Last year, when Jeju Air's position as South Korea's largest low-cost airline appeared to be under threat from the merger of South Korea's two largest airlines, the company's chief executive He made it clear to employees that he would “respond proactively” by acquiring the company.
A week after the Dec. 29 crash that killed 179 people, Jeju Air's future is clouded by even more serious questions.
South Korean authorities on Thursday raided the company's offices and imposed a travel ban on CEO Kim Ebbe as part of an investigation into the country's worst air disaster in nearly 30 years. Passengers are canceling reservations, further straining the airline's debt-laden balance sheet. And Jeju Air's stock price, already trading near record lows, has fallen 10% since the disaster.
Earlier this week, Kim said Jeju Air would reduce its flights by 15% until March to “improve operational stability.”
As investigators investigate the cause of Jeju Air Flight 7C2216's crash, the airline is under intense scrutiny from the government and public over its operating practices. Some of the company's operating practices have been questioned, including how it flew its planes more frequently than its competitors and how it outsourced maintenance overseas.
Speaking at a press conference at Muan International Airport on the day of the crash, Kim said that a maintenance inspection had found no problems with the plane, and that the plane had no history of accidents. In an official statement, Jeju Air said it was “committed” to helping those affected by the crash and was “cooperating fully” with the investigation into the cause. He did not return calls seeking comment.
Jeju Air's business outlook was already uncertain. Over the past two years, the airline, like other airlines, has grappled with rising costs due to inflation and rising interest rates. According to OAG, a global air travel data provider, Jeju Air's flight capacity had not fully returned to 2019 levels. The airline's number of flights in 2024 was 4% lower than before the 2019 coronavirus pandemic.
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 agreed four years ago, will ultimately create a single national airline. As part of the deal, the three low-cost carriers operated by the two companies will be combined under one brand, surpassing Jeju Air as South Korea's largest low-cost carrier.
Twenty years ago, Jeju Air became the country's first new low-cost carrier, aiming to compete with the monopolies of Korean Air and Asiana Airlines. Jeju Air will operate 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 conglomerate best known for selling laundry detergent and toothpaste. Jeju Air's second largest shareholder is the Jeju government.
Jeju Air was born from the amalgamation of other small airlines and has become one of the country's leading low-cast airlines. It has added routes throughout Asia, including stops outside traditional travel hubs, to serve wealthy Koreans seeking overseas vacations. Based on the number of seats available, the OAG said seats have increased by an average of 20% per year over the past 12 years.
Like many low-cost carriers, Jeju Air tightly controlled costs, introduced new technology and squeezed travelers with even small perks. The focus was on short-haul regional flights using the same model's single-aisle Boeing 737-800 aircraft.
“The airline is a reliable low-cost carrier with good access to Southeast Asia and North Asia,” said Mayur Patel, regional sales director at OAG.
After its initial public offering in 2015, Jeju Air had been on a fairly stable financial footing until the pandemic hit. Since 2020, the company has had to raise capital three times, totaling nearly $500 million. The company also received a $29 million loan from the government, provided it retains 90 percent of its workforce.
Even after travel restrictions were lifted and Jeju Air was flooded with pent-up demand, its debt problems continued as costs rose as fast as revenues.
Jeju Air said in a corporate filing that it must repay about $165 million in short-term loans by the end of September next year. This already exceeds its cash and cash equivalent balance of nearly $150 million. And this was before a wave of cancellations expected to further pressure cash balances.
But analysts say liquidity concerns are common among low-cost carriers.
Brendan Sobie, an independent aviation consultant and analyst, said: “Most of these airlines, if you look at their financials, you would think they're financially weak, but airlines are more vulnerable to these conditions than other companies.'' “We have a way to survive.” . He explained that companies in the airline supply chain have a strong incentive to support airlines in trouble.
On Thursday, Jeju Air executives dismissed liquidity concerns and said the airline is moving forward with expansion plans that include a deal to buy up to 40 new aircraft from Boeing over the next few years.
The airline hopes to take advantage of South Korea's government plan to support low-cost carriers to modernize its fleet to counter monopoly risks posed by the merger of Korean Air and Asiana Airlines. The government said it plans to prioritize low-cost airlines in opening new international routes from South Korea to Europe and Asia.
But now some of Jeju Air's flight practices that helped cut costs are under the microscope.
Jeju Air operated Boeing 737-800 aircraft more frequently than its competitors. According to South Korea's Ministry of Land, Infrastructure, Transport and Tourism, during the first 11 months of 2024, Jeju Air flew its planes for an average of 14.1 hours per day. In comparison, Korean Air's flight time was 8.6 hours, and low-cost airline Jin Air's flight time was 11.4 hours, according to the ministry.
Under normal circumstances, the difference in plane usage would be taken as a sign of Jeju Air's efficiency, but it is an important consideration for a low-cost airline with low margins and high sales. But when viewed through the lens of fatal crashes, this discrepancy raised concerns.
Analysts who follow the airline industry said increasing the frequency of flights will not affect airline safety as long as regulators continue to closely monitor pilot flight hours and aircraft maintenance standards.
At Tuesday's press conference, Jeju Air was asked a lot of questions about maintenance, including its practice of outsourcing maintenance to overseas experts. Unlike Korean Air and Asiana Airlines, which have the facilities and personnel to perform more maintenance in-house, Jeju Air and other independent low-cost carriers in Japan rely primarily on overseas dispatch services. are.
This practice has also helped Jeju Air keep maintenance costs down even as other major expenses have increased.
In 2023, Jeju Air's revenue more than doubled compared to the previous year. It spent twice as much on fuel and airport costs to accommodate the surge in traffic, but maintenance costs, which are more fixed costs, did not increase at a similar rate.
Jonathan Berger, managing director of Alton Aviation Consultants, said outsourcing some maintenance is common in the industry. He said maintenance work is highly regulated and audited, regardless of whether it is outsourced or where it is performed.
“Jeju Air is nothing special,” Berger said. “All airlines outsource a significant amount of maintenance.”
For the time being, Jeju Air said it would focus on restoring its reputation and supporting the victims and their families. The company said the planes involved in the crash were insured for up to $1 billion, ensuring families received the assistance they needed.
Jin Yu Young contributed to this report.
