charity work in diverse fields encompassing the environment, culture, youth development, sports and medicine as well as volunteering for the socially defenseless.


impoverished regions in countries like Malaysia, the Philippines and Mongolia to practice sharing by extending medical support, repairing schools, offering writing tools and providing meals. Sharing is also realized by assisting orphaned children, extending scholarships, helping the disabled or the elderly who live alone, or visiting welfare centers.

Korean Air’s social volunteering team has provided free rice packs to the needy, and helped make kimchi or spicy pickled cabbage for the poor in community activities. The team regularly visits villages under the “One Company One Village” campaign – including communities in Gangwon Province and in Seoguipo City on Jeju Island – to volunteer social and medical support.

Moreover, since 2001 and to gain a first-hand view of sharing, our employees and executives voluntarily have participated in building free houses for people without homes.

In the Family Month of May, Korean Air along with Korea Airport Corporation hosted children from areas exposed to aircraft noise near Gimpo Airport as well as those living in oil spill-damaged areas near Taean on a field trip to the airport and to Jeju Island.

Our acts of sharing can be seen across the world and we will continue to partner with the communities we serve to make this a better planet on which we all can live, work and play.

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HUMANRESOURCES

Environmental Responsibility Social Contributions Human Resources

The “Company is the People” is a philosophy that has guided Korean Air’s human resources (HR) strategies and management philosophies since its inception. The philosophy is based on the late Chairman and founder, Joong Hoon Cho’s corporate principle that “People Create The Company And The Company Evolves Upon The People’s Endeavors.” Since its founding, Korean Air has placed a major focus on creating effective human resources policies and strategies. Although many companies highlight human resources, Korean Air has consistently been at the forefront in effectively practicing human resource management.

KORean aiR’s HR pHilOsOpHy encOmpasses tHRee Basic pRinciples:

a) People are the company’s most valuable resource.b) Corporate development is achieved through its people.c) Mutual development of the company and its people is essential.

KALMANSHIP is the term to describe the ideal employee that Korean Air wants and needs to hire and retain to succeed.

Korean Air respects and supports those who have a proactive mindset, possess a high sense of global awareness, are highly service-oriented, and are well disciplined.

Korean Air has placed significant focus on creating effective human resources policies and strategies and has consistently been at the forefront in effectively practicing human resource management.

SuStAinABility Review


This is KALMANSHIP and is reflected in our HR policies.

a) proactive mindset - Always think innovatively and proactively.- A future-oriented mindset breaks stereotypes.

Active and creative mindsets are significant factors and criteria in recruiting new employees to Korean Air, and we offer a variety of education programs to enhance a proactive employee mindset. We also include innovative thinking as an item in our employee appraisal system.

b) global awareness- Be able to understand and embrace different cultures

from around the world.- Be open-minded with a broad cultural knowledge and

language proficiencies.

The airline instills a sense of global citizenship with our new employees by conducting international volunteer service every year. Korean Air dispatches assistant manager level employees to foreign stations for a year to provide the opportunity to learn a foreign culture and lifestyle. Also several employees are sent to world-renowned international educational institutions to earn MBAs.

c) Service-oriented- Always have a neat appearance, be kind-hearted, and show good manners.- Exhibit professionalism and polite behavior in all situations involving customers.

During the recruitment process, Korean Air carefully monitors the service-mindedness of the candidates to see if they fit the company’s standard. Service Excellence is a key factor of evaluation for all Korean Air employees and the airline operates a unique service institute to train and educate service mindedness in all of our employees.

d) well disciplined - Take responsibility for the job assigned. - Maintain good interpersonal relationships with other employees.

With service and safety being the crucial factors of the airline business, Korean Air highly values our employees’ integrity and teamwork abilities. Such values are strongly reflected in employment, education, appointment and advancement of all our personnel.

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Financial Review45 Management’s Discussion and Analysis

56 Independent Auditors’ Report

57 Non-Consolidated Statements of Financial Position

59 Non-Consolidated Statements of Operations

60 Non-Consolidated Statements of Appropriations of Retained Earnings

61 Non-Consolidated Statements of Changes in Equity

62 Non-Consolidated Statements of Cash Flows

64 Notes to Non-Consolidated Financial Statements

107 Independent Accountants’ Review Report on Internal Accounting Control System

108 Report on the Operations of the Internal Accounting Control System


ManageMent’s Discussion anD analysis

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I. 2010 RevIew

1. economic environment

A. Global economy

2010 was a year of continued uncertainty in the global economy. As countries around the world took steps to overcome the global financial crisis throughout 2009, markets and real economies began showing signs of recovery. However, with new financial crises emerging in Europe in early 2010 and most developed countries experiencing sluggish rates of growth, market volatility remained the norm. In the first half of 2010 in particular, global markets benefited from the strong performance of emerging markets, led by China and India. Nonetheless, as governments began to withdraw their stimulus measures and enact new budget-tightening policies later in the year, the global recovery lost momentum.

B. Domestic economy

Korea’s domestic economy exhibited sluggish growth in the latter half of 2010, although certain robust sectors continued to power a general turnaround. Real GDP rose by 6.5% on an annualized basis for the Q1 to Q3 period, confirming that the economy was successfully transitioning from government-led growth to privately-led growth. Exports were particularly strong, in some cases recording a 30% annualized growth rate for January through October. The global recovery incited especially strong demand for Korean semiconductors and automotive products. Strong export demand, in turn, drove increased facility investment, and also boosted employment and consumption figures. However, momentum waned as the pace of global economic recovery slowed amid tensions over exchange rates, and the domestic economy struggled with a weak real estate market and high household debt levels.

C. Oil Prices and Foreign exchange Rate

International oil prices have been following an upward trend since the latter half of 2009, driven by strong demand from rapidly-growing emerging countries, China in particular. Jet fuel prices averaged USD 69.60 per barrel in 2009, rising to about USD 89.00 per barrel in 2010. In the first half of 2009, the KRW/USD exchange rate floated around 1,400won, moving to a more stable zone of 1,100 to 1,200 won per dollar throughout 2010.

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02000/01 2001/01 2002/01 2003/01 2004/01 2005/01 2006/01 2007/01 2008/01 2009/01 2010/01 2011/01

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1,400

1,200

1,000

800

600

400

200

0

(unit : $/bbl) (unit : KRw)

Oil Prices Foreign Exchange RateWTI

* source : eia, the Bank of Korea

+ Oil Prices and Foreign exchange Rate

Financial Review

2. Airline Industry Overview

A.Passenger Business

The number of passengers on Korean Air international flights reached a record high in 2010, thanks to traffic generated by various international sporting events, including the Guangzhou Asian Games, as well as macro factors such as an increasingly stable exchange rate and domestic economic recovery. According the ‘Aviation Statistics’ released by Korea’s Ministry of Land, Transport and Maritime Affairs, the number of passengers on international flights exceeded 40 million in 2010 for the first time in the nation’s history, an increase of 19.5% from the previous year. Year-on-year demand increase per route was particularly strong on short-haul routes: 28.1% for China, 23.5% for Southeast Asia and 6.9% for Japan. Demand increase was 14.3% on routes to the Americas, 7.5% for Europe and 4.3% for Oceania. The number of passengers on domestic flights reached 20.2 million, up 11.9% year-on-year.

B. Cargo Business

Demand for air cargo services had plunged in 2009 due to economic conditions in major advanced markets including the US. Financial recovery at home and abroad in 2010 brought a resurgence in demand for IT products such as semiconductors, LCDs and mobile phones, helping to lift air freight volumes back to pre-crisis levels.

Management’s Discussion & analysis Independent Auditors’ Report Financial Statements & Notes

(unit : thousand Passengers, %)

international Passenger

Domestic Passenger annual change

2010

2009

2008

2007

2006

33,514

40,061

35,341

36,867

32,707

2010

2009 18,061

20,216

2008 16,990

2007 16,848

2006 17,181

annual change

2010

2009

2008

2007

2006

11.9

-1.9

0.1

6.3

0.8

2010

2009

2008

2007

2006

19.5

12.7

10.2

-5.2

-4.1

* source : Ministry of land, transport and Maritime affairs, ‘aviation statistics’

(unit : thousand Passengers, %)

+ Passenger Transport volume by Year


II. 2010 KOReAn AIR’s OPeRATIOn RevIew

1. Overview

As of the end of December, 2010, Korean Air had a fleet of 128 aircraft, and operated routes to 13 domestic locations and 100 foreign locations in 38 countries. Throughout the year, we concentrated on delivering an enhanced customer experience to passengers on all flights. In addition to the air transport business, Korean Air is exploring synergistic business opportunities with partners in various industries including aerospace, with a focus on research & development of aircraft parts manufacturing, maintenance and satellite technology, in-flight catering, in-flight duty free sales and hotel operations. Air transport accounted for 88% of the company’s sales in 2010, giving Korean Air a domestic market share of 38.5% in international passenger transport and 36.8% of cargo transport.

Korean Air improved its brand recognition and brand value in the aviation industry in 2010 through several efforts. In June, the International Air Transport Association (IATA) ranked our international passenger service as 13th in volume, up from 17th in 2009. In the cargo sector, we ranked No. 1 for the sixth consecutive year, starting from 2004. Our company was also honored with an environmental award in China. The internationally-respected Global Traveler magazine recognized the excellence of Korean Air’s passenger experience at its ‘GT Tested’ Awards, presenting us with their prizes for ‘Best Business Class Design’ and ‘Best Flight Crew Service’.

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(unit : thousand tons, %)

2010

2009

2008

2007

2006

269

262

254

316

355

international cargo

Domestic cargo annual change

2010

2009 2,872

3,189

2008 2,997

2007 3,138

2006 2,854

annual change

-4.2

-4.5

11.0

10.0

9.0

-2.5

-10.9

2010

2009

2008

2007

2006 -4.6

5.7

-19.0

2010

2009

2008

2007

2006

* source : Ministry of land, transport and Maritime affairs, ‘aviation statistics'

+Air Cargo Transport volume by Year

(unit : thousand tons, %)

Financial Review

2. Business Performance

Korean Air reported record-high performance results in 2010 thanks to the dedicated efforts of our employees and the favorable business conditions created by the global economic recovery. The aviation industry as a whole benefited from the recovery of freight volumes to pre-crisis levels, and the Korean industry recorded substantial increases in passenger numbers as exchange rates stabilized and the domestic economy strengthened. Korean Air in particular stayed attuned to market trends and strategically introduced new equipment, strengthened competitiveness in mid- and long-distance routes and bolstered its premium brand image in pace with the airline market’s recovery.

As a result, the company’s sales volume posted a record performance, rising 22% year-on-year to KRW 11.46 trillion, with operating income climbing KRW 976 billion to KRW 1.11 trillion. Net income recorded KRW 461.7 billion in the black in 2010, at negative KRW 98.9 billion in 2009.

A. Operating Revenue

+Operating Revenue by Business sector (unit : KRw billion)

2010 2009 2008 2007 2006

Domestic Passenger 534.3 489.7 601.5 585.5 612.2

international Passenger 5,808.8 4,973.2 5,351.8 4,631.6 4,144.8

cargo 3,788.6 2,704.6 3,026.8 2,533.0 2,370.8

aerospace 342.9 251.7 367.7 235.1 211.6

catering 280.9 235.1 257.9 260.6 222.1

Hotel/limousine 40.4 41.8 39.7 35.2 36.5

Others 664.6 697.6 567.2 531.0 479.8

Total 11,460.5 9,393.7 10,212.6 8,812.0 8,077.8

[Passenger Business]

Korean Air’s passenger business accounts for more than half of the company’s total revenue. In 2010, the segment recorded revenue growth of 16% compared with the previous year, attributable to the recovery of outbound travelers and growing demand from Asia-based transit passengers. Due to Korean Air’s growing reputation as one of Asia’s top premium carriers and its convenient route network into Asia and Europe via Incheon Airport, passenger traffic maintained an average L/F of 76% throughout the year.



+Operating Revenue by Route – Passenger Business

(unit : %)

2010 2009 2008 2007 2006Domestic 8.4 9.4 10.5 11.2 12.9Japan 15.3 15.2 13.0 12.9 13.4china 10.1 8.9 10.0 10.1 9.3Southeast asia 13.3 12.4 12.9 13.0 12.5Oceania 5.5 6.3 6.2 6.4 6.4americas 32.7 32.9 30.2 29.7 29.3europe 14.7 14.9 17.2 16.7 16.2Total 100.0 100.0 100.0 100.0 100.0

The portion of operating revenue from China and Southeast Asia routes increased by 1.2%p and 0.9%p, year on year, respectively.

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20%

10%

0%

-10%

RPK growth Rate

2006 2007 2008 2009 2010

9.79%

0.13%-0.54%

6.09%6.38%

+RPK Growth Rate among International Passengers

+RPK (Revenue-Passenger-Kilometers)

The RPK in 2010 went up by 10% compared to the previous year, and the yield (in US cents) increased 9% year on year.

70,000

50,000

30,000

10,000

02010 2009 2008 2007 2006

60,528 55,127 55,054 55,35452,178

(unit : Million RPK)

Financial Review

The RPK growth rate had gone down since 2006, but took an upturn beginning in 2009. In 2010, in particular, the rate reached as high as 9.7%, compared with just 0.13% in 2009.

[Cargo Business]

Cargo revenues began recovering in late 2009, achieving 40% growth from 2009 to 2010. The rise was driven by strong demand on American and European routes, which accounted for more than 70% of total cargo revenue. With increased exports of IT products, automobile components and machinery, average L/F for the US and Europe was 75% and 82%, respectively, with both regions having strong flows throughout the year.

+Operating Revenue by Route – Cargo Business(unit : %)

2010 2009 2008 2007 2006

Domestic 0.7 1.0 0.9 1.0 1.2

Japan 4.6 4.1 4.0 4.1 4.7

china 9.8 10.8 10.2 8.3 7.5

Southeast asia 11.6 11.5 13.3 14.0 16.7

Oceania 1.0 1.3 1.4 2.4 1.3

americas 42.4 43.2 40.7 41.8 42.8

europe 29.9 28.1 29.5 28.4 25.8

Total 100.0 100.0 100.0 100.0 100.0


10,000

9,500

9,000

8,500

8,000

7,5002010

9,670

2009

8,426

2008

9,005

2007

9,678

2006

8,857

(unit : Million FtK)

+RFTK (Revenue-Freight-Ton-Kilometers)

The FTK in 2010 increased 15% compared to the previous year, and the yield (in US cents) increased to 31% year on year, sufficient to move up one scale.


B. Operating expenses

Jet fuel costs accounted for 33% of the company’s total operating expenses in 2010, thereby having a significant direct influence on Korean Air’s profitability. Total operating expenses amounted to KRW 10,351 billion, up 11.8% from the previous year. This rise was caused in large part by the increase in the Dubai price of oil from an average of USD 69.60 in 2009 to USD 89.00 in 2010, as well as increases in maintenance and other costs.

+Operating expenses(unit : KRw billion)

2010 2009 changeamount %

Jet Fuel 3,450.7 2,938.7 512.0 17.4%

Maintenance 626.1 560.4 65.7 11.7%

labor 1,189.1 1,017.5 171.6 16.9%

Ground Handling 400.9 352.5 48.4 13.7%

landing Fees 276.8 267.8 9.0 3.4%

Rental 296.0 308.8 -12.8 -4.1%

Depreciation 846.4 771.8 74.6 9.7%

Others 1,941.1 1,762.9 178.2 10.1%

SG&a 1,323.8 1,280.3 43.5 3.4%

Total 10,350.9 9,260.7 1,090.2 11.8%

50 + 51

20%

10%

0%

-10%

FtK growth Rate

2006 2007 2008 2009 2010

14.76%

6.43%

-6.95%

9.26%8.81%

+FTK Growth Rate

The FTK growth rate turned negative since 2007, but climbed from -6.4% in 2009 to 14.8% in 2010, exceeding its 2007 peak.

