While the Shilla Duty Free company now looks favourite to acquire the Paradise Duty Free operation in Busan City, following the decision by its parent company to sell up and concentrate on gaming, there is

still opposition to this from customs and employees.

At the same time, Lotte Duty Free appears to have withdrawn from chasing Paradise after claims it would hold a duty free monopoly in Busan, but it remains at the fore to acquire AK Duty Free from the Aekyung Group, South Korea's third-largest duty free operator – although any acquisition here also looks as though it will still take some time to complete.

Lotte appears to have withdrawn from the race for Paradise after protests that since it already operates the only other downtown duty free shop – as well as shops at KimHae Airport – it would have a monopoly. The absence of any foreign companies is also notable, with DFS Group – amongst others – understood to have been watching developments in Busan with varying degrees of interest.

But while the Paradise Duty Free Business is considerable, with an annual sales turnover of around Won.140bn ($122m), the big prize is undoubtedly AK Duty Free with its annual sales turnover of around Won.320bn $280m. Lotte Duty Free's holding company Lotte Hotel was understood to have been close to signing a memorandum of understanding (MOU) to acquire 81% of AK Gobal and its duty free shops at Incheon and Gimpo airports in late December – but there is no confirmation whether this has happened or not.

COMPLEX POLITICAL CONSIDERATIONS
Although the Aekyung Group seems all too happy to sell considering it is said to be carrying losses close to Won.200bn ($175m) which Lotte has apparently agreed to take on, there remain 'complex political considerations' here – as is so often the case in Korea.

With an annual sales turnover of $964m in 2008, Lotte Duty Free Shop is already the country's biggest operator and it is perhaps predictable that it faces all the usual cries of 'monopoly' every time it expresses any interest in any other company within Korea. Whether Korea's Fair Trade Commission will look favourably on any acquisition would appear to be the biggest barrier to a takeover of AK Duty Free by Lotte which is already estimated to account for a 49% share of the total duty free business in Korea, followed by Shilla with around 29%.

Any acquisition of AK Duty Free would also pose questions for Incheon International Airport, since it walked on political egg shells to try and keep all parties happy with various awards in the last round of bidding (apart from foreign companies), even though the annual minimum guarantees for some operators were doubled in certain instances.

SIGNIFICANT TURNOVER AND DEBT
But besides any sales turnover gains (and Won.200bn/$175m worth of debt), any takeover of AK Duty Free would also theoretically – subject to airport authority and customs approvals – deliver some significant new locations for Lotte. Currently, AK Duty Free exclusively operates the duty free concession at Seoul's second airport of Gimpo where duty free sales were 21% up to $40m between January and August last year and on target to reach $50m by the end of this year (=source, personal interviews by The Business with operators in Seoul).

AK Duty Free operates the airport's sole 460sq m departure shop at Gimpo Airport where departure sales were averaging $5m a month last year. Passenger numbers have also grown with the main customers being South Korean nationals and Japanese visitors, with a sprinkling of mainland Chinese (AK Duty Free was awarded the Gimpo Airport license in December 2005).

Currently, eight flights operate daily between Gimpo and Haneda by Korean Air, Asiana, Japan Airlines and All Nippon Airways.International flights from Gimpo increased in October 2007 with the start of shuttle flights to China to Shanghai's Hongqiao Airport.

Perfumes and cosmetics account for 30% of duty free revenue at Gimpo, with fashion items accounting for a further 30%. AK Duty Free also operates five 10sq m shop-in-shops at Gimpo featuring products from Dunhill, Bally, Etro, Versace and StDupont. Korean products account for a further 30% of sales at Gimpo, while liquor and tobacco products make up the remaining 10%.

Elsewhere – and following the expiry of its first concession in February 2008 – AK Duty Free also operates shops at Incheon under two new concessions that began in March 2008 – one to sell perfumes and cosmetics comprising three shops and the other sole store selling fashion goods, including garments, leather goods and accessories. All these outlets are located in Incheon Airport's main passenger terminal departure area.

AK Duty Free's main Incheon perfume and cosmetics shop is rectangular in area and covers 800sq m. It also operates two departure gate perfume and cosmetic shops in Incheon Airport, with one covering 200sq m and the other some 40sq m in area. But sales have suffered this year due to the drop in passenger numbers and spending caused by the global economic crisis and the impact of swine flu. This is one of the reasons why the parent company is looking to sell.

$100M-WORTH OF INCHEON SALES
The company's sales in the period January to August 2009 totalled $100m compared with the same period in 2008, a drop of 26% in revenue and like Lotte and Shilla, AK Duty Free has been burdened with heavy concession fees at the location. Like its rivals, the retailer was awarded a token 8% rebate for this year's concession fee after applying jointly with Lotte Duty Free and Shilla Duty Free to Incheon International Airport Authority.

AK Duty Free also operates a downtown pre-order duty free shop in the basement of the COEX shopping mall, hotel and office complex in Seoul's developing southern Kangnam business area. The company took over the COEX duty free shop from the financially troubled former operator, SKM Duty Free. New brands introduced into this outlet over the last year or so include Louis Vuitton, Cartier, Fendi, Bvlgari, Loewe and others, including Est?e Lauder and Christian Dior.

Duty free sales in the COEX downtown shop totalled $65m between January and August 2009, representing an overall increase of 30% compared with sales totalling $50m during the same period in 2008.

The AK Duty Free COEX shop totals 6,000sq m in area and occupies two basement floor levels. The upper entrance level covers 2,500sq m and consists mostly of brand boutiques. South Korean travellers account for about 60% of all purchases, while Japanese visitors represent 30%, with the remaining purchases made by Chinese and other travellers.

SMALL INFLIGHT BUSINESS
Further afield, the Aekyung Group has also added civil aviation business activities to its operations having set up Jeju Airlines with the Jeju provincial government in 2005 to fly domestic and international routes from Jeju Airport on Jeju Island. Currently its international routes also include a daily international service from Incheon Airport to Osaka and a twice-weekly service from Incheon to Kitakyushu in Japan, along with seasonal charter flights from Incheon to Bangkok and Phuket.

Following the start of scheduled international flight services to Japan in March of last year, Jeju Airlines introduced an inflight duty free sales service in May, appointing AK Duty Free to run the cabin sales programme.