1. You’re right - Korea is the only option.
2. The defender fighters will fire, killing transports with any hits, as they have no other target. If both attacking transports are killed, the battle is over, as no units remain that can hit each other or retreat. If any attacking transports survive, the attacker may retreat. There is no way the attacker can win this sea battle, as no units that could hit the fighters were brought to the battle, so bringing the transports along was pointless.
What happens to the defending transport varies with the outcome of the battle. If the subs get three or more hits on the initial attack, it will be sunk. If it survives the first round and the attacker retreats, it will live. If the battle ends with only attacking subs and defending fighters in the sea zone, it will be sunk.
In any case, the fighters will land on New Zealand after the battle is over.