Financial Review Management’s Discussion & analysis Independent Auditors’ Report Financial Statements & Notes

C. Financial Ratios

[Debt to equity Ratio] (unit : KRw billion)

2010 2009 2008

liabilities 14,315 13,862 13,044

equity 3,499 3,057 2,823

Debt to equity Ratio 409.1% 453.5% 462.0%

[Operating Margin](unit : KRw billion)

2010 2009 2008

Operating income 1,109 133 99

Operating Margin (%) 9.7 1.4 -1.0

Significant growth in operating revenues in 2010 drove substantial gains in operating income, which was KRW 976 billion higher than in the previous year. As a result, the operating margin improved by 8.3%p year-on-year.

[eBITDAR]

Korean Air’s operating income grew 732% in 2010. EBITDAR amounted to KRW 2,262.8 billion, up 84.7% over 2009, while EBITDAR margin was up 6.6%p to 20.1%.

(unit : KRw billion) (unit : KRw billion)

1,200

1,000

800

600

400

200

02010

1,109.6

2009

133.4

2010

2,262.8

2009

1,224.7

2,500

2,000

1,500

1,000

500

0

+Operating Income +eBITDAR

The net income of Korean Air in 2010 moved from the red with KRW 98.9 billion in 2009 to the black with KRW 461.7 billion in 2010. Thanks to the conversion to the black, the net income per share also skyrocketed from KRW (-)1.464 to KRW 6,837.


D. Cash Flow

Cash flow from operations, which is the largest contributor to corporate cash flow, leapt from KRW 489.9 billion in 2009 to KRW 2,242.1 billion in 2010. Cash flow from investment activities recorded an outflow of KRW 971.2 billion, while cash flow from financing activities logged an outflow of KRW 1,253.3 billion. Cash on hand at year-end 2010 totaled KRW 733.5 billion, up KRW 17.5 billion year-on-year.

Investment cash flows included KRW 14.3 billion spent on acquiring aircraft and engines, and KRW 85.3 billion consumed on acquiring aircraft equipment.

Financing cash flows included an inflow of KRW 938.6 billion from issuance of short-term debt and KRW 664.6 billion from issuance of private bonds, and outflows of KRW 975.1 billion on retirement of short-term debt and KRW 2,251.5 billion on the current portion of long-term debt.

[CAPeX]

In 2010, Korean Air invested KRW 1,638.2 billion on aircraft, the company’s essential profit-generating asset. Going forward, we plan to scale our investments so as to be able to actively respond to increasing demand for service, and to invest consistently in equipment and infrastructure at a level that enables us to deliver a premium customer service experience.

+Cash Flows(unit : KRw billion)

2010 2009

cash Flow from Operating activities 2,242.1 489.9

cash Flow from investing activities -971.2 -685.4

cash Flow from Financing activities -1,253.3 417.0

increase (Decrease) in cash 17.5 221.5

cash and cash equivalents at Year-end 733.5 716.0

e. Fleet status

As of year-end 2010, Korean Air owned a total of 128 aircraft, comprising the greatest share of all company assets. The company is phasing in upgraded, high-functional aircraft, including the B777-300ER and A330-200, so that it can continue to offer state-of-the-art in-flight convenience, service and sophistication, along with increased fuel efficiency. We have also invested in upgrades to our existing aircraft.

Currently, Korean Air has plans to introduce and operate 18 new aircraft in 2011, including five A380s, three B777-300ERs and two B747-8F cargo aircraft. These acquisitions reflect the company’s commitment to respond concretely to the world’s environmental concerns, and to maintain competitiveness in an era of high oil prices. Korean Air also intends to pursue growth by increasing its marketing to foreign customers, while expanding its global network by introducing new routes in China, the Middle East and other regions with strong demand potential.

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Financial Review

+Fleet by Type(unit : no. of aircraft)

Type 2010 2009 2008 2007

Passenger B747 17 22 22 24B777 28 25 22 20a330 21 19 19 19a300 8 8 8 8B737 30 31 29 32Sub-total 104 105 100 103

cargo B747 24 22 22 21a300 0 0 2 2Sub-total 24 22 24 23

Total 128 127 124 126

F. workforce(unit : no. of people)

Office staffFlight/

cabin crew engineer OthersMale 2,439 2,467 4,921 348Female 2,022 3,334 36 52Total 4,461 5,801 4,957 400

G. Risk Management

In an era when the aviation industry’s operating environment is in flux due to rising oil prices and volatile Forex rates, risk management competency tops the list of tools needed for a successful air carrier to survive and succeed. Korean Air has developed and operates its own risk management systems to stay ahead of changes in the business environment. We also focus on taking preemptive measures against various adverse possibilities, such as regulatory impositions, sector-specific response strategies, work manuals and emergency response systems.

[Oil Price]

Korean Air hedges its oil price risk to avoid the need to purchase jet fuel at the top of the price cycle. We entered into oil price swap and zero-cost collar agreements referencing WTI to fix our prices within an acceptable range. The company operates a Fuel Management Team, which was created in 2004 to help the company respond to rising fuel prices by implementing fuel-saving measures in aircraft operation and maintenance.

[FX Rate]

Korean Air minimizes financial losses on domestic and foreign sales resulting from Forex fluctuations by conducting flexible goal management. To avoid Forex losses on foreign-currency borrowings, the company has entered into zero-cost collar option contracts with major domestic and foreign banks.



III. 2011 OuTlOOK

1. 2011 Industry Outlook

Global GDP is expected to grow at a 3.1% rate in 2011. This, combined with rising business confidence, will result in a forecasted increase in passenger traffic of 5.6%, and cargo growth of 6.1%. Regional differences will remain amplified throughout the year, reflecting sharp differences in economic performance among the world’s various economies. Parts of Europe will remain in deep recession as a result of ongoing banking and sovereign debt crises. European airlines will suffer from weak demand in their home markets, although long-haul business travel and outbound freight will perform better. Asia-Pacific, Latin American and African airlines should continue to benefit from surging economic activity in these regions. Airlines in the Middle East are also expected to benefit from strong regional economies and further gains in their share of the long-haul market. (Source: IATA)

Korean Air’s domestic market is projected to maintain its current growth momentum, with outbound domestic passenger numbers rising in response to the stabilizing exchange rate. Demand for cargo flights will rise in line with higher trading volume driven by Korea’s FTA agreements with other countries. Potential risk factors remain prominent, however, due to the effect on oil prices of political instability in the Middle East, as well as an expected contraction in demand from Japan following the recent earthquake. Despite these acknowledged risks, we will develop business plans for 2011 under the assumption of continuing growth momentum.

2. Business Plan for 2011

Korean Air expects to post an operating revenue of KRW 12,470 billion in 2011, up 8.8% from 2010 when we recorded a record-high operating profit of KRW 11,460.5 billion. Propelled by the increase in operating profit, increased efficiency and higher profitability, our operating income is targeted to reach KRW 1,280 billion, up 14.4% from 2010. Our 2011 management plan has been formulated based on an assumed average WTI price of USD 85.00 and a won/dollar exchange rate of 1,150 won.

Our total investments are expected to reach KRW 2,328.8 billion in 2011, up 33% year-on-year, of which approximately 90.7% will be invested in aircraft. This spending plan includes the cost of bringing in five A380s, three B777-300ERs and two B747-8F cargo aircraft.

In order to reach our 2011 management goals, we will strive to carry out three core tasks under our vision of ‘sustainable growth through greater competency and profitability’. First, we will strengthen profitability and growth potential by securing long-term growth engines. Second, we will continuously drive cost reductions by optimizing processes and implementing efficiency improvements, thereby building greater competencies. Lastly, we will realize sustainable growth by exploring and partaking in customer-oriented and socially-oriented activities.

Korean Air will ensure that 2011 is a year of building a solid foundation for sustainable growth. We will ensure the absolute safety of our operations and deliver the top level of customer service while putting our core tasks into action, thereby achieving our goals regardless of changes in the business environment.

54 + 55

Financial Review

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

We have audited the accompanying non-consolidated statement of financial position of Korean Air Lines Co., Ltd. (the “Company”) as of December 31, 2010, and the related non-consolidated statements of operations, appropriation of retained earnings, changes in equity and cash flows for the year then ended. These non-consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these non-consolidated financial statements based on our audit. The accompanying non-consolidated financial statements of the Company as of and for the year ended December 31, 2009, were audited by other auditors, whose report thereon dated March 5, 2010, expressed an unqualified opinion on those statements.

We conducted our audit 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 audit provides a reasonable basis for our opinion.

In our opinion, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of Korean Air Lines Co., Ltd. as of December 31, 2010 and the results of its operations, appropriation of its retained earnings, the changes in its equity and its cash flows for the year then ended in conformity with accounting principles generally accepted in the Republic of Korea.

The accompanying non-consolidated financial statements as of and for the year ended December 31, 2010 have been translated into United States dollars solely for the convenience of the reader. We have audited the translation and, in our opinion, the non-consolidated financial statements expressed in Korean won have been translated into dollars on the basis set forth in note 3 to the non-consolidated financial statements.

Without qualifying our opinion, we draw attention to the following:

As discussed in note 2(a) to the non-consolidated financial statements, accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations, changes in 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 non-consolidated financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use by those knowledgeable about Korean accounting principles and auditing standards and their application in practice.

KPMG Samjong Accounting Corp.

Seoul, Korea

March 10, 2011

inDePenDent auDitoRs’ RePoRt

this report is effective as of March 10, 2011, the audit report date. certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

Management’s Discussion & Analysis independent auditors’ Report Financial Statements & notes


non-consoliDateD stateMents oF Financial PositionAs of December 31, 2010 and 2009

56 + 57

(in millions of won and in thousands of us dollars)

note 2010 2009 2010

assets

cash and cash equivalents \ 733,494 715,956 $ 644,037

short-term financial instruments 142,000 106,055 124,682trade accounts and notes receivable, less allowance for doubtful accounts of \ 7,862 in 2010 and \ 8,151 in 2009 23 854,497 870,280 750,283other accounts receivable, less allowance for doubtful accounts of \ 1,439 in 2010 and \ 1,756 in 2009 53,389 64,716 46,878

inventories 4 343,039 320,265 301,202

Prepayments 133,026 142,137 116,801

current deferred income tax assets 18 232,705 110,465 204,324

other current assets 9 143,044 166,191 125,600

Total current assets 2,635,194 2,496,065 2,313,807

non-current investments 5 1,680,063 1,532,398 1,475,163

long-term prepaid expenses 348,477 389,091 305,977

non-current deferred income tax assets 18 104,232 358,608 91,520

Property, aircraft and equipment, net 6, 8 12,597,996 11,681,659 11,061,547

intangible assets 7 279,187 296,740 245,137

other non-current assets 9 169,160 164,711 148,529

Total non-current assets 15,179,115 14,423,207 13,327,873

Total assets \ 17,814,309 16,919,272 $ 15,641,680

see accompanying notes to non-consolidated financial statements.

Financial Review

non-consoliDateD stateMents oF Financial PositionAs of December 31, 2010 and 2009

Management’s Discussion & Analysis Independent Auditors’ Report Financial Statements & notes

(in millions of won and in thousands of us dollars, except share data)

note 2010 2009 2010

liabilities

short-term borrowings 10 ￦ 762,801 811,930 $ 669,770

trade accounts and notes payable 23 245,710 158,160 215,743

other accounts payable 22 244,803 130,333 214,947

advance receipts from customers 687,919 492,510 604,021

accrued expenses 519,716 268,355 456,332

current portion of long-term liabilities, net of discount on bonds and present value discount of ￦ 6,784 in 2010 and ￦ 16,114 in 2009 2,764,950 1,900,964 2,427,737

current portion of leases 11 698,068 772,392 612,932

other current liabilities 14 109,240 80,286 95,917

Total current liabilities 6,033,207 4,614,930 5,297,399

Bonds, net of discount on bonds 8,11 2,162,198 2,801,423 1,898,498

long-term debt, net 8,11 1,260,449 2,075,735 1,106,725

obligations under capital leases 8,11 2,925,474 2,807,695 2,568,684

asset-backed securitization loans 11 724,384 480,000 636,038

Provision for retirement and severance benefits 13 610,104 535,424 535,696

unredeemed mileage liabilities 345,092 279,841 303,005

other non-current liabilities 14 254,367 267,171 223,343

Total non-current liabilities 8,282,068 9,247,289 7,271,989

Total liabilities 14,315,275 13,862,219 12,569,388

Stockholders' equity

common stock of ￦ 5,000 par value authorized - 250,000,000 shares issued – 71,971,631 shares in 2010 and 2009 outstanding – 67,534,304 shares in 2010 and 2009 359,858 359,858 315,970

Preferred stock 6,896 6,896 6,055

capital surplus 2,109,470 2,108,727 1,852,199

capital adjustments` 16 (65,399) (65,399) (57,423)

accumulated other comprehensive income 21 736,043 761,794 646,275

Retained earnings (accumulated deficit) 352,166 (114,823) 309,216

Total stockholders' equity 3,499,034 3,057,053 3,072,292

Total liabilities and stockholders' equity ￦ 17,814,309 16,919,272 $ 15,641,680



non-consoliDateD stateMents oF oPeRationsFor the years ended December 31, 2010 and 2009

58 + 59

(in millions of won and in thousands of us dollars, except earning (loss) per share)

note 2010 2009 2010

Revenue: 23, 24

air transportation \ 11,017,908 9,054,819 $ 9,674,166

other 442,614 338,884 388,633

11,460,522 9,393,703 10,062,799

cost of revenue: 23, 24

air transportation 8,656,546 7,697,310 7,600,795

other 370,609 282,705 325,410

9,027,155 7,980,015 7,926,205

Gross profit 2,433,367 1,413,688 2,136,594

selling and administrative expenses 17, 23, 24 1,323,785 1,280,312 1,162,336

Operating income 24 1,109,582 133,376 974,258

interest income 36,676 31,982 32,203

interest expense (565,066) (546,987) (496,151)

Foreign currency transaction loss, net (137,069) (37,433) (120,352)

Foreign currency translation gain, net 12 143,553 517,775 126,045

equity in earning (loss) of equity method accounted investees, net 5 92,935 (142,275) 81,601

gain (loss) on disposition of equity method investments 5 77,573 (10,808) 68,112

gain (loss) on valuation of derivatives, net 15 (7,021) 26,677 (6,165)

gain (loss) on transaction of derivatives, net 15 (15,297) 40,191 (13,431)

loss on sale of property, aircraft and equipment, net (86,779) (142,058) (76,195)

other, net (35,254) 4,179 (30,955)

Other income (expense) (495,749) (258,757) (435,288)

income (loss) before income taxes 613,833 (125,381) 538,970

income taxes 18 (152,132) 26,485 (133,578)

net income (loss) \ 461,701 (98,896) $ 405,392

earning (loss) per share in won 19 \ 6,837 (1,464) $ 6.00


Financial Review

non-consoliDateD stateMents oF aPPRoPRiations oF RetaineD eaRningsFor the years ended December 31, 2010 and 2009

Date of Appropriation for 2010: March 18, 2011Date of Disposition for 2009: March 19, 2010


(in millions of won and in thousands of us dollars, except share data)

note 2010 2009 2010

Unappropriated retained earnings (undisposed accumulated deficit)

Balance at beginning of year \ (114,823) (15,927) $ (100,819)

net income (loss) 461,701 (98,896) 405,392

changes in retained earnings arising from equity method accounted investees 5,288 - 4,643

Balance at end of year before appropriation (disposition) 352,166 (114,823) 309,216

appropriation of retained earnings

legal reserve 3,452 - 3,031

cash dividends - 10% of par value of \ 5,000 for common stock and 11% of par value of \ 5,000 for preferred stock in 2010 20 34,519 - 30,309Facility usage reserve 200,000 - 175,608Unappropriated retained earnings (undisposed accumulated deficit) to be carried over to subsequent year \ 114,195 (114,823) $ 100,268



non-consoliDateD stateMents oF changes in equityFor the years ended December 31, 2010 and 2009

