Last year, when Jeju Air’s position as South Korea’s largest low-cost carrier appeared to be threatened by the merger of the country’s two largest airlines, the company’s chief executive assured employees that it would “respond proactively”, possibly through smaller acquisitions competitors to deal with.
Now, a week after the Dec. 29 crash that killed 179 people, Jeju Air’s future is clouded by deeper problems.
South Korean officials raided the company’s offices on Thursday and imposed a travel ban on Chief Executive Kim Eul-bae as part of an investigation into the country’s worst air crash in nearly three decades. Passengers are canceling bookings, putting further pressure on debt-laden balance sheets. Jeju Air’s stock price is already near record lows, down 10% since the disaster.
Earlier this week, Kim Jong-un said Jeju Air would cut 15% of its flights by March to “enhance operational stability.”
As investigators look into the cause of the crash of Jeju Air flight 7C2216, the airline’s operations are coming under intense scrutiny from the government and the public. Some of its operating practices are being challenged, including how it flies more frequently than rivals and outsources maintenance overseas.
On the day of the crash, Kim Jong-un said at a press conference at Muan International Airport that maintenance inspections found no problems with the aircraft and that there had been no accidents with the aircraft. Jeju Air said in a public statement that it was “committed” to helping anyone affected by the accident and was “fully cooperating” with the investigation into the cause of the accident. The company did not immediately return a call seeking comment.
Jeju Air’s business prospects are already unclear. The airline, like other airlines, has grappled with rising costs due to inflation and rising interest rates over the past two years. Data from OAG, a global air travel data provider, shows that Jeju Air’s flight capacity has not yet fully returned to 2019 levels. The airline’s flight number in 2024 is 4% lower than in 2019 before the outbreak of the new crown epidemic.
The accident occurred after Korean Air completed its acquisition of a majority stake in Asiana Airlines last month. The merger, a $1.05 billion deal struck four years ago, will ultimately create a single national airline. As part of the deal, the three low-cost airlines operated by the two companies will be brought under one brand, which will surpass Jeju Air to become South Korea’s largest low-cost carrier.
Twenty years ago, Jeju Air became the country’s first emerging low-cost airline, aiming to challenge the duopoly of Korean Air and Asiana Airlines. Jeju Air will fly on the busy tourist route between Seoul and Jeju Island, a scenic island off South Korea’s southern coast. The airline is majority-owned by AK Holdings, a group best known for selling laundry detergent and toothpaste. Jeju Air’s second largest shareholder is the Jeju Provincial Government.
Jeju Air stands out from many small airlines and becomes the country’s leading low-cost airline. The company has added routes across Asia, including stops outside traditional travel hubs, to serve increasingly wealthy Koreans who want to vacation abroad. OAG said it has increased its capacity, measured by available seats, by an average of 20% annually over the past 12 years.
Like many budget airlines, Jeju Air tightly controls costs, embraces new technology, and offers even small perks to passengers. It focuses on short-haul regional flights operated by single-aisle Boeing 737-800 aircraft of the same model.
“This is a reliable low-cost airline with a route network covering Southeast Asia and North Asia,” said Mayur Patel, OAG regional sales director.
After its initial public offering in 2015, Jeju Air’s financial position was quite stable until the outbreak. It has been forced to raise capital three times since 2020, totaling nearly $500 million. In also received a $29 million government loan on the condition that it retain 90% of its workforce.
Even after travel restrictions were lifted and Jeju Air was swamped by pent-up demand, its debt problems persisted as its costs grew as fast as revenue.
Jeju Air said in company documents that it must repay about $165 million in short-term loans by the end of September next year. That’s more than its cash and cash equivalents balance of nearly $150 million. This comes ahead of a run on cancellations that are expected to further squeeze its cash balance.
But analysts say liquidity concerns are common for budget airlines.
“Most of these airlines, if you look at their financials, you would think many of them are financially vulnerable,” said Brendan Sobie, an independent aviation consultant and analyst. , but airlines have better means of surviving these things than others, he explained, and companies in the airline supply chain have strong incentives to help airlines in trouble.
A Jeju Air executive on Thursday dismissed liquidity concerns and said the airline was moving forward with expansion plans that include a deal to buy up to 40 new planes from Boeing over the next few years.
The company hopes to modernize its fleet to take advantage of the South Korean government’s plan to support low-cost airlines to counter monopoly risks posed by the Korean Air and Asiana Airlines alliance. The government said it plans to prioritize new international routes from South Korea to Europe and Asia by giving priority to low-cost airlines.
But now, some of the operating practices that help Jeju Air maintain low costs are coming under scrutiny.
Jeju Air’s Boeing 737-800 fleet flies more frequently than its competitors. According to data from South Korea’s Ministry of Land, Infrastructure, Transport and Tourism, Jeju Air’s aircraft flew an average of 14.1 hours a day in the first 11 months of 2024. In comparison, Korean Air’s flight time was 8.6 hours and budget carrier Jin Air’s flight time was 11.4 hours, according to the ministry.
Under normal circumstances, the difference in aircraft usage would be seen as a sign of Jeju Air’s efficiency, an important consideration for a budget airline operating on razor-thin margins. But when viewed through the lens of a fatal crash, the disparity raises concerns.
Analysts who follow the aviation industry say flying more frequently will have no impact on airline safety as long as regulators strictly monitor pilot flying hours and fleet maintenance standards.
During a media briefing on Tuesday, Jeju Air came under a host of questions about maintenance, including its practice of outsourcing maintenance to overseas experts. Unlike Korean Air or Asiana Airlines, which have greater facilities and personnel to handle more of their own maintenance work, Jeju Air and the country’s other independent low-cost carriers largely rely on moving work Dispatched abroad.
This approach has also helped Jeju Air reduce maintenance costs at a time when other major expenses have increased.
In 2023, Jeju Air’s revenue more than doubled from the previous year. It’s spending twice as much on fuel and airport costs to keep up with the surge in passenger traffic, but maintenance costs, a more fixed expense, haven’t increased at a similar rate.
Jonathan Berger, managing director of Alton Aviation Consultancy, said some maintenance outsourcing was common in the industry. Regardless of whether it is outsourced or where it is performed, maintenance is strictly regulated and audited, he said.
“Jeju Air is not unique,” Mr. Berger said. “All airlines outsource a lot of their maintenance work.”
For now, Jeju Air says it will focus on repairing its reputation and supporting victims and their families. The company said the plane involved in the crash had been insured for up to $1 billion to ensure that the families of the victims received necessary assistance.
Kim Woo Young Contributed reporting.
