When Jeju Air’s standing as South Korea’s largest low-cost service appeared threatened by the merger of the nation’s two largest airways final yr, the corporate’s chief government officials assured that it’s going to “actively retaliate”, probably by buying smaller rivals.
Now, every week after a disaster which killed 179 individuals on December 29, the way forward for Jeju Air is clouded by even deeper questions.
South Korean officers on Thursday raided the corporate’s workplaces and imposed a journey ban on Chief Govt Kim Ee-bae as a part of an investigation into the nation’s worst air catastrophe in practically three many years. The passengers are cancellation of reservationsincluding additional pressure to a debt-laden stability sheet. And Jeju Air’s share value, already buying and selling close to file lows, fell 10 p.c after the catastrophe.
Earlier within the week, Mr Kim mentioned Jeju Air would lower 15 p.c of its flights till March to “enhance operational stability”.
As investigators look into the reason for the crash of Jeju Air Flight 7C2216, the airline is underneath intense scrutiny from the federal government and the general public about the way it operates. A few of its operational practices have been contested, together with the way it flew its planes extra typically than rivals and the way outsourced its maintenance overseas.
At a information convention at Mueang Worldwide Airport on the day of the crash, Mr Kim mentioned upkeep checks had discovered no issues with the airplane, 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. He didn’t instantly return a telephone name for remark.
Jeju Air’s enterprise prospects had been already unsure. Over the previous two years, like different airways, the corporate has struggled with rising prices as a consequence of inflation and better rates of interest. Jeju Air’s flight capability has not absolutely returned to 2019 ranges, based on OAGa worldwide supplier of air journey knowledge. The service operated 4 p.c fewer flights in 2024 than earlier than the 2019 Covid pandemic.
The crash got here after Korean Air’s acquisition of a majority stake in Asiana Airways was accomplished final month. The merger — a $1.05 billion deal agreed 4 years in the past — will finally create a single nationwide service. As a part of this deal, three low-cost carriers operated by the 2 corporations will likely be mixed underneath one model, which 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 new funds airline to problem the duopoly of Korean Air and Asiana. Jeju Air will fly the busy vacationer route between Seoul and Jeju, a scenic island off South Korea’s southern coast. The airline is majority owned by AK Holdings, a conglomerate finest recognized for promoting laundry detergent and toothpaste. Jeju Air’s second largest shareholder is the Jeju Provincial Authorities.
Jeju Air has emerged from a pile of different small airways to turn into the nation’s main low-cost service. It has added Asian routes, together with stops outdoors conventional vacationer hubs, to cater to more and more prosperous South Koreans who need to trip overseas. Measured by the variety of locations out there, it has added capability by a mean of 20 p.c a yr over the previous 12 years, the OAG mentioned.
Like many low-cost airways, Jeju Air has stored a decent rein on prices, launched new know-how and squeezed passengers for even small bonuses. It focuses on quick regional flights served by the identical plane mannequin, single-aisle Boeing 737-800.
“It’s a dependable low-cost service with an excellent attain in Southeast Asia and North Asia,” mentioned Mayur Patel, regional gross sales director for OAG.
After an preliminary public providing in 2015. Jeju Air was on pretty sound monetary footing till the pandemic hit. From 2020 since then, it has been compelled to lift capital in three separate circumstances totaling practically $500 million. In additionally acquired government loan of $29 million supplied it maintains 90 p.c of its workforce.
Even after journey restrictions had been lifted and Jeju Air was swamped by pent-up demand, its debt issues persevered as a result of its prices grew as quick as its revenues.
In company filings, Jeju Air mentioned it needed to repay roughly $165 million in short-term loans by the top of subsequent September. This already exceeded the money and money equal stability of practically $150 million. And that was earlier than the cancellation pile-up, which is anticipated to additional cut back its money stability.
However analysts mentioned liquidity issues had been widespread for low-cost airways.
“Most of those airways, in case you have a look at their monetary well being, you’ll assume plenty of them are financially susceptible, however airways have a approach of surviving these items greater than different corporations,” mentioned Brendan Sobey, an unbiased aviation marketing consultant and analyst. He defined that corporations in airline provide chains have a powerful incentive to assist airways which might be experiencing issues.
On Thursday, Jeju Air CEO dismissed liquidity concernssaying the corporate is constant with growth plans, together with a deal to purchase as much as 40 new planes from Boeing within the coming years.
The corporate needs to modernize its fleet to make the most of a South Korean government plan to help low-cost airways as a countermeasure to the monopoly danger posed by the merger of Korean Air and Asiana. The federal government has mentioned it plans to prioritize funds airways in awarding new worldwide routes from South Korea to Europe and Asia.
However now a few of the operational practices which have helped Jeju Air hold its prices low are underneath the microscope.
Jeju Air flies its fleet of Boeing 737-800 plane extra continuously than its rivals. Within the first 11 months of 2024 Jeju Air flew its planes a mean of 14.1 hours a day, based on South Korea’s Ministry of Land, Infrastructure and Transport. That compares with 8.6 hours for Korean Air and 11.4 hours for its low-cost service Jin Air, based on the ministry.
Below regular circumstances, the distinction in plane utilization can be thought of an indication of Jeju Air’s effectivity, an essential consideration for low-margin low-cost carriers. However by way of the prism of a lethal crash, the discrepancy has brought on concern.
Analysts who observe the aviation business mentioned flying planes extra continuously wouldn’t have an effect on the service’s security, so long as regulators preserve strict oversight of what number of hours its pilots fly and its fleet upkeep requirements.
At a media briefing on Tuesday, Jeju Air was bombarded with questions on upkeep, together with its apply of outsourcing upkeep. Not like Korean Air or Asiana, which have bigger amenities and employees to deal with extra of their very own upkeep, Jeju Air and the nation’s different unbiased low-cost carriers rely totally on outsourcing work .
This apply additionally helped Jeju Air hold upkeep prices low whilst different main prices rose.
In 2023 Jeju Air’s income doubled from the earlier yr. It spent twice as a lot on gasoline and airport prices to deal with the rise in visitors, however upkeep prices, a extra mounted expense, didn’t improve at an identical charge.
Jonathan Berger, managing director at Alton Aviation Consultancy, mentioned some upkeep outsourcing was widespread within the business. Upkeep work is very regulated and audited, no matter whether or not it’s outsourced or the place it’s carried out, he mentioned.
“Jeju Air will not be distinctive,” Mr. Berger mentioned. “All airways outsource a major quantity of upkeep.”
For now, Jeju Air mentioned it should deal with rebuilding its fame and supporting the victims and their households. The corporate mentioned the airplane concerned within the crash is roofed by an insurance coverage coverage of as much as $1 billion, which can make sure the households get the assistance they want.
Jin Yoo Younger contributed reporting.