60 + 61


capital stock

capital surplus

capitaladjustments

accumulatedother

comprehensive income

Retainedearnings

(accumulated deflict) Total

Balance at January 1, 2009 \ 366,754 3,008,763 (65,399) 429,202 (915,927) 2,823,393 $ 2,479,053

Recovery of accumulated deficit - (900,000) - - 900,000 - -

net loss - - - - (98,896) (98,896) (86,835)

other capital surplus - (36) - - - (36) (32)

gain on valuation of long-term investment securities - - - 14,931 - 14,931 13,110

gain on valuation of derivative instruments - - - 264,403 - 264,403 232,156

change in equity of equity method investees - - - 58,419 - 58,419 51,294

loss on valuation of other non-current assets - - - (5,161) - (5,161) (4,532)

Balance at December 31, 2009 \ 366,754 2,108,727 (65,399) 761,794 (114,823) 3,057,053 $ 2,684,214

Balance at January 1, 2010 \ 366,754 2,108,727 (65,399) 761,794 (114,823) 3,057,053 $ 2,684,214

net income - - - - 461,701 461,701 405,392

other capital surplus - 743 - - - 743 653

gain on valuation of long-term investment securities - - - 8,818 - 8,818 7,743

gain on valuation of derivatives - - - 5,373 - 5,373 4,718

change in equity of equity method investees - - - (39,942) - (39,942) (35,071)

changes in retained earnings arising from equity method accounted investees - - - - 5,288 5,288 4,643

Balance at December 31, 2010 \ 366,754 2,109,470 (65,399) 736,043 352,166 3,499,034 $ 3,072,292


Financial Review Management’s Discussion & Analysis Independent Auditors’ Report Financial Statements & notes


2010 2009 2010

cash flows from operating activities

net income (loss) \ 461,701 (98,896) $ 405,392

adjustments for:

Depreciation 859,258 785,986 754,463

accrual for retirement and severance benefits 157,437 104,749 138,236

Mileage compensation 65,250 44,566 57,292

Foreign currency translation gain, net (142,942) (518,444) (125,509)

equity in loss (earning) of the equity method accounted investees, net (92,935) 142,275 (81,601)

loss (gain) on disposition of equity method accounted investees, net (77,573) 10,808 (68,112)

loss (gain) on valuation of derivatives, net 7,021 (26,677) 6,165

loss on sale of property, aircraft and equipment, net 86,779 142,058 76,195

others 56,340 53,359 49,469

918,635 738,680 806,598

changes in assets and liabilities:

trade accounts and notes receivable 23,952 (198,352) 21,031

other accounts receivable 11,658 (41,115) 10,236

inventories (22,774) (69,290) (19,997)

other current assets 8,076 (53,617) 7,091

Derivative instrument assets 30,218 63,272 26,533

Deferred income tax assets 140,181 (24,892) 123,085

trade accounts and notes payable 90,267 64,525 79,258

other accounts payable 116,424 23,054 102,225

advance receipts from customers 195,409 272,702 171,577

accrued expenses 271,478 (152,241) 238,369

withdrawal of severance and retirement benefits from the nPs 1,617 677 1,420

Derivative instrument liabilities (859) - (754)

long-term advance receipts from customers - (3,465) -

Payment of retirement and severance benefits (109,942) (42,354) (96,533)

Deposits for retirement and severance benefits 25,570 3,212 22,451

others, net 80,443 7,969 70,632

861,718 (149,915) 756,624

net cash provided by operating activities \ 2,242,054 489,869 $ 1,968,614


non-consoliDateD stateMents oF cash FlowsFor the years ended December 31, 2010 and 2009



2010 2009 2010

cash flows from investing activities

increase in short-term financial instruments, net \ (35,945) (106,451) $ (31,561)

Disposal of property, aircraft and equipment 54,207 353,727 47,596

acquisition of property, aircraft and equipment (974,997) (1,000,726) (856,087)

acquisition of intangible assets (455) (2,031) (400)

Decrease in long-term receivable under capital lease 979 928 860

others, net (14,973) 69,200 (13,147)

net cash used in investing activities (971,184) (685,353) (852,739)

cash flows from financing activities

Proceeds (repayment) from short-term borrowings, net (36,522) 218,675 (32,068)

Proceeds from issuance of bonds 664,558 1,288,023 583,509

Proceeds from long-term debt 661,461 794,892 580,789

Proceeds from asset-backed securitization loans 543,800 500,000 477,478

Repayment of obligations under capital leases, net (835,097) (909,525) (733,249)

Repayment of current maturities of long-term liabilities (2,251,532) (1,475,113) (1,976,935)

net cash provided by (used in) financing activities (1,253,332) 416,952 (1,100,476)

net increase in cash and cash equivalents 17,538 221,468 15,399

cash and cash equivalents at beginning of year 715,956 494,488 628,638

cash and cash equivalents at end of year \ 733,494 715,956 $ 644,037


Financial Review

notes to non-consoliDateD Financial stateMents December 31, 2010 and 2009


1. ORGAnIzATIOn AnD DesCRIPTIOn OF BusIness

Korean Air Lines Co., Ltd. (the “Company”) was incorporated on June 19, 1962 under the Commercial Code of the Republic of Korea and is engaged in the business of 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, 2010 amounted to \ 366,754 million.

(a) Basis of Presenting Financial statements

The Company maintains its accounting records in Korean won and prepares statutory non-consolidated financial statements in the Korean language in conformity with accounting principles generally accepted in the Republic of Korea. 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 solely for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated into English (with certain expanded descriptions) from the Korean language non-consolidated financial statements.

Certain information included in the Korean language non-consolidated financial statements, but not required for a fair presentation of the Company's financial position, results of operations, cash flows or changes in equity is not presented in the accompanying non-consolidated financial statements.

The Company prepares the non-consolidated financial statements in accordance with generally accepted accounting principles in the Republic of Korea. The Company applied the same accounting policies that were adopted in the previous year’s non-consolidated financial statements.

(b) Revenue Recognition

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

(c) Allowance for Doubtful Accounts

Allowance for doubtful accounts is estimated based on an analysis of individual accounts and past experience of collection and presented as a deduction from trade receivables.

2. BAsIs OF PResenTInG FInAnCIAl sTATeMenTs AnD suMMARY OF sIGnIFICAnT ACCOunTInGPOlICIes


(d) Inventories

Inventories are stated at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less the estimated selling costs. The cost of inventories is determined by moving-average method for airline service supplies and aerospace raw materials, the specific identification method for materials-in-transit and the first-in, first-out method for all other inventories.

(e) Investments in securities (excluding Investments in Associates, subsidiaries and Joint ventures)

Classification

Upon acquisition, the Company classifies debt and equity securities (excluding investments in subsidiaries, associates and joint ventures) into the following categories: held-to-maturity, available-for-sale or trading securities.

Investments in debt securities where the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity. Securities that are acquired principally for the purpose of selling in the short term are classified as trading securities. Investments not classified as either held-to-maturity or trading securities are classified as available-for-sale securities.

Initial recognition

Investments in securities (excluding investments in subsidiaries, associates and joint ventures) are initially recognized at cost.

subsequent measurement and income recognition

Trading securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of trading securities are included in the statement of income in the period in which they arise. Available-for-sale securities are subsequently carried at fair value. Gains and losses arising from changes in the fair value of available-for-sale securities are recognized as accumulated other comprehensive income, net of tax, directly in equity. Investments in available-for-sale securities that do not have readily determinable fair values are recognized at cost less impairment, if any. Held-to-maturity investments are carried at amortized cost with interest income and expense recognized in the statement of income using the effective interest method.

Fair value information

The fair value of marketable securities is determined using quoted market prices as of the period end. Non-marketable debt securities are fair valued by discounting cash flows using the prevailing market rates for debt with a similar credit risk and remaining maturity. Credit risk is determined using the Company’s credit rating as announced by accredited credit rating agencies in Korea.

The fair value of investments in money market funds is determined by investment management companies.

Financial Review

2. BAsIs OF PResenTInG FInAnCIAl sTATeMenTs AnD suMMARY OF sIGnIFICAnT ACCOunTInGPOlICIes (COnTInueD)

(e) Investments in securities (excluding Investments in Associates, subsidiaries and Joint ventures), Continued

Presentation

Trading securities, available-for-sale securities which mature within one year from the end of the reporting period or where the likelihood of disposal within one year from the end of the reporting period is probable, held-to-maturity securities which mature within one year from the end of the reporting period, short-term deposits and short-term loans are combined and presented as current assets. All other available-for-sale securities and held-to-maturity securities are combined and presented as long-term investments.

Impairment

The Company reviews investments in securities whenever events or changes in circumstances indicate that the carrying amount of the investments may not be recoverable. Impairment losses are recognized when the reasonably estimated recoverable amounts are less than the carrying amount and it is not obviously evidenced that impairment is unnecessary.

An impairment loss is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized and a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortization or depreciation) had no impairment loss been recognized in the asset in prior years. For financial assets measured at amortized cost and available-for-sale assets that are debt securities, the reversal is recognized in profit or loss. For available-for-sale financial assets that are equity securities, the reversal is recognized directly in equity.

(f) Investments in Associates and subsidiaries

Associates are entities of the Company and its subsidiaries that have the ability to significantly influence the financial and operating policies. It is presumed to have significant influence if the Company holds directly or indirectly 20 percent or more of the voting power unless it can be clearly demonstrated that this is not the case. Subsidiaries are entities controlled by the Company.

Investments in associates and subsidiaries are accounted for using the equity method of accounting and are initially recognized at cost.

The Company’s investments in associates and subsidiaries include goodwill identified on the acquisition date (net of any accumulated impairment loss). Goodwill is calculated as the excess of the acquisition cost of an investment in an associate or subsidiary over the Company’s share of the fair value of the identifiable net assets acquired. Goodwill is amortized using the straight-line method over its estimated useful life. Amortization of goodwill is recorded together with equity income (losses).

When events or circumstances indicate that the carrying value of goodwill may not be recoverable, the Company reviews goodwill for impairment and records any impairment loss immediately in the statement of income.




The Company’s share of its post-acquisition profits or losses in investments in associates and subsidiaries is recognized in the statement of income, and its share of post-acquisition movements in equity is recognized in equity. The cumulative post-acquisition movements are adjusted against the carrying amount of each investment. Changes in the carrying amount of an investment resulting from dividends by an associate or subsidiary are recognized when the associate or subsidiary declares the dividend. When the Company’s share of losses in an associate or subsidiary equals or exceeds its interest in the associate or subsidiary, including preferred stock or other long term loans and receivables issued by the associate or subsidiary, the Company does not recognize further losses, unless it has incurred obligations or made payments on behalf of the associate or subsidiary.

If an associate or a subsidiary uses accounting policies or estimates other than those of the Company for like transactions and events in similar circumstances, the Company makes appropriate adjustments to conform the associate’s accounting policies to those of the Company when the associate’s financial statements are used by the Company in applying the equity method. However, under the revised Statements of Korea Accounting Standards (“SKAS”) No. 15 Equity Method of Accounting, in the event that accounting policies and estimates differ due to the application of Exceptions to Accounting for Small and Medium-sized Entities or K-IFRS, no adjustments are made.

If the investee is a subsidiary, net income and net assets of the parent company’s separate financial statements should agree with the parent company’s share in the net income and net assets of the consolidated financial statements, except when the Company discontinues the application of the equity method due to its investment in a subsidiary being reduced to zero.

Unrealized gains on transactions between the Company and its associates or subsidiaries are eliminated to the extent of the Company’s interest in each associate or subsidiary.

(g) Property, Aircraft and equipment

Property, aircraft and equipment are stated at cost, except in the case of revaluations made in accordance with the Asset Revaluation Law, which allowed for asset revaluation prior to the Law being revoked on December 31, 2000. Assets acquired through investment in kind or donation are recorded at their fair value upon acquisition. For assets acquired in exchange for a non-monetary asset, the fair value of the asset given up is used to measure the cost of the asset received unless the fair value of the asset received is more clearly evident.

Significant additions or improvements extending the useful life of assets are capitalized. Normal maintenance and repairs are charged to expense as incurred.

Depreciation is computed by the using the straight-line method over the estimated useful lives of the assets as follows:

66 + 67

Financial Review



2. BAsIs OF PResenTInG FInAnCIAl sTATeMenTs AnD suMMARY OF sIGnIFICAnT ACCOunTInG POlICIes (COnTInueD)

Useful lives (years)Buildings 40

aircraft and engine 20leased aircraft and engine 20

aircraft parts 15vehicles 6others 6~15

The Company recognizes interest costs and other financial charges on borrowings associated with the production, acquisition or construction of property, aircraft and equipment as an expense in the period in which they are incurred.

Land that is revalued in accordance with revised SKAS No. 5 Property, Aircraft and Equipment 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.

The Company reviews property, aircraft and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the expected estimated undiscounted future net cash flows from the use of the asset and its eventual disposal are less than its carrying amount.

(h) Intangible Assets

Intangible assets are stated at cost less accumulated amortization and impairment losses, if any. Impairment losses are determined as the amount required to reduce the carrying amount of an intangible asset to its recoverable amount.

The criteria for determining whether an incurred cost qualifies as an intangible asset and the periods of amortization for each classification of intangible asset are described below.

Useful lives (years)Development costs 5 ~ 16Facility usage rights 10 ~ 30

other intangible assets 6 ~ 20

(i) Discount on Debentures

Discount on debentures issued, which represents the difference between the face value and issuance price of debentures, is amortized using the effective interest rate method over the life of the debentures. The amount amortized is included in interest expense.


(j) leases

The Company classifies and accounts for leases as either operating or capital, depending on the terms. Leases where the Company assumes substantially all of the risks and rewards of ownership are classified as capital leases. All other leases are classified as operating leases.

The assumption of substantially all of the risks and rewards of ownership is evidenced when one or more of the criteria listed below are met:

- Ownership of the leased property will be transferred to the lessee at the end of the lease term.

- The lessee has a bargain purchase option, and it is reasonably certain at inception of the lease that the option will be exercised.

- The lease term is equal to 75% or more of the estimated economic useful life of the leased property.

- The present value at the beginning of the lease term of the minimum lease payments equals or exceeds 90% of the fair value of the leased property.

In addition, if the leased property is specialized to the extent that only the lessee can use it without any major modification, it would be considered a capital lease.

Where the Company is a lessee under a capital lease, the present value of future minimum lease payments is capitalized and a corresponding liability is recognized. Payments made under operating leases are charged to the statement of income on a straight-line basis over the period of the lease.

(k) Retirement and severance Benefits

Employees who have been with the Company for more than one year are entitled to lump-sum payments based on salary rates and length of service at the time they leave the Company. The Company's estimated liability under the plan, which would be payable if all employees left at the end of the reporting period, is accrued in the accompanying non-consolidated statements of financial position. A portion of the liability is covered by an employees’ severance benefits trust where the employees have a vested interest in the deposit with the insurance company (or the bank) in trust. The deposit for severance benefits held in trust is, therefore, reflected in the accompanying non-consolidated statements of financial position as a reduction of the liability for retirement and severance benefits.

(l) valuation of Receivables and Payables at Present value

Receivables and payables arising from long-term cash loans, borrowings and other similar transactions are stated at present value. The difference between the nominal value and present value of these receivables or payables is amortized using the effective interest rate method. The amount amortized is included in interest expense or interest income.

(m) Foreign Currency Translation

Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at the foreign exchange rate on the end of the reporting period, with the resulting gains or losses recognized in the statement of income. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated into Korean won at the foreign exchange rate on the date of the transaction.

