When Jeju Air’s standing as South Korea’s greatest low-cost provider appeared beneath menace from the merger of the nation’s two greatest airways final 12 months, the corporate’s chief government assured workers that it might “actively reply,” presumably by buying smaller rivals.
Now, per week after a crash that killed 179 individuals on Dec. 29, Jeju Air’s future is clouded by even deeper questions.
South Korean officers on Thursday raided the corporate’s workplaces and imposed a journey ban on Kim E-bae, the chief government, as a part of the investigation into the nation’s worst air catastrophe in virtually three a long time. Passengers are canceling bookings, including additional pressure to a stability sheet heavy with debt. And Jeju Air’s inventory worth, already buying and selling close to report lows, has fallen 10 p.c because the catastrophe.
Earlier within the week, Mr. Kim mentioned that Jeju Air would reduce 15 p.c of its flights till March to “improve operational stability.”
As investigators look into what prompted Jeju Air Flight 7C2216 to crash, the airline has come beneath intense authorities and public scrutiny for the way it operates. A few of its operational practices are being challenged, together with the way it flew its planes extra continuously than opponents and the way it outsourced its upkeep abroad.
At a information convention at Muan Worldwide Airport on the day of the crash, Mr. Kim mentioned that upkeep checks had discovered no issues with the aircraft, which he mentioned had no historical past of accidents. In a public assertion, Jeju Air mentioned it was “dedicated” to serving to anybody affected by the crash and was “absolutely cooperating” with investigations into its trigger. It didn’t instantly reply to a telephone name searching for remark.
Jeju Air’s enterprise outlook was already unsure. During the last two years, like different airways, the corporate has grappled with elevated prices due to inflation and better rates of interest. The capability of Jeju Air’s flights had not absolutely returned to 2019 ranges, based on OAG, a world air journey information supplier. The provider operated 4 p.c fewer flights in 2024 than earlier than the Covid pandemic in 2019.
The crash got here after the completion of Korean Air’s acquisition of a majority stake in Asiana Airways final month. The merger — a $1.05 billion deal agreed upon 4 years in the past — will finally create a single nationwide provider. As a part of that deal, three price range carriers operated by the 2 firms might be introduced beneath one model that can surpass Jeju Air as South Korea’s largest low-cost providing.
Twenty years in the past, Jeju Air grew to become the nation’s first upstart price range airline with the intention of difficult the duopoly of Korean Air and Asiana. Jeju Air would fly the busy vacationer route between Seoul and Jeju, a scenic island off the southern coast of South Korea. The airline is majority-owned by AK Holdings, a conglomerate greatest identified for promoting laundry detergent and toothpaste. Jeju Air’s second greatest shareholder is Jeju’s provincial authorities.
Jeju Air emerged from a jumble of different small airways to change into the nation’s main low-cast provider. It added routes throughout Asia, together with stops outdoors of the normal journey hubs, to serve more and more rich South Koreans trying to trip overseas. As measured by the variety of out there seats, it added capability of 20 p.c a 12 months on common over the past 12 years, OAG mentioned.
Like many price range airways, Jeju Air saved a decent rein on prices, put new know-how in place and squeezed vacationers for even small perks. It centered on quick regional flights served by the identical mannequin of airplane, the single-aisle Boeing 737-800.
“It’s a dependable low-cost provider with good attain into Southeast Asia and north Asia,” mentioned Mayur Patel, a regional gross sales director for OAG.
After an preliminary public providing in 2015, Jeju Air was on pretty secure monetary footing till the pandemic struck. Since 2020, it has been pressured to boost capital on three separate events, totaling almost $500 million. In additionally acquired a authorities mortgage of $29 million on the situation that it keep 90 p.c of its work pressure.
Even after journey restrictions had been lifted and Jeju Air was awash in pent-up demand, its debt issues continued as a result of its prices had been going up simply as quick as its income.
In company filings, Jeju Air mentioned it should repay roughly $165 million in short-term loans by the tip of subsequent September. That already exceeded its money and money equal stability of almost $150 million. And this was earlier than the run on cancellations that’s anticipated to additional crimp its money stability.
However analysts mentioned liquidity considerations are widespread for low-cost airways.
“Most of those airways, in the event you have a look at their monetary place, you’ll assume a whole lot of them are financially weak however airways have a method to survive these items extra so than different firms,” mentioned Brendan Sobie, an unbiased aviation advisor and analyst. He defined that firms in airline provide chains have a robust incentive to assist airways that have bother.
On Thursday, a Jeju Air government dismissed liquidity considerations, saying that the corporate was continuing with enlargement plans, together with a deal to buy as much as 40 new planes from Boeing within the coming years.
The corporate desires to modernize its fleet to benefit from a South Korean authorities plan to assist low-cost airways as a counter to the monopoly threat posed by the union of Korean Air and Asiana. The federal government mentioned it deliberate to provide precedence to price range airways in awarding new worldwide routes from South Korea to Europe and Asia.
However now, a few of the working practices that helped Jeju Air maintain its prices low are beneath a microscope.
Jeju Air flew its fleet of Boeing 737-800 planes extra continuously than its opponents. Within the first 11 months of 2024, Jeju Air flew its planes 14.1 hours on common per day, based on South Korea’s Ministry of Land, Infrastructure and Transport. This in contrast with 8.6 hours for Korean Air and 11.4 hours for its low-cost provider, Jin Air, based on the ministry.
Beneath regular circumstances, the distinction in aircraft use can be held up as an indication of Jeju Air’s effectivity, an vital consideration for low-cost carriers engaged on skinny margins. However by means of the lens of a lethal crash, the discrepancy raised considerations.
Analysts who comply with the aviation trade mentioned flying planes extra typically would don’t have any influence on a provider’s security so long as regulators maintained strict oversight of what number of hours its pilots fly and its requirements for sustaining its fleet.
At a media briefing on Tuesday, Jeju Air was barraged with questions on upkeep, together with its observe of outsourcing upkeep to abroad specialists. In contrast to Korean Air or Asiana, which have higher services and personnel to deal with extra of their very own upkeep, Jeju Air and the nation’s different unbiased low-cost carriers rely totally on sending work outdoors the nation.
This observe has additionally helped Jeju Air maintain upkeep prices down at the same time as its different main bills have risen.
In 2023, Jeju Air’s income greater than doubled from the earlier 12 months. It spent twice as a lot on gas and airport prices to maintain up with the surge in visitors, however upkeep prices, a extra mounted expense, didn’t improve at an analogous price.
Jonathan Berger, a managing director at Alton Aviation Consultancy, mentioned some outsourcing of upkeep is widespread within the trade. Upkeep work is extremely regulated and audited no matter whether or not it’s outsourced or the place it’s completed, he mentioned.
“Jeju Air isn’t distinctive,” mentioned Mr. Berger. “All airways outsource a major quantity of upkeep.”
For now, Jeju Air mentioned it might give attention to repairing its popularity and supporting the victims and their households. The corporate mentioned the plane concerned within the crash was coated by an insurance coverage coverage of as much as $1 billion that can be sure that the households obtain the mandatory support.
Jin Yu Younger contributed reporting.