68 + 69

Financial Review


(n) Derivatives and Hedge Accounting

The Company holds derivative financial instruments to hedge its foreign currency, interest rate and aircraft fuel price risk exposures. Embedded derivatives are separated from the host contract and accounted for separately if the economic characteristics and risks of the host contract and the embedded derivative are not closely related, and a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative.

Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. Attributable transaction costs are recognized in profit or loss when incurred.

Hedge accounting

Where a derivative, which meets certain criteria, is used for hedging the exposure to changes in the fair value of a recognized asset, liability or firm commitment, it is designated as a fair value hedge. Where a derivative, which meets certain criteria, is used for hedging the exposure to the variability of the future cash flows of forecasted transactions, it is designated as a cash flow hedge.

The Company documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting the changes in fair values or in cash flows of hedged items.

Cash flow hedge

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognized in equity. The gain or loss relating to any ineffective portion is recognized immediately in the statement of income. Amounts accumulated in equity are recycled to the statement of income in the periods in which the hedged item will affect income or expense. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at the time remains in equity and is recognized when the forecast transaction is ultimately recognized in the statement of income. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the statement of income.

Derivatives that do not qualify for hedge accounting

Changes in the fair value of derivative instruments that are not designated as fair value or cash flow hedges are recognized immediately in the statement of income.




(o) Provisions, Contingent Assets and Contingent liabilities

Provisions are recognized when all of the following are met: (1) an entity has a present obligation as a result of a past event, (2) it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and (3) a reliable estimate can be made of the amount of the obligation. Where the effect of the time value of money is material, a provision is recorded at the present value of the expenditures expected to be required to settle the obligation.

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

Where the expenditure required to settle a provision is expected to be reimbursed by another party, the reimbursement is recognized as a separate asset when, and only when, it is virtually certain that reimbursement will be received if the Company settles the obligation. The expense generated by the provision is presented net of the amount of expected reimbursement.

(p) Income Taxes

Income tax on the income or loss for the year comprises current and deferred tax. Income tax is recognized in the statement of income except to the extent that it relates to items recognized directly in equity, in which case it is recognized in equity.

Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted.

Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the end of the reporting period.

A deferred tax asset is recognized only to the extent that it is probable that future taxable income will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized.

Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related asset or liability for financial reporting or the expected reversal date of the temporary difference for those with no related asset or liability such as loss carryforwards and tax credit carryforwards. The deferred tax amounts are presented as a net current asset or liability and a net non-current asset or liability.

Changes in deferred taxes due to a change in the tax rate except for those related to items initially recognized outside profit or loss (either in other comprehensive income or directly in equity) are recognized as income in the current year.

70 + 71

Financial Review




(q) earning (loss) Per share

Earning (loss) per share are calculated by dividing net income (loss) attributable to stockholders of the Company by the weighted-average number of shares outstanding during the period.

(r) use of estimates

The preparation of non-consolidated financial statements in accordance with accounting principles generally accepted in the Republic of Korea requires management to make estimates and assumptions that affect the amounts reported in the non-consolidated financial statements and related notes to non-consolidated financial statements. Actual results could differ from those estimates.

3. BAsIs OF TRAnslATInG FInAnCIAl sTATeMenTs

The non-consolidated financial statements are expressed in Korean won and have been translated into US dollars at the rate of \ 1,138.9 to $ 1, the basic exchange rate on December 31, 2010 posted by Seoul Money Brokerage Services, solely for the convenience of the reader. These translations should not be construed as a representation that any or all of the amounts shown could be converted into US dollars at this or any other rate.

4. InvenTORIes

Inventories as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

Merchandise \ 14,206 13,333 $ 12,473

Raw materials 67,035 72,556 58,859

supplies 255,542 230,874 224,377

Materials-in-transit 6,256 3,502 5,493

\ 343,039 320,265 $ 301,202


5. nOn-CuRRenT InvesTMenTs

Non-current investments as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

available-for-sale securities

Marketable equity securities \ 63,401 59,741 $ 55,669

non-marketable equity securities 18,754 11,109 16,467

investments in affiliated companies 1,390 1,390 1,220

Debt securities 3,000 3,000 2,634

investments in other equity securities 2,853 1,884 2,505

89,398 77,124 78,495

Held-to-maturity securities 12,017 11,983 10,552

equity method accounted investments 1,578,648 1,443,291 1,386,116

\ 1,680,063 1,532,398 $ 1,475,163

(a) Available-for-sale securities

As of December 31, 2010 and 2009, available-for-sale securities (non-current) consists of marketable securities recorded at fair value, non-marketable securities recorded at fair value, investments in affiliated companies, debt securities recorded at amortized cost and investments in other equity securities.

(i) Marketable securities recorded at fair value

Marketable securities recorded at fair value as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

Percentage

of ownership

acquisition cost

Fair value

Book value

Book value

Book value

Marketable equity securities

hana Financial group inc. 0.11% \ 1,602 10,110 10,110 7,682 $ 8,877

hanil cement co., ltd. 3.70% 10,229 16,746 16,746 22,440 14,704

Meritz securities co., ltd. 0.84% 3,283 2,505 2,505 3,186 2,199

gs home shopping inc. 4.50% 20,226 32,284 32,284 25,343 28,347 hanjin heavy industries co.,ltd. 0.08% 399 1,534 1,534 919 1,347 hanjin heavy industries & construction holdings co., ltd. 0.05% 148 222 222 171 195

\ 35,887 63,401 63,401 59,741 $ 55,669

Financial Review



5. nOn-CuRRenT InvesTMenTs (COnTInueD)

(ii) non-marketable securities recorded at cost

Non-marketable securities recorded at fair value as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010Percentage

of ownership

acquisition cost

Fair value

Book value

Book value

Book value

non-marketable equity securities

the Korea economic Daily co., ltd. 0.05% \ 145 56 56 145 $ 49

Daehan oil Pipeline corporation 3.10% 6,968 13,540 13,540 7,678 11,889

Kihyup Finance co., ltd. 1.72% 500 458 458 500 402

cheju convention center ltd. 0.42% 700 808 808 700 709

Korea tourist supply center inc.(*) 0.18% 81 81 81 81 71

entob co., ltd. 6.25% 1,000 2,670 2,670 1,000 2,344

incheon united Football club(*) 0.30% 100 100 100 100 88

sita inc.(*) 0.85% 405 405 405 405 357

seoul tourism Marketing co., ltd. 2.41% 500 636 636 500 558

\ 10,399 18,754 18,754 11,109 $ 16,467

(*) the company recognizes these securities at cost since the difference between acquisition costs and fair values of them is immaterial.

(iii) Investments in affiliated companies


2010 2009 2010Percentage

of ownership

acquisition cost

Fair value

Book value

Book value

Book value

investments in affiliated companies

Korea global logistics system co., ltd. 65.00% \ 650 650 650 650 $ 571

hanjin gt&s co., ltd. 25.00% 250 250 250 250 220

hanjin int’l Japan 55.00% 394 394 394 394 345

terminal one Management inc. 25.00% 32 32 32 32 28

global logistics system asia Pacific 31.50% 64 64 64 64 56

\ 1,390 1,390 1,390 1,390 $ 1,220

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.


(iv) Debt securities

Debt securities as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

acquisitioncost

Fairvalue

Bookvalue

Bookvalue

Bookvalue

Debt securities

Bonds \ 3,000 3,000 3,000 3,000 $ 2,634

(v) Investments in other equity securities


2010 2009 2010

acquisitioncost

Fairvalue

Bookvalue

Bookvalue

Bookvalue

investments in other equity securities

Korea Defense industry association \ 2,853 2,853 2,853 1,884 $ 2,505

(b) Held-to-maturity securities

Held-to-maturity securities as of December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

Due after one year through to five years \ 11,982 11,976 $ 10,521

Due after five years through to ten years 35 7 31

\ 12,017 11,983 $ 10,552

Financial Review




(c) equity Method Accounted Investments

(i) equity method accounted investments as of December 31, 2010 and 2009 are as follows: (in millions of won)

2010 2009

company

Percentage of

ownershipacquisition

costnet

assetsBook value

Book value

Korea airport service co., ltd. 59.54% \ 93,320 165,444 165,444 145,352

hanjin information systems & telecommunication co., ltd. 99.35% 15,111 33,178 33,178 30,077

topas co., ltd. 67.35% 731 24,061 24,061 22,024

Kal hotel network co., ltd. 100.00% 99,900 54,591 54,591 51,510

hanjin travel service co., ltd. 55.82% 27,788 52,755 52,755 51,692

air total service co., ltd. 100.00% 2,000 3,468 3,468 3,816

Jungseok enterprise co., ltd. 24.53% 54,328 75,374 75,374 75,272

Jedong leisure co., ltd. 100.00% 14,000 26,653 26,653 26,597

hanjin energy co., ltd. 82.52% 854,821 913,544 914,749 866,329

grandstar cargo int’l airlines co., ltd. (gcia)(*1) 25.00% 17,413 6,483 8,930 10,084

Jin air co., ltd. 100.00% 27,288 11,256 11,376 2,179

homeo therapy co., ltd. 100.00% 15,036 10,364 10,364 4,686

tianjin hanjin-sino trans air cargo terminal co., ltd. (*1) 47.00% 8,827 7,178 7,178 5,132

hanjin int’l corp. (*1) 100.00% 209,598 32,207 32,207 33,833

hanjin shipping holdings co.,ltd.(*2) 16.71% 136,541 152,406 157,244 16,072

hanjin shipping co., ltd. - - - - 98,636

hanjin central asia Mchj. 100.00% 176 176 176 -

iat co., ltd. 90% 900 900 900 -

\ 1,577,778 1,570,038 1,578,648 1,443,291

(*1) the company applied the equity method of accounting based on unaudited or unreviewed financial statements as it was unable to obtain the audited financial statements and performed procedures to verify the unaudited financial statements.

(*2) although the company’s equity in the investees is less than 20%, the investments are classified as equity method investments, given the company’s significant influence on the investees.


(ii) Changes in carrying amount of equity method investments for the year ended December 31, 2010 are as follows:

(in millions of won)

company

Balance atJan. 1, 2010

increase(decrease) Dividends

net income(loss)

accumulatedother

comprehensiveincome (loss)

Other increase(decrease)

Balance at Dec. 31,2010

Korea airport service co., ltd. \ 145,352 - (943) 33,775 (12,718) (22) 165,444

hanjin information systems & telecommunication co., ltd. 30,077

- (348) 3,863 (497) 83 33,178

topas co., ltd. 22,024 - (5,388) 7,534 - (109) 24,061

Kal hotel network co., ltd. 51,510 - - 3,081 - - 54,591

hanjin travel service co., ltd. 51,692 - (141) 1,408 (899) 695 52,755

air total service co., ltd. 3,816 - - (348) - - 3,468

Jungseok enterprise co., ltd. 75,272 - (171) 1,296 (589) (434) 75,374

Jedong leisure co., ltd. 26,597 - - 56 10 (10) 26,653

hanjin energy co., ltd. 866,329 - - 42,435 (66) 6,051 914,749

grandstar cargo int’l airlines co., ltd. (gcia) 10,084 - - (1,192) 53 (15) 8,930

Jin air co., ltd. 2,180 - - 9,196 - - 11,376

homeo therapy co., ltd. 4,686 8,000 - (2,284) (38) - 10,364

tianjin hanjin-sino trans air cargo terminal co., ltd. 5,131 2,354 - (410) 103 - 7,178

hanjin int’l corp. 33,833 5,591 - (6,772) (235) (210) 32,207

hanjin shipping holdings co., ltd.(*) 16,072 128,133 - 9,007 4,768 (736) 157,244

hanjin shipping co., ltd.(*) 98,636 (50,051) - (7,710) (40,875) - -

hanjin central asia Mchj. - 176 - - - - 176

iat co.,ltd. - 900 - - - - 900

\ 1,443,291 95,103 (6,991) 92,935 (50,983) 5,293 1,578,648

(*) For the year ended December 31, 2010, the company participated in hanjin shipping holdings co., ltd.’s capital increase by investing their interests in hanjin shipping co., ltd., and as a result, recognized gain on disposal of equity method investment amounting to \ 77,573 million.

76 + 77

Financial Review




(iii) Changes in equity in capital adjustments of affiliates for the year ended December 31, 2010 are as follows:

(in millions of won)equity in capital adjustments of

affiliates

company

Balance at

Jan. 1, 2010 changesBalance at

Dec. 31,2010Tax

effect

Balance atDec. 31, 2010

(net of tax effect)

Korea airport service co., ltd. \ 26,723 (12,717) 14,006 (3,081) 10,925

hanjin information systems & telecommunication co., ltd. 1,105 (498) 607 (146) 461

topas co., ltd. (20) - (20) 4 (16)

Kal hotel network co., ltd. (1,251) - (1,251) - (1,251)

hanjin travel service co., ltd. 14,876 (898) 13,977 (3,269) 10,708

Jungseok enterprise co., ltd. 18,524 (589) 17,935 (3,903) 14,032

Jedong leisure co., ltd. 12,319 10 12,329 (2,712) 9,617

hanjin energy co., ltd. 26,605 (67) 26,538 (5,838) 20,700

grandstar cargo int’l airlines co., ltd. (gcia) 1,895 53 1,948 - 1,948

homeo therapy co., ltd. - (38) (38) - (38)

tianjin hanjin-sino trans air cargo terminal co., ltd. (693) 104 (589) - (589)

hanjin int'l corp. (2,194) (235) (2,429) - (2,429)

hanjin shipping holdings co., ltd. 6,080 4,767 10,847 (2,386) 8,461

hanjin shipping co., ltd. 40,875 (40,875) - - -

\ 144,844 (50,983) 93,860 (21,331) 72,529

(iv) Changes in goodwill for equity method accounted investments for the year ended December 31, 2010 are as follows:


companyBalance at

Jan. 1, 2010 increase Disposalamortized

amountsBalance at

Dec. 31,2010

hanjin energy co., ltd. \ 2,169 - - (964) 1,205

Jin air co., ltd. 178 - - (58) 120

hanjin shipping holdings co., ltd. - 21,038 - (3,156) 17,882

hanjin shipping co., ltd. (6,841) - 6,841 - -

\ (4,494) 21,038 6,841 (4,178) 19,207


(v) Changes in eliminated unrealized gains (losses) from inter-company transactions for the year ended December 31, 2009 are as follows:


companyBalance at

Jan. 1, 2010 increase DecreaseBalance at

Dec. 31, 2010

grandstar cargo int'l airlines co., ltd. \ 2,777 - (330) 2,447

hanjin shipping holdings co., ltd. - (13,044) - (13,044)\ 2,777 (13,044) (330) (10,597)

(vi) The summary of financial position of the equity method investees as of December 31, 2010 and the results of their operations for the year then ended based on the investees’ latest available financial statements is as follows:


companyTotal

assetsTotal

liabilities Salesnet

income (loss)

Korea airport service co., ltd. \ 386,536 119,439 363,716 56,729

hanjin information systems & telecommunication co., ltd. 62,146 27,556 100,864 4,087

topas co., ltd. 45,813 10,089 55,506 11,185

Kal hotel network co., ltd. 154,444 96,859 49,303 2,989

hanjin travel service co., ltd. 128,718 29,324 26,207 2,523

air total service co., ltd. 7,608 4,140 25,418 (348)

Jungseok enterprise co., ltd. 372,512 62,076 34,857 5,283

Jedong leisure co., ltd. 14,336 12 - 55

hanjin energy co., ltd. 2,154,995 1,047,995 127,399 52,590

grandstar cargo international airlines co., ltd. 104,891 78,958 87,491 (3,448)

Jin air co., ltd. 57,141 45,886 115,998 9,254

homeo therapy co., ltd. 10,517 153 - (2,284)

tianjin hanjin-sino trans air cargo terminal co., ltd. 17,446 5 - -

hanjin int’l corp. 92,023 66,351 37,764 (6,772)

hanjin shipping holdings co., ltd. 1,088,697 176,383 158,702 141,756

Financial Review



6. PROPeRTY, AIRCRAFT AnD equIPMenT

(a) Property, aircraft and equipment at December 31, 2010 and 2009 are summarized as follows:


2010 2009 2010

Property, aircraft and equipment, at cost \ 18,978,691 17,331,885 $ 16,664,054

accumulated depreciation (6,380,695) (5,650,226) (5,602,507)

Property, aircraft and equipment, net \ 12,597,996 11,681,659 $ 11,061,547

(b) Changes in property, aircraft and equipment for the year ended December 31, 2010 were as follows:


Beginningbalance acquisition Disposal Depreciation Others

ending balance

ending balance

land \ 1,714,745 75 - - - 1,714,820 $ 1,505,681

Buildings 639,092 389 (50) (22,189) 11,042 628,284 551,659

aircraft 1,793,827 14,262 (169,614) (279,935) 425,461 1,784,001 1,566,424

engines 574,017 - (26,958) (78,786) 191,243 659,516 579,082

leased aircraft 4,551,755 - - (336,899) 667,177 4,882,033 4,286,620

leased engines 1,108,918 - - (79,832) 98,946 1,128,032 990,457

construction- in-progress 986,560 827,861 - - (321,158) 1,493,263 1,311,145

other 312,745 132,410 (83,237) (61,617) 7,746 308,047 270,479

\ 11,681,659 974,997 (279,859) (859,258) 1,080,457 12,597,996 $ 11,061,547

(c) As of December 31, 2010 and 2009, the Company’s insurance policies to cover losses from fire and other casualty losses are as follows;

(in millions of won and in thousands of us dollars)2010 2009

aircraft and engines $ 9,895,793 $ 9,305,477

Buildings and machinery \ 1,984,925 \ 1,904,419

cash and investments 5,250 8,078

national properties 547,800 541,960

others 53,024 64,990

(d) The official declared value of land as of December 31, 2010, as announced by the Minister of Construction and Transportation was \ 1,027,975 million. The official declared value, which is used for government purposes, is not intended to represent fair value.


7. InTAnGIBle AsseTs

(a) Changes in intangible assets for the year ended December 31, 2010 are as follows:

(in millions of won and in thousands of us dollars)Facility

usage rights

Development costs

Other intangible

assets Total Total

net balance at beginning of year \ 168,925 34,037 93,778 296,740 $ 260,550

acquisition - 788 1,049 1,837 1,612

amortization (11,020) (3,013) (5,357) (19,390) (17,025)

net balance at end of year \ 157,905 31,812 89,470 279,187 $ 245,137

(b) Changes in intangible assets for the year ended December 31, 2009 were as follows:

(in millions of won and in thousands of us dollars)Facility

usage rights

Development costs

Other intangible

assets Total Total

net balance at beginning of year \ 179,945 34,424 1,541 215,910 $ 189,578

acquisition - 3,654 93,748 97,402 85,523

amortization (11,020) (4,041) (1,511) (16,572) (14,551)

net balance at end of year \ 168,925 34,037 93,778 296,740 $ 260,550

80 + 81

Financial Review



8. PleDGeD AsseTs AnD GuARAnTees

The following assets were pledged as collateral for the Company’s short-term borrowings and long-term debt as of December 31, 2010:

(in millions of won and in thousands of foreign currency)

Type of borrowings asset lender

Borrowing amount

collateralized amount

Borrowings, etc. aircraft Korea Development Bank

usD 820,904 KRw 120,000

KRw 207,004 usD 685,200

Facility usage rights

KRw 140,000

land/buildings KRw 820,900

usD 303,905

nlg 1,143

Korea exchange Bank KRw 30,000 KRw 73,000

Kookmin Bank KRw 13,046 KRw 20,544

aircraft Korea exim Bank usD 82,178 usD 354,559

nacF(*) KRw 317,143 KRw 240,000

usD 149,453 usD 333,995

land/buildings KRw 192,000

aircraft hana Bank, and others

KRw 22,900 usD 150,350

JPy 2,437,500 JPy 5,070,000

Facility usage rights usD 64,250 KRw 45,500

Performance bond non-current investments - government and public bonds

Defense Procurement agency - -

import shipments incheon airport customs - -

long-term debt equity method investments - hanjin shipping holdings

Korea exchange Bank KRw 29,819 469,593 shares

Borrowings equity method investments - hanjin energy

woori Bank, and others KRw 1,012,022 34,000 shares

(*) national agricultural cooperative Federation


9. OTHeR AsseTs

Other current and other non-current assets as of December 31, 2010 and 2009 are as follows:


2010 2009 2010

Other current assets

current investments \ 4 151 $ 4

short-term derivative instrument assets 17,534 41,621 15,396

Prepaid expenses 75,707 78,927 66,474

accrued income, net 49,799 45,492 43,726

\ 143,044 166,191 $ 125,600

Other non-current assets

long-term financial instruments \ 925 947 $ 812

long-term receivables under capital leases 19,782 21,266 17,369

guarantee deposits 144,968 140,664 127,289

long-term prepayments 3,485 1,834 3,059

\ 169,160 164,711 $ 148,529

10. sHORT-TeRM BORROwInGs

Short-term borrowings as of December 31, 2010 and 2009 are as follows:


Borrowings from annual interest rate 2010 2009 2010

Korea Development Bank - singapore branch 3M libor + 3.30% \ 22,778 17,514 $ 20,000

Korea Development Bank 3M libor + 3.10, 5.33% 235,780 116,760 207,024

Korea exim Bank 3M libor + 2.98~3.20% 113,890 116,760 100,000

Kookmin Bank - - 70,000 -

hana Bank 6M libor + 3.40% 3M cD Rate + 2.50% 143,962 145,700 126,405

nacF 3M libor + 2.92% 68,334 133,408 60,000

Mirae asset life insurance - - 30,000 -

Korea exchange Bank 3M cD Rate + 2.70%3M libor + 3.30% 86,945 58,380 76,341

Bank of china 3M libor + 2.50% 56,945 58,380 50,000

Kwangju Bank - - 30,000 -

woori Bank 3M libor + 4.90% 34,167 35,028 30,000

\ 762,801 811,930 $ 669,770

Financial Review



11. lOnG-TeRM DeBT

(a) Bonds

The non-guaranteed bonds issued and outstanding as of December 31, 2010 and 2009 are as follows:


Series issue date Maturity annual interest rate 2010 2009 201023-2nd 06.04.17 11.04.17 5.00% \ 150,000 150,000 $ 131,70624-2nd 06.09.25 11.09.25 4.00% 250,000 250,000 219,51025-1st 07.02.08 10.02.08 - - 200,000 -25-2nd 07.02.08 12.02.08 5.00% 100,000 100,000 87,80426-1st 07.05.25 10.05.25 - - 100,000 -26-2nd 07.05.25 12.05.25 5.00% 100,000 100,000 87,80427-1st 07.09.17 10.09.17 - - 150,000 -27-2nd 07.09.17 12.09.17 5.00% 50,000 50,000 43,90228th 07.10.31 10.10.31 - - 200,000 -29-1st 07.11.12 10.11.12 - - 140,000 -29-2nd 07.11.12 12.11.12 5.00% 40,000 40,000 35,12130-1st 08.03.06 11.03.06 5.00% 200,000 200,000 175,60930-2nd 08.03.06 13.03.06 5.00% 100,000 100,000 87,80431-1st 08.05.14 11.05.14 5.00% 220,000 220,000 193,16931-2nd 08.05.14 13.05.14 5.00% 80,000 80,000 70,24331-3rd 08.05.14 11.05.14 3M liBoR +1.90% 102,501 105,084 90,00032nd 08.09.01 11.09.01 7.00% 300,000 300,000 263,41233rd 08.11.14 11.11.14 8.00% 100,000 100,000 87,80434-1st 09.02.12 10.02.12 - - 150,000 -34-2nd 09.02.12 10.08.12 - - 100,000 -34-3rd 09.02.12 12.02.12 7.40% 250,000 250,000 219,51035st 09.04.09 12.04.09 6.63% 200,000 200,000 175,60936-1st 09.08.06 12.08.06 6.50% 230,000 230,000 201,94936-2nd 09.08.06 14.08.06 7.20% 70,000 70,000 61,46336-3rd 09.08.06 12.08.06 6M liBoR + 6.80% 85,418 87,570 75,00037-1st 09.10.29 12.10.29 6.10% 100,000 100,000 87,80437-2nd 09.10.29 14.10.29 7.10% 100,000 100,000 87,80438-1st 10.02.04 13.02.04 5.95% 100,000 - 87,80438-2nd 10.02.04 15.02.04 6.90% 200,000 - 175,60939th 10.04.15 13.01.15 3M liBoR + 4.45% 68,334 - 60,00040th 10.08.02 13.08.02 5.10% 300,000 - 263,412

3,496,253 3,872,654 3,069,852less discount on bonds (17,606) (33,924) (15,459)

3,478,647 3,838,730 3,054,393less current portion of bonds, net of discount on bonds (1,316,449) (1,037,307) (1,155,895)

\ 2,162,198 2,801,423 $ 1,898,498


(b) long-term borrowings

Long-term borrowings as of December 31, 2010 and 2009 are as follows:


annual interest rate 2010 2009 2010Korea Development Bank 3.52% ~ 4.21%,

6M KDB Bond + 1.33% \ 108,004 164,586 $ 94,832

4.15% 11,000 11,000 9,658

6M KDB Bond + 1.26% ~ 2.84% 80,000 213,333 70,243

3M liBoR + 0.57% ~ 3.35% 707,148 750,090 620,905

industrial Bank of Korea 4.35% 4,000 4,000 3,512

hana Bank cD Rate + 1.53% 22,900 27,480 20,107

3M liBoR + 0.60% ~ 4.40% 152,705 41,742 134,081

Kookmin Bank 3.00% 13,046 13,790 11,455

3M liBoR + 0.48% 51,319 77,892 45,060

Kyobo life insurance - - 30,000 -

nacF cD Rate + 2.00% 157,143 221,428 137,978

3M liBoR + 0.6% ~ 2.00%3M cD Rate + 3.00% 330,211 380,294 289,939

Korea life insurance - - 40,000 -

samsung life insurance - - 40,000 -

scFBK(*) 3M JPy liBoR + 3.00% 34,054 45,556 29,901

longboat quay aviation ltd. - - 6,764 -

shinhan capital 6M JPy liBoR + 5.30% 139,708 126,282 122,669

standard chartered securities Korea limited 6M liBoR + 5.45% 56,945 - 50,000

woori Bank 3M liBoR + 4.40% 56,945 - 50,000

Korea exim Bank 3M liBoR + 1.65% 93,592 273,439 82,178

Korea exchange Bank 3M liBoR + 2.90% 13,118 11,676 11,518

washington Mutual - - 52 -

ut Finance corp. - - 78,585 -

shinhan Bank 6M liBoR + 4.80% 64,097 29,116 56,280

Bankcomm 3M liBoR + 3.95% 39,861 40,866 35,000

national Federation of Fisheries cooperatives 3M liBoR + 4.40% 56,945 - 50,000

societe generale 3M liBoR + 0.60% 63,788 - 56,008

Korea Finance corporation 3M liBoR + 3.23% 78,733 - 69,131

others 56,945 116,760 50,000

2,392,207 2,744,731 2,100,454

less current portion (1,131,758) (668,996) (993,729)

\ 1,260,449 2,075,735 $ 1,106,725

(*) standard chartered First Bank Korea limited

Financial Review



11. lOnG-TeRM DeBT (COnTInueD)

(c) Obligations under capital leases


annual interest rate 2010 2009 2010

ansett 5.73% \ 67,710 - $ 59,452

Kaleca10 aviation liMiteD 3M liBoR + 0.30% 186,742 - 163,967

andros aviation limited - - 68,375 -

arirang ltd. 3M liBoR + 1.05% 136,473 161,694 119,829

Brooklyn leasing ltd. 6.84% 49,709 143,634 43,647

constitution aircraft leasing 3 ltd. 9.57% 24,177 26,477 21,228

Duria aviation ltd. 3M liBoR + 0.99% 35,588 44,324 31,248

Kal-eca 2001 aviation ltd. 3M liBoR + 0.77% 23,613 46,936 20,733

Kaleca03 aviation ltd. 3M JPy liBoR + 0.15% 57,695 62,084 50,659

Kaleidos aviation ltd. - - 18,059 -

Kaleidos three aviation ltd. - - 25,458 -

Kaleidos two aviation ltd. - - 24,233 -

Ke atomos ltd. 3M liBoR + 1.50% 99,654 119,679 87,500

Ke augustus ltd. 3M liBoR + 0.44% 118,318 142,836 103,888

Ke cayman leasing ltd. 3M JPy liBoR + 1.39% 77,575 88,462 68,114

Ke celtics ltd. 3M liBoR + 4.75% 48,119 64,510 42,250

Ke evergreen ltd. 3M liBoR + 4.41% 63,778 84,067 56,000

Ke export leasing ltd. 3M liBoR + 0.3%~5.0%, 4.60% ~5.33% 1,798,057 1,508,357 1,578,766

Ke harmony ltd. 3M euRiBoR + 1.35% 64,205 114,985 56,375

Ke innisfree ltd. 3M liBoR + 1.64% 38,287 52,458 33,618

Ke Jumbos v ltd. 3M liBoR + 1.10% 131,597 157,940 115,547

Ke octavius ltd. 3M liBoR + 0.625% 242,126 290,095 212,596

Ke Pc2018 ltd. 3M liBoR + 3.45% 64,860 - 56,950

Millenium Kal ltd. 4.97% 72,960 112,335 64,062

Mugungwha ltd. 6M liBoR + 3.60% 68,000 77,872 59,707

Peninsula aviation ltd. 6M liBoR + 3.60% 61,750 70,056 54,219

sKyteaM 2010 limited 3M liBoR + 3.50% 35,875 - 31,500

sumisho aircraft asset Management B. v. 5.73% 20,830 24,696 18,290

Ke u simjo ltd. 3M liBoR + 0.9% 35,844 50,465 31,472

3,623,542 3,580,087 3,181,617

less current portion (698,068) (772,392) (612,932)

\ 2,925,474 2,807,695 $ 2,568,685


Minimum lease payments and present value of long-term obligations under capital leases as of December 31, 2010 are as follows:


Obligations under capital leases

Obligations under capital leases

less than 1 year \ 860,345 $ 755,418

More than 1 year to 5 years 2,507,376 2,201,577

More than 5 years 961,637 844,356

4,329,358 3,801,351

Present value discounts (705,816) (619,735)

Present value \ 3,623,542 $ 3,181,616

(d) Guaranteed loans

The Company has agreed to assume certain guaranteed liabilities of Hanjin Shipping Co., Ltd. with KEB and other financial institutions (guaranteed loans), pursuant to the Government Guidelines for the Rationalization of the Marine Industry. The guaranteed loans accrue no interest, and are payable in equal installments over 20 years. In accordance with the repayment schedule, the Company made its first installment payment in 2003 and final installment will be due in 2017. The outstanding balance of guaranteed loans as of December 31, 2010 and 2009 are as follows:


From 2010 2009 2010

Korea Development Bank \ 18,311 20,928 $ 16,078

woori Bank 11,998 13,711 10,535

Korea asset Management corp. 772 882 678

hanshin Federation of savings Bank 925 1,057 812

Kookmin Bank 691 789 607

shinhan Bank 3,081 3,521 2,705

Daegu Bank 2,267 2,590 1,991

Korea exchange Bank 29,818 34,079 26,180

tong yang life insurance co., ltd. 6,140 7,017 5,391

lotte insurance co., ltd. 634 725 557

74,637 85,299 65,534

less present value discounts (21,544) (27,133) (18,916)

53,093 58,166 46,618

less current portion, net of present value discounts (9,930) (9,930) (8,719)

\ 43,163 48,236 $ 37,899

Financial Review



11. lOnG-TeRM DeBT (COnTInueD)

(e) Asset-backed securitization loans

The asset-backed securitization (“ABS”) loans of the Company are obtained from various special purpose entities, which entailed the sales of the beneficial rights of receiving a certain amount of cash flows from the future receivables of the Company to several financial institutions. Details of the ABS loans as of December 31, 2010 and 2009 are as follows:


annual interest rate 2010 2009 2010

Kal - 3rd aBs - \ - 28,537 $ -

Kal - 4th aBs 4.75% ~ 7.26% 480,000 500,000 421,459

Kal - 5th aBs 1.25% 551,196 - 483,972

1,031,196 528,537 905,431

less current portion (306,812) (48,537) (269,393)

\ 724,384 480,000 $ 636,038

(f) The maturity of long-term liabilities


December 31, Bondslong-termborrowings

Obligations under capital

leases Guaranteed loans

asset-backed securitization

loans Total

2011 \ 1,322,501 1,131,758 698,068 10,662 306,812 3,469,801

2012 1,155,418 627,815 664,879 10,662 309,068 2,767,842

2013 648,334 278,449 594,283 10,662 295,316 1,827,044

2014 170,000 217,673 421,889 10,662 120,000 940,224

2015 200,000 71,753 323,836 10,662 - 606,251

thereafter - 64,759 920,587 21,327 - 1,006,673

\ 3,496,253 2,392,207 3,623,542 74,637 1,031,196 10,617,835


12. AsseTs AnD lIABIlITIes DenOMInATeD In FOReIGn CuRRenCY

Assets and liabilities denominated in foreign currency as of December 31, 2010 and 2009 are summarized as follows:

(in millions of won and in thousands of foreign currency)

2010 2009

assets usD 297,323 \ 338,621 usD 469,636 \ 548,347

JPy 10,523,581 147,023 JPy 10,689,482 134,989

hKD 242,517 35,493 hKD 282,553 42,541

twD 66,069 2,582 twD 120,615 4,377

sgD 8,765 7,748 sgD 8,506 7,070

gBP 9,345 16,425 gBP 4,698 8,822

euR 34,912 52,843 euR 27,265 45,649

cny 446,657 77,048 cny 557,405 95,350

others - 128,654 others - 108,755

\ 806,437 \ 995,900

liabilities usD 5,829,934 6,639,712 usD 5,526,366 \ 6,452,585

JPy 67,927,029 948,995 JPy 29,421,687 371,543

hKD 33,907 4,962 hKD 19,682 2,963

twD 47,734 1,866 twD 8,089 294

sgD 751 664 sgD 896 745

gBP 2,935 5,159 gBP 2,431 4,565

euR 50,621 76,620 euR 76,677 128,378

cny 44,747 7,719 cny 20,574 3,519

others - 11,906 others - 6,732

\ 7,697,603 \ 6,971,324

The Company recognized gain on foreign currency translation, net amounting to \ 143,553 million as non-operating income in relation to the above foreign currency translation for the year ended December 31, 2010.

Financial Review



13. PROvIsIOn FOR ReTIReMenT AnD seveRAnCe BeneFITs

Changes in retirement and severance benefits for the years ended December 31, 2010 and 2009 were as follows:


2010 2009 2010

estimated severance benefits at beginning of period \ 810,566 749,002 $ 711,710


Payment of retirement and severance benefits (109,942) (43,185) (96,533)

estimated severance benefits at end of period 858,061 810,566 753,413

transfer to national Pension Fund (9,237) (10,853) (8,111)

Deposit for retirement and severance benefits trust (238,720) (264,289) (209,606)

net balance at end of period \ 610,104 535,424 $ 535,696

14. OTHeR lIABIlITIes

Other current and other non-current liabilities as of December 31, 2010 and 2009 are as follows:


2010 2009 2010

Other current liabilities

withholdings \ 83,305 65,304 $ 73,145

unearned revenues 12,555 8,749 11,024

short-term derivative instrument liabilities 13,380 6,233 11,748

\ 109,240 80,286 $ 95,917

Other non-current liabilities

guaranteed loans \ 43,163 48,236 $ 37,899

long-term other accounts payable 170,835 175,140 150,000

long-term withholdings 40,369 43,795 35,444

\ 254,367 267,171 $ 223,343


15. DeRIvATIve InsTRuMenTs AnD HeDGe ACCOunTInG

(a) Details of derivatives as of December 31, 2010 are as follows:

Type of transactionsPurpose of transaction

Financial institution

Description of contract

Foreign currency swap trading hsBc usD 90,000,000

Foreign currency option trading nomura and 2 other financial institutions usD 310,000,000

oil-price option hedging JP Morgan and 2 other financial institutions 1,300,000 BBl

(b) Details of the gains and losses on derivatives for the year ended December 31, 2010 are as follows:


Type of transaction valuation gain (loss), net Transaction loss, net

oil - price option \ 10,878 (11,628)

oil - price swap contracts (2,972) (3,669)

Foreign currency swap (1,547) -

currency option (13,380) -

\ (7,021) (15,297)

16. TReAsuRY sTOCK

In accordance with Article 165-2 of the Financial Investment Services and Capital Market Act, the Company acquired 4,437,327 shares of registered common stock and 11,869 shares of preferred stock which will be resold according to the market situation hereafter and credited them as capital adjustment.

90 + 91

Financial Review



17. sellInG, GeneRAl AnD ADMInIsTRATIve eXPenses

Details of selling, general and administrative expenses for the years ended December 31, 2010 and 2009 were as follows:


2010 2009 2010

salary \ 229,255 200,281 $ 201,295


Depreciation 10,992 11,850 9,651

Rental 18,637 19,947 16,364

sales commission 511,163 631,448 448,822

advertising 86,441 73,229 75,899

welfare 80,393 48,611 70,588

training 7,124 7,883 6,255

communications 78,687 68,179 69,090

taxes & dues 18,605 14,641 16,336

Facility maintenance 9,435 10,016 8,284

commission 97,926 67,221 85,983

Mileage compensation 39,366 26,022 34,565

others 101,605 85,279 89,214

\ 1,323,785 1,280,312 $ 1,162,336


18. InCOMe TAXes

(a) The Company was subject to income taxes on taxable income at the following normal tax rates.

Taxable incomeTax rate

2009 2010 2011 Thereafter

up to \ 200 million 12.1% 12.1% 11.0% 11%

over \ 200 million 27.5% 24.2% 24.2% 22%

(b) The components of provision for (benefit from) income taxes for the years ended December 31, 2010 and 2009 were as follows:


2010 2009 2010

current income taxes(*) \ 13,158 (1,593) $ 11,553Deferred income taxes(*1) 132,136 82,748 116,021items charged directly to shareholders` equity(*2) 6,838 (107,640) 6,004

\ 152,132 (26,485) $ 133,578

(*) additional tax payments (or tax returns) arising from finalized tax assessment are added or deducted in current income taxes.

(*1) (in millions of won and in thousands of us dollars)

2010 2010

Deferred income tax assets at end of period \ 336,937 $ 295,844

Deferred income tax assets at beginning of period 469,073 411,865

changes in deferred income tax arising from temporary differences \ 132,136 $ 116,021

(*2) (in millions of won and in thousands of us dollars)

2010

change Tax effect

gain (loss) on valuation of long-term investment securities \ 11,305 (2,487)

equity adjustment arising from equity method investments (50,983) 11,041

gain (loss) on valuation of derivatives 7,089 (1,716)

\ (32,589) 6,838

Financial Review



18. InCOMe TAXes [COnTInueD]

(c) The income tax expense calculated by applying statutory tax rates to the Company’s income (loss) before income taxes differs from the actual tax expense in the non-consolidated statement of income for the years ended December 31, 2010 and 2009 for the following reasons:


2010 2009 2010

income (loss) before income taxes \ 613,833 (125,381) $ 538,970

income tax expense computed at statutory rate 148,521 (30,342) 130,407

adjustments

non-deductible expense 14,279 8,486 12,538

additional payments or tax returns 13,157 (3,638) 11,552

unrecognized deferred tax (318) 5,301 (279)

effect of change in tax rate and others (23,507) (6,292) (20,640)

income taxes \ 152,132 (26,485) $ 133,578

(d) significant changes in cumulative temporary differences except tax loss carryforward and tax credit for the year ended December 31, 2010 were as follows:

(i) Change in deferred tax assets arising from temporary differences


Beginning balance increase Decrease

ending balance

Provision for retirement and severance benefits \ 324,038 54,006 - 378,044

Depreciation 178,750 75,027 - 253,777

Foreign currency translation adjustment debit 3,737 - 3,728 9

unredeemed mileage liabilities 279,841 65,250 - 345,091

gain from assets contributed 54,322 - - 54,322

Foreign currency translation gain, net 506,935 - 251,928 255,007

equity method accounted investments 254,694 1,984 1,293 255,385

impairment loss on property, aircraft and equipment, net 39,454 - - 39,454

loss on valuation of derivatives 7,089 - 7,089 -

other 158,880 69,676 8,967 219,589

\ 1,807,740 265,943 273,005 1,800,678


(ii) Change in deferred tax liabilities arising from temporary differences


Beginning balance increase Decrease

ending balance

Provision for temporary depreciation \ (4) - (4) -

Present value discounts long-term liabilities-guaranteed loans (27,020) - (5,713) (21,307)

gain on valuation of long-term investment securities (24,564) (11,305) - (35,869)

Revaluation surplus arising from property, aircraft and equipment (916,906) - - (916,906)

equity method accounted investments (214,234) (101,364) (48,220) (267,378)

gain on valuation of derivatives (40,206) - (48,083) 7,877

Reserve (45,719) - (22,860) (22,859)

other (5,933) - (744) (5,189)

(1,274,586) (112,669) (125,624) (1,261,631)

\ 533,154 153,274 147,381 539,047

(e) Details of gross deferred income tax assets and liabilities as of December 31, 2010 are as follows:


current non-current Total Total

temporary differences - deferred tax assets \ 584 327,487 328,071 $ 289,734

temporary differences - deferred tax liabilities 1,649 (247,489) (245,840) (217,531)

tax loss carryforward 230,472 17,274 247,746 217,530

tax credit - 6,960 6,960 6,111

\ 232,705 104,232 336,937 $ 295,844

Temporary difference unrecognized

equity method investments \ 253,417

gain from assets contributed 54,322

Revaluation surplus arising from property, aircraft and equipment (102,115)

\ 205,624

Financial Review



19. eARnInG (lOss) PeR sHARe

Basic earning (loss) per share for the years ended December 31, 2010 and 2009 are as follows:

(in millions of won and in thousands of us dollars,except for share information)

2010 2009 2010

net income (loss) \ 461,701 (98,896) $ 405,392weighted-average number of common shares outstanding 67,534,304 67,534,304 67,534,304Basic earning (loss) per share \ 6,837 (1,464) $ 6.00

20. DIvIDenDs

(a) Details of dividends for the years ended December 31, 2010 and 2009 were as follows:

(in millions of won, except number of shares and dividend per share)

2010 2009

common stock Preferred stock common stock Preferred stock

total dividends(*) \ 33,767 752 - -

number of shares 67,534,304 1,367,308 67,534,304 1,367,308

Dividend per share \ 500 549 - -

(*) this amount includes was not recorded in the 2010 non-consolidated financial statements. it will be recorded upon declaration by the Board of Directors in 2011.

(b) Dividends as a percentage of net income for the years ended December 31, 2010 and 2009 were as follows:


2010 2009

Dividend amount \ 34,519 -

net income 461,701 (98,896)

Dividends as a percentage of net income 7.48% -

(c) Dividend for common stock yield ratio for the years ended December 31, 2010 and 2009 was as follows:

(in won)

2010 2009

Dividend per share \ 500 -

Market price as of year-end 69,600 54,900

Dividend yield ratio 0.72% -


21. COMPReHensIve InCOMe (lOss)

Comprehensive income for the years ended December 31, 2010 and 2009 are as follows:


2010 2009 2010

net income (loss) \ 461,701 (98,896) $ 405,392

other comprehensive income (loss), net of taxes(*)

gain on valuation of long-term investment securities 8,818 14,931 7,743

gain on valuation of derivatives 5,373 264,403 4,718

changes in capital adjustments arising from equity method accounted investments (39,942) 58,419 (35,071)

gain on valuation of other non-current assets - (5,161) -

changes in retained earnings arising from equity method accounted investments 5,288 - 4,643

(20,463) 332,592 (17,967)

comprehensive income \ 441,238 233,696 $ 387,425

(*) (in millions of won and in thousands of us dollars)

2010 2009 2010

gain on valuation of long-term investment securities \ (2,487) (4,211) (2,184)

gain on valuation of derivatives (1,715) (84,414) (1,506)

changes in capital adjustments arising from equity method accounted investments 11,041 (20,471) 9,696

gain on valuation of other non-current assets - 1,456

\ 6,839 (107,640) $ 6,006

Financial Review



22. COMMITMenTs AnD COnTInGenCIes

(a) As of December 31, 2010, seoul Guarantee Insurance Company has provided guarantees of \ 8,547 million on behalf of the Company for compliance with various contracts, bidding and warranties.

(b) As of December 31, 2010, the Company opened letters of credit for up to us$ 78.1 million with HsBC. The Company also has a credit line agreement for up to \ 170,000 million with Kookmin Bank and other financial institutions and us$ 130 million with woori Bank and other financial institutions.

(c) As of December 31, 2010, the Company has one outstanding promissory note pledged as collateral to Korea Defense Industry Association.

(d) As of December 31, 2010, 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.

In regard to an alleged anti-trust violation relating to the Company and other parties colluding on price fixing of air cargo services, the Company made a plea to the united states Department of Justice on August 1, 2007 for the payment of fines totaling us$ 300 million to be paid in annual installments up to 2012. with respect to the four installment payments, including the one made in July 2009, united states Department of Justice approved a one year extension in 2009 and an additional one year in 2010 resulting in two years of extension in total. The related outstanding balance of \ 227,780 million as of December 31, 2010 was accounted for as other accounts payable amounting to\ 56,945 million and long-term other accounts payable amounting to \ 170,835 million.

In connection with the above anti-trust violation, various other parties also filed lawsuits against the Company claiming damages at the united states District Court for the eastern District of new York which are still pending. In addition, the Company is currently under investigation by the Australian Competition and Consumer Commission and new zealand Commerce Commission for allegedly colluding on price fixing. As of December 31, 2010, the ultimate outcome of this investigation cannot be presently determined.

(e) The Company has entered into various aircraft purchase contracts with aircraft manufacturers, including the Boeing Company. The amount of such contracts is approximately us$ 8,173 million as of December 31, 2010.


(f) Operating lease contracts

The Company has entered into operating lease agreements to lease 26 aircraft and certain aircraft parts from BCC Bolongo Ltd., 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 the New York City Industrial Development Agency (“IDA”).

As of December 31, 2010, the schedule of lease payments on these agreements is summarized as follows:


2010 2010

2011.1.1 ~ 2011.12.31 \ 153,937 $ 135,163

2012.1.1 ~ 2012.12.31 122,644 107,686

2013.1.1 ~ 2013.12.31 106,183 93,233

2014.1.1 ~ 2014.12.31 99,362 87,244

2015.1.1 ~ 2015.12.31 92,906 81,575

2016.1.1 and after 301,238 264,499

\ 876,270 $ 769,400

Korea Development Bank has provided a guarantee of US$ 6 million on behalf of the Company for the aircraft operating lease agreements and a guarantee up to US$ 72 million to the Company for opening letters of credit with Hongkong & Shanghai Banking Corp.

The Company has entered into operating lease agreements to lease four aircraft and certain aircraft parts to Jin Air Co., Ltd. as of December 31, 2010. The schedule of lease collection on this agreement is summarized as follows:


2010 2010

2011.1.1 ~ 2011.12.31 \ 16,593 $ 14,569

2012.1.1 ~ 2012.12.31 16,593 14,569

2013.1.1 ~ 2013.12.31 16,593 14,569

2014.1.1 ~ 2014.12.31 13,295 11,673

2015.1.1 ~ 2015.12.31 12,383 10,873

2016.1.1 and after 10,957 9,621

\ 86,414 $ 75,874

Financial Review


22. COMMITMenTs AnD COnTInGenCIes (COnTInueD)

The Company, including Air France KLM and other users of the JFK Airport in New York (collectively “the JFK users”), have provided a joint guarantee of US$ 329 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 1 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 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.

(g) The company has entered into an agreement to improve financial structure through sales and lease back with creditors including KDB on november 5, 2009.

23. TRAnsACTIOns AnD BAlAnCes wITH RelATeD COMPAnIes

(a) Details of parent and subsidiary relationships as of December 31, 2010 are as follows:

Relationship name

subsidiary Korea airport service co., ltd.hanjin information systems & telecommunication co., ltd. topas co., ltd., Kal hotel network co., ltd., iat co., ltd.hanjin travel service co., ltd., air total service co., ltd.Jungseok enterprise co., ltd., Jedong leisure co., ltd. hanjin energy co., ltd., Jin air co., ltd.homeo therapy co., ltd., hanjin int'l corp., hanjin central asia MchJ.incheon international airport oiling Facilitywaikiki Resort hotel inc.

other related party grandstar cargo int'l airlines co., ltd., hanjin shipping holdings co.,ltd., tianjin hanjin-sino trans air cargo terminal co., ltd.Korea global logistics system co., ltd., hanjin gt&s co., ltd. hanjin int'l Japan, terminal one Management inc.global logistics system asia Pacific, hanjin transportation co., ltd. hanjin shipping co., ltd., air Korea, cybersky co., ltd. s-oil corporation



(b) significant transactions which occurred in the normal course of business with related companies for the years ended December 31, 2010 and 2009 are as follows:


Sales and other transactions

Purchases and other transactions

2010 2009 2010 2009

Korean airport service co., ltd. \ 895 570 265,070 243,382

hanjin travel service co., ltd. 194 186 4,372 17,374

Jungseok enterprise co., ltd. 14 - 908 909

hanjin information systems & telecommunication co., ltd. 993 439 37,075 37,292

topas co., ltd. 25,828 21,999 29,002 23,543

air total service co., ltd. 3 - 25,418 26,478

Jin air co., ltd. 33,499 29,865 342 5

incheon international airport oiling Facility 6 2 10,784 10,355

grandstar cargo int'l airlines co., ltd. 3,178 4,650 - -

hanjin transportation co., ltd. 2,003 1,883 17,694 14,729

s-oil corporation - - 301,996 273,170

others 7,743 5,858 43,470 34,524

\ 74,356 65,452 736,131 681,761

(c) Account balances with related companies as of December 31, 2010 and 2009 are as follows:


Receivables Payables

2010 2009 2010 2009

Korean airport service co., ltd. \ 568 527 47,337 56,386

hanjin travel service co., ltd. 67 33 2,381 3,464

Jungseok enterprise co., ltd. 435 428 2 6

hanjin information systems & telecommunication co., ltd. 172 65 7,938 6,914

topas co., ltd. 4,571 3,696 5,335 4,539

air total service co., ltd. 1 - 4,705 5,916

Jin air co., ltd. 21,521 22,846 18,301 12,180

incheon international airport oiling Facility 2 - 899 898

grandstar cargo int'l airlines co., ltd. 1,460 4,868 - -

hanjin transportation co., ltd. 233 231 2,806 2,588

s-oil corporation - - 29,647 12,629

others 1,453 1,496 2,915 2,780

\ 30,483 34,190 122,266 108,300

Financial Review



23. TRAnsACTIOns AnD BAlAnCes wITH RelATeD COMPAnIes (COnTInueD)

(d) Key management personnel compensation in total and for each of the following categories for the years ended December 31, 2010 and 2009 are as follows:


compensation details 2010 2009 2010

salaries \ 3,454 2,583 $ 3,033Provision for retirements and severance benefits 7,853 743 6,895

\ 11,307 3,326 $ 9,928

(e) Details of guarantees which the Company has provided for related companies as of December 31, 2010 are as follows:


Relationship nameGuaranteed

amountsFinancial

institutions

subsidiaries Korea airport service co., ltd. KRw 19,387 KeB

KRw 11,907 KDB

KRw 14,396 woori Bank and others

Jungseok enterprise co., ltd. KRw 23,651 KeB and others

hanjin int'l corp. usD 50 hana Bank

equity method investee associates grandstar cargo int'l airlines co., ltd. usD 29 Bank of china

hanjin transportation co., ltd. KRw 14,535 KeB

KRw 8,931 KDB

KRw 11,783 woori Bank and others

other hanjin heavy industries & construction holdings co., ltd. KRw 15,099 KDB

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 of \ 1,012,021 million by means of participation in paid-in capital increases of HJE, lending subordinated loans to HJE, or other means in case HJE has insufficient funds for repayment.

The Company made a commitment to GoodNest LLC to secure the repayment for the principal and interest of KAL Hotel Network Co., Ltd. (“KHN”)’s debt of \ 85,000 million in case KHN has insufficient funds for repayment.


(f) Guarantees provided by related companies as of December 31, 2010 are as follows:


Relationship nameGuaranteed

amountsFinancial

institutions

subsidiaries Korea airport service co., ltd. \ 38,764 KeB

23,804 KDB

31,422 woori Bank and others

Jungseok enterprise co., ltd. 38,764 KeB

23,804 KDB


associates hanjin transportation co., ltd. 38,764 KeB

23,804 KDB


hanjin shipping co., ltd. 38,764 KeB

23,804 KDB


other hanjin heavy industries & construction holdings co., ltd. 93,990 KeB and others

24. seGMenT InFORMATIOn

The Company defines its business segments by the nature of services and products as follows:

Segment Products or services Major customers

air transportation transporting passengers and cargoes individual customers

aerospace Maintaining aircraft and manufacturing aircraft parts

Boeing commercial, Defense Procurement agency and others

in-flight meals catering for in-flight meals singapore airlines ltd. and other 28 foreign airlines

hotel and limousine and others land transport, accommodations individual customers

102 + 103

Financial Review



24. seGMenT InFORMATIOn (COnTInueD)

The following tables present the segment information of business segments and geographical segments as of December 31, 2010 and 2009 and for the years ended December 31, 2010 and 2009:


2010

air transportation aerospace in-flight meals

Hotel and limousine Total

operating revenues:

external revenues \ 11,017,908 342,949 59,247 40,418 11,460,522

inter-segment revenues 12,108 93,774 117,872 11,836 235,590

total \ 11,030,016 436,723 177,119 52,254 11,696,112

operating income (loss): \ 1,089,757 8,811 12,571 (1,557) 1,109,582

Property, aircraft and equipment, and intangible assets: \ 12,134,615 563,512 46,140 132,916 12,877,183

Depreciation and amortization: \ 846,685 20,805 6,766 4,391 878,647


2009

air transportation aerospace in-flight meals

Hotel and limousine Total

operating revenues:

external revenues \ 9,054,819 251,659 45,457 41,768 9,393,703

inter-segment revenues 7,578 75,278 109,372 6,725 198,953

total \ 9,062,397 326,937 154,829 48,493 9,592,656

operating income (loss): \ 37,400 10,208 87,890 (2,122) 133,376

Property, aircraft and equipment, and intangible assets: \ 11,250,103 548,754 49,836 129,705 11,978,398

Depreciation and amortization: \ 775,579 17,861 6,035 3,083 802,558



Domestic asia america europe Oceania Total

operating revenues:

air transportation \ 1,300,435 3,514,805 3,697,905 2,059,321 445,442 1,1017,908

aerospace 108,217 15,151 183,594 35,987 - 342,949

in-flight meals 59,247 - - - - 59,247

hotel and limousine 40,418 - - - - 40,418

December 31, 2010 \ 1,508,317 3,529,956 3,881,499 2,095,308 445,442 11,460,522

December 31, 2009 \ 1,467,461 2,808,246 3,070,573 1,643,126 404,296 9,393,702

25. ResulTs OF OPeRATIOns FOR THe lAsT InTeRIM PeRIOD (unAuDITeD)

(in millions of won and in thousands of us dollars, except earnings per share)

2010 2009 2010

4th Quarter 4th Quarter 4th QuarterRevenue \ 2,898,950 2,578,254 $ 2,545,395operating income 179,204 154,028 157,348net income for the period 62,928 84,887 55,253earnings per share in won 932 1,257 0.82

26. suBsequenT evenTs

(a) On January 27, 2011, the 2010 financial statements were authorized for issue at the Board of Directors meeting.

(b) The Company issued unsecured debenture bonds on February 8, 2011. Details are as follows:

Maturity date annual interest rate Face value

2014.2.8 4.82% \ 300,000

Financial Review



27. PlAnnInG AnD ADOPTIOn OF K-IFRs (InTeRnATIOnAl FInAnCInG RePORTInG sTADARDs)

(a) K-IFRs Adoption status

The Company plans to prepare its financial statements under K-IFRS from 2011. To manage all the things accompanied with adoption of K-IFRS, the Company has organized a separate task force, and they have analyzed the impact of the adoption of K-IFRS and have been in the process of modification of their system. Also, the Company has trained persons in charge of adoption of K-IFRS in Korean Air Lines and its subsidiaries and it is reporting the results of its operation to the audit committee and management group periodically. Details of action plans and current status for the preparation of K-IFRS as of December 31, 2010 are as follows:

Major activities Preparation plans current status as of December 31, 2010

analysis of the impact on adoption of K-iFRs and managing the separate task Force team for the adoption of K-iFRs

Preparation in adopting K-iFRs by man-aging the separate task Force team for the adoption of K-iFRs

established separate task Force and hired an accounting firm to execute an analysis of the likely effects of K-iFRs adoption

concurrent K-iFRs closing Preparation of financial statements under both current K-gaaP and K-iFRs for the purpose of comparison with 2011 K-iFRs financial statements

concurrent K-iFRs closing to be carried out for 2010

Modification of system update of accounting system in accordance with K-iFRs

currently maintaining accounting re-cords under both K-gaaP and K-iFRs

(b) summary of main differences between K-GAAP and K-IFRs

Subject K-iFRS K-GaaP

Revenue recognition for mileage credits the deferred revenue method the incremental cost method

valuation on severance and retirement benefit

Based on the projected unit credit method, provision for severance and retirement benefit is calculated based on actuarial present value and discount rate

estimated payment amount for employees who served more than one year of employment

Borrowing cost attributable to the acquisition

capitalized expensed

component accounting for aircraft aircraft is divided into significant parts according to its expected useful life and is audited at the end of each reporting period

aircraft is divided into body and engine components and its depreciation is calculated by applying its expected useful life


To the President of Korean Air Lines Co., Ltd.:

We have reviewed the accompanying Report on the Operations of Internal Accounting Control System(“IACS”) of Korean Air Lines Co., Ltd. (the “Company”) as of December 31, 2010. The Company's management is responsible for designing and maintaining effective IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review management's assessment and issue a report based on our review. In the accompanying report of management’s assessment of IACS, the Company’s management stated: “Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2010, in all material respects, in accordance with the IACS Framework (name of other standard, if used) issued by the Internal Accounting Control System Operation Committee.”

We conducted our review in accordance with IACS Review Standards, issued by the Korean Institute of Certified Public Accountants. Those Standards require that we plan and perform the review to obtain assurance of a level less than that of an audit as to whether the Report on the Operations of Internal Accounting Control System is free of material misstatement. Our review consists principally of obtaining an understanding of the Company’s IACS, inquiries of company personnel about the details of the report, and tracing to related documents we considered necessary in the circumstances. We have not performed an audit and, accordingly, we do not express an audit opinion.

A company's IACS is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, IACS may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Based on our review, nothing has come to our attention that the Report on the Operations of Internal Accounting Control System as of December 31, 2010 is not prepared in all material respects, in accordance with IACS Framework issued by the Internal Accounting Control System Operation Committee.

This report applies to the Company’s IACS in existence as of December 31, 2010. We did not review the Company’s IACS subsequent to December 31, 2010. This report has been prepared for Korean regulatory purposes, pursuant to the External Audit Law, and may not be appropriate for other purposes or for other users.

Seoul, Korea

March 10, 2011

inDePenDent accountants’ Review RePoRt on inteRnal accounting contRol systeM

notice to Readers this report is annexed in relation to the audit of the non-consolidated financial statements as of December 31, 2010 and the review of internal accounting control system pursuant to article 2-3 of the act on external audit for stock companies of the Republic of Korea.

106 + 107

Financial Review

RePoRt on the oPeRations oF the inteRnal accounting contRol systeM


KOREAN AIR ANNUAL REPORT 2010KOREAN AIR ANNUAL REPORT 2010

ORGANIZATION CHART

108 + 109

cHaiRman & ceO

pResiDent & cOO

caRGO Business Div.CUSTOMER SERVICE fliGHt OpeRatiOns Div.passenGeR Business Div.

CARGO BUSINESS PLANNING & ADMINISTRATIONINTERNAL AUDITING FLIGHT OPERATIONS PLANNINGPASSENGER BUSINESS PLANNING

& ADMINISTRATION

CARGO NETWORK & REVENUE MANAGEMENTINTERNATIONAL AFFAIRS FLIGHT OPERATIONS

TECHNICAL SUPPORTPASSENGER NETWORK

MANAGEMENT

CARGO STRATEGY & DEVELOPMENTLEGAL AFFAIRS LINE OPERATIONSPASSENGER REVENUE

MANAGEMENT

CARGO LOGISTICS & SERVICE

FACILITIES & ENVIRONMENT FLIGHT STANDARDSPASSENGER MARKETING

CORPORATE SAFETY, SECURITY & COMPLIANCE

FLIGHT OPERATIONS QUALITY ASSURANCEPASSENGER BUSINESS IT

PROCUREMENT FLIGHT TRAINING CENTERAIRPORT CUSTOMER SERVICE

PASSENGER SERVICE CENTER

CUSTOMER AIRLINES SERVICE CENTER

INFORMATION TECHNOLOGY

aeROspace Business Div.

CORPORATE COMMUNICATIONS

PLANNING & ADMINISTRATION

cORpORate stRateGy & planninG Div.

MARKETING & CONTRACT

Human ResOuRces Div.

maintenance & enGineeRinG Div.

emeRGency pROvisiOn team

Defense affaiRs team

QUALITY MANAGEMENT

EMPLOYEE RELATIONS

MAINTENANCE PLANNING

cateRinG & in-fliGHt saels Business Div. R&D CENTER

HUMAN RESOURCES DEVELOPMENT CENTER

ENGINEERING

HOtel Business Div.

DEFENSE & AIRCRAFT MODIFICATION PLANT

HUMAN RESOURCES

AEROMEDICAL CENTER

MATERIAL SUPPLY

caBin seRvice Div.

COMMERCIAL AIRCRAFT MANUFACTURING PLANT

GENERAL AFFAIRS

SPORTS ADMINISTRATION & SUPPORT OFFICE

MAINTENANCE QUALITYASSURANCE

CABIN CREW OPERATIONS PLANNING

COMMERCIAL AIRCRAFT HEAVY MAINTENANCE OPERATIONS

cORpORate finance Div.

MAINTENANCE TRAINING CENTER

CABIN CREW TRAINING CENTER

AVIONICS & COMPONENT MAINTENANCE OPERATIONS

FINANCE AFFAIRS

LINE & BASE MAINTENANCE CENTER

POWERPLANT MAINTENANCE CENTER

CABIN CREW OPERATIONS

UAS BUSINESS DEPARTMENT

REVENUE ACCOUNTING

FINANCE

ACCOUNTING

OpeRatiOns cOntROl Div.

SCHEDULING

ReGiOnal HeaD QuaRteRs

OPERATIONS CONTROL

EXECUTIVE OFFICERS

AdditonAl inFoRmAtion

Hanjin Group corporatemanagement

pyeongchang Olympic Bid support Office

Suh, yong wonexecutive vice president

jung, ji youngmanaging vice president

Shin, Hyun ohmanaging vice president

joo, Sung Kyunvice president

Shin, mu Cholmanaging vice president

company Headquarters

international affairs

corporate communications

facilities & environment

procurement

customer Relations

park, yong SoonSenior vice president

Suh, Kang yoonmanaging vice president

lee, Soo Keunmanaging vice president

Kang, young Sikexecutive vice president

yoo, jong Seokmanaging vice president

Bang, Sun ohmanaging vice president

internal auditing

jeon, Sang Kivice president

Han, Ki doomanaging vice president

lee, Hwa Seokmanaging vice president

corporate safety,security & compliance

Blake peter johnSenior vice president

Hong, jun movice president

legal affairs

Kim, Se taimanaging vice president

Kim, tae joonvice president

Cho, emily leevice president

information technology

lee, Sang manmanaging vice president

Kim, Chul woo managing vice president

lee, Ki Kwangvice president

cho, yang Hochairman & ceO

corporate strategy & planning Division

Cho, won taeSenior vice president

Kim, yun Hwivice president

Kim, Realvice president

Human Resources Division

Suh, yong wonexecutive vice president

Kim, yong Soonmanaging vice president

lee, you Sungmanaging vice president

lee, Kwang Soomanaging vice president

Kim, Kyu Hwanmanaging vice president

Hwang, Soo youngmanaging vice president

corporate finance Division

eRp project

lee, Sang Kyoonexecutive vice president

lee, Sang manmanaging vice president

Hur, young jinmanaging vice president

Kang, Sung minvice president

Kim, Hyun Seokmanaging vice president

lee, Sung Hwanvice president

lee, yong Kookvice president

chi, chang Hoonpresident & cOO

passenger Business Division

cargo Buisness Division

catering & in-flight sales Business Division

Hotel Business Division

woo, Kee Hongmanaging vice president

Kang, Kyoo wonSenior vice president

Cho, Hyun AhSenior vice president


yoon, Shinmanaging vice president

park, Hak jinmanaging vice president

jung, yoon dongmanaging vice president

Cho, Byung taekmanaging vice president

park, Hyung Soonvice president

yoon, Kyoung moonvice president

yang, june yongvice president

Kim, Suk wanvice president

park, Bum jungvice president

Cho, yong Raevice president

lim, jae wookvice president

yoon, jin Hovice president

Choi, jung Hovice president

yoo, myung Subvice president

KOREAN AIR ANNUAL REPORT 2010KOREAN AIR ANNUAL REPORT 2010110 + 111

americas

china

Japan

south east asia

europe & middle east

commonwealth of independent states

lee, jin Kulmanaging vice president

park, in Chaivice president

Kwon, Byung Chanmanaging vice president

Kim, jang Soovice president

Kim, jae Homanaging vice president

lee, Hyung Keunmanaging vice president

Kim, jong Cheolvice president

Kang, dae Hwanvice president

ma, wonvice president

Kim, young Baevice president

park, Byung Ryoolvice president

jackson iii john edwardvice president

Regional Headquarters

Korea

lee, nae Kyumanaging vice president

lee, Seung Bummanaging vice president

Kim, jong daemanaging vice president

lee, jong Sukmanaging vice president

park, woon Homanaging vice president

Choi, eun joovice president

Kim, yong Chulvice president

Rhee, Song jongvice president

lee, Kyung woovice president

Choi, Soo ilvice president

flight Operations Divisions

Hwang Chulmanaging vice president

Seo, Hwa Sokmanaging vice president

Ban, Seung eummanaging vice president

nam, Suk woovice president

Kim, won Kyuvice president

Choi, Ho Kyungvice president

Kang, Keum Seopvice president

cabin service Division

yeo, woon jinvice president


Kim, dae wonvice president

Ahn, yeong Seokvice president

Operations control Division

moon, Kap Suckmanaging vice president

lee, Sang Kivice president

aerospace Business Division

Kim, Se HanSenior vice president

Choi, june Chulmanaging vice president

Ham, myung Raemanaging vice president

lee, Chang Hyomanaging vice president

do, Hyun junmanaging vice president

Kim, jong Hamanaging vice president

Kim, in Hwavice president

Song, Kee joovice president

Cho, Seong Baevice president

maintenance & engineering Division

Kang, young Sikexecutive vice president

Kim, maeng gonmanaging vice president

Kwon, Hyuk minmanaging vice president

Cho, Kyoo Binmanaging vice president

Kwon, young Hwanmanaging vice president

jang, Kwang Soomanaging vice president

Kim, Sung gabvice president

lee, Hak jaevice president

lim, Cheon Soovice president

Hwang, in jongvice president

Navoi

OkayamaToyko

ShizuokaNagoya

OsakaFukuoka

Oita

Guam

CebuHo Chi Minh City

Phnom Penh

Kota Kinabalu

Denpasar(Bali)Jakarta

Singapore

Kuala Lumpur

Penang

Phuket

Bangkok

Siem ReapChiang Mai

Hanoi

Guangzhou

Kunming

Hong Kong

Taipei

Changsha

ShanghaiWuhan

Xi’an

Xiamen

Beijing

Qingdao

KagoshimaNagasaki

Weihai

Ulaanbaatar

ShenyangYanji

Dalian

Vladivostok

Komatsu

Busan

SeoulIncheon

Jeju

TianjinZhengzhou

Shenzhen

Manila

NiigataAkita

AomoriHakodate

SapporoSeattle

San Francisco

Las Vegas

Los Angeles

Honolulu

Sao Paulo

Auckland

Nadi

Brisbane

Sydney

Melbourne

Madrid

Rome

Milano

ZurichParis

BrusselsLondon

BaselFrankfurt

Amsterdam

Prague

Copenhagen Moscow

Saint PetersburgStockholmOslo

Vienna

Cairo

Tel Aviv

Istanbul

Dubai

Tashkent

Mumbai

Chennai(Madras)

Kathmandu

Miami

Washington D.C

New York

Toronto

Chicago

Atlanta

Dallas

Vancouver

Anchorage

Navoi

Mudanjiang

ROUTE NETWORK Passenger & Cargo Cargo



Navoi

OkayamaToyko

ShizuokaNagoya

OsakaFukuoka

Oita

Guam

CebuHo Chi Minh City

Phnom Penh

Kota Kinabalu

Denpasar(Bali)Jakarta

Singapore

Kuala Lumpur

Penang

Phuket

Bangkok

Siem ReapChiang Mai

Hanoi

Guangzhou

Kunming

Hong Kong

Taipei

Changsha

ShanghaiWuhan

Xi’an

Xiamen

Beijing

Qingdao

KagoshimaNagasaki

Weihai

Ulaanbaatar

ShenyangYanji

Dalian

Vladivostok

Komatsu

Busan

SeoulIncheon

Jeju

TianjinZhengzhou

Shenzhen

Manila

NiigataAkita

AomoriHakodate

SapporoSeattle

San Francisco

Las Vegas

Los Angeles

Honolulu

Sao Paulo

Auckland

Nadi

Brisbane

Sydney

Melbourne

Madrid

Rome

Milano

ZurichParis

BrusselsLondon

BaselFrankfurt

Amsterdam

Prague

Copenhagen Moscow

Saint PetersburgStockholmOslo

Vienna

Cairo

Tel Aviv

Istanbul

Dubai

Tashkent

Mumbai

Chennai(Madras)

Kathmandu

Miami

Washington D.C

New York

Toronto

Chicago

Atlanta

Dallas

Vancouver

Anchorage

Navoi

Mudanjiang

KOREAN AIR ANNUAL REPORT 2010KOREAN AIR ANNUAL REPORT 2010112 + 113

Vladivostok

companyinformationdAte oF eStABliSHmentJune 19, 1962 | Privatized on March 1, 1969

HeAd oFFiCe1370 Gonghang-dong, Gangseo-gu, Seoul, Korea

weBSitewww.koreanair.com

liStingThe stock was listed on Korean StockExchange in March 1966

pAid-in CApitAl KRW 367 billion

Common StoCK 71,971,631 shares

pReFeRRed StoCK 1,379,177 shares

geneRAl SHAReHoldeRS’ meeting March18, 2011

DOMESTIC / CHINA / JAPAN NETWORK

Passenger & Cargo Cargo



DIRECTORY OF REGIONAL & DISTRICT OFFICES

euROpe

Paris Sales (331) 4297-3080Paris Airport (331) 4862-6161Dubai Sales (9714) 3377-003London Airport (44208) 897-0030London Sales (44207) 495-8641Rome Sales (3906) 6595-5952Madrid Sales (3491) 542-5700Milano Sales (3902) 7209-5654Brussels Sales (322) 751-8085Vienna Sales (431) 7007-32515Stockholm Sales (468) 411-2599Amsterdam Sales (3120) 655-6333Oslo Sales (47) 2292-5570Istanbul Sales (90212) 465-2650Zurich Sales (4143) 443-6061Cairo Sales (202) 2576-8255Copenhagen Sales (45) 3314-6363Praha Sales (4202) 2011-6827Frankfurt Airport (4969) 697-64610Frankfurt Sales (49180) 500-9800Tel Aviv Sales (9723) 754-4700

cis

Moscow Airport (7495) 956-4632Moscow Sales (7495) 725-2727Vladivostok Sales (74232) 433-444Tashkent Sales (99871) 129-2004

uZBeKistan

Navoi Sales (99879) 770-3811

cHina

Reservation Center 40065-88888Beijing Airport (8610) 6459-0556Beijing Sales (8610) 8468-5288Guangzhou Airport (8620) 3606-7455Guangzhou Sales (8620) 3877-3878Dalian Airport (86411)8388-7179Dalian Sales (86411) 8365-8899Mudanjiang Sales (86453) 631-8858Shanghai Passenger Sales (8621) 5208-2080Shanghai Cargo Sales (8621) 6835-4802Xiamen Sales (86592) 268-0088Shenyang Sales (8624) 2334-1880Shenyang Airport (8624) 8939-8308Shenzhen Sales (86755) 8293-3106Xi'an Sales (8629) 8836-1818Yanji Sales (86433) 291-8824Yantai Sales (86535) 660-5389Wuhan Sales (8627) 8556-1581Ulaanbaatar Sales (97611) 31-7100Weihai Sales (86631) 532-7054Zhengzhou Sales (86371) 6788-1288Jinan Sales (86531) 8611-8847Changsha Sales (86731) 8225-9425Qingdao Airport (86532) 8471-6321Qingdao Sales (86532) 8388-0221Kunming Sales (86871) 315-8300Taipei Sales (8862) 2518-2200Tianjin Airport (8622) 2490-5701Tianjin Sales (8622) 2330-8219Pudong Airport (8621) 6835-5620Hongqiao Airport (8621) 2235-1260Hongkong Passenger Sales (852) 2733-7110Hongkong Airport (852) 2769-7511Hongkong Cargo Sales (852) 2215-3514

sOutHeast asia

Kuala Lumpur Airport (603) 8787-3466Kuala Lumpur Sales (603) 2020-0200Denpasar Airport (62361) 8468-5288Delhi Sales (9111) 2565-4948Manila Airport (632) 853-7744Manila Sales (632) 789-3714Mumbai Sales (9122) 2287-3200Bangkok Airport (662) 134-2270Bangkok Sales (662) 620-6900Cebu Sales (6332) 340-5431Siem Reap Airport (85563) 964-881Jakarta Airport (6221) 550-2389Jakarta Sales (6221) 521-2180Chennai Sales (9144) 4900-2700Chiang Mai Airport (6653) 922-556Kathmandu Sales (9771) 443-1565Kota Kinabalu Sales (6088) 413-710Singapore Sales (65) 6796-2001Singapore Airport (65) 6542-0623Penang Sales (604) 644-2099Penang Airport (604) 644-2099Phuket Airport (6676) 328-540Phnom Penh Sales (85523) 224-047Hanoi Sales (844) 3934-7247Ho Chi Minh Airport (848) 3844-6649Ho Chi Minh Sales (848) 3824-2878Guam Sales (1671) 642-3217Nadi Sales (679) 672-1433Melbourne Sales (613) 9670-5800Brisbane Sales (617) 3226-6000Sydney Airport (612) 9669-6466Sydney Sales (612) 9262-6000Auckland Airport (649) 255-0130Auckland Sales (649) 914-2000

KORea

Reservation Center 1588-2001Seoul Passenger Sales 1588-2001Busan Passenger Sales (051) 461-7272Cheongwon Sales (055) 296-2006Gangwon Sales (033) 253-5561Suwon Sales (031) 239-3539Incheon Sales (032) 882-5627 Gwangju Sales (062) 384-9660Daegu Sales (053) 606-2055Daejeon Sales (042) 862-2001Jeju Sales (064) 750-8333Seoul Cargo Sales (02) 751-7200Busan Cargo Sales (051) 461-7110Gwangju Passenger Service (062) 942-0111Gunsan Passenger Service (063) 471-5001Gimpo Passenger Service (02) 2656-5006Daegu Passenger Service (053) 984-0111Busan Passenger Service (051) 970-3314Yeosu Passenger Service (061) 683-7502Wonju Passenger Service (033) 344-2000Ulsan Passenger Service (052) 288-0111Incheon Passenger Service (032) 742-7654Jeju Passenger Service (064) 713-9104Jinju Passenger Service (055) 852-3374Cheongju Passenger Service (043) 213-2107Pohang Passenger Service (054) 284-0111Incheon Cargo Service (032) 742-5745

Japan

Reservation Center 0088-21-2001Tokyo Passenger Sales (816) 6264-3311Tokyo Airport (81476) 32-7561Tokyo Cargo Sales (813) 5443-3377Kagoshima Airport (81995) 58-3763Kanazawa Sales (816) 6264-3315Komatsu Sales (81761) 24-5531Nagasaki Airport (81957) 52-8081Nagoya Airport (81569) 38-0750Nagoya Sales (816) 6264-3311Niigata Airport (8125) 271-5541Niigata Sales (8125) 244-3320Sapporo Sales (81123) 27-3311Shizuoka Sales (8154) 829-2650Aomori Airport (8117) 729-0511Akita Airport (8118) 886-8188Osaka Airport (8172) 456-5111Osaka Passenger Sales (816) 6263-8900Osaka Cargo Sales (816) 6263-8896Oita Airport (8197) 537-3316Okayama Sales (8186) 294-4951Haneda Airport (813) 6428-0308Hakodate Airport (81138) 59-3323Fukuoka Airport (8192) 477-7651Fukuoka Sales (8192) 441-3348

ameRica

Reservation Center (1) 800-438-5000Los Angeles Passenger Sales (1213) 484-5700Los Angeles Airport (1310) 646-4866Los Angeles Cargo Sales (1310) 417-5207 New 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 (5511) 2445-4805Sao Paulo Sales (5511) 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) 248-8875Washington Airport (1703) 572-2420Washington Sales (1703) 572-2430Toronto Airport (1905) 676-8440Toronto Sales (1416) 862-2555Honolulu Airport (1808) 836-1711Honolulu Sales (1808) 926-8000Miami Sales (1305) 357-5396


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Excellence in Flight - Home - Korean Air · PDF file · 2018-03-07KOREAN AIR ANNUAL REPORT 2010 Excellence in Flight 2010 AnnuAl RepoRt + Nagoya + Osaka ... 114 Company Information