By Daisuke Wakabayashi
When Jeju Air’s position as South Korea’s largest low-cost carrier appeared jeopardized by the merger of the nation’s two foremost airlines last year, the CEO reassured staff that the company would “actively respond,” potentially through acquisitions of smaller competitors.
Now, just a week post the disaster that resulted in the deaths of 179 individuals on Dec. 29, Jeju Air’s prospects are overshadowed by even more profound concerns.
On Thursday, South Korean authorities conducted raids on the company’s facilities and placed a travel restriction on Kim E-bae, the CEO, as part of an inquiry into the worst aviation incident the country has seen in nearly thirty years. Passengers have begun canceling their reservations, placing additional pressure on a balance sheet already laden with debt. Additionally, Jeju Air’s stock, previously trading near record lows, has dropped 10% since the incident.
Earlier this week, Kim announced that Jeju Air would reduce flights by 15% through March to “increase operational stability.”
As investigators delve into the causes of Jeju Air Flight 7C2216’s crash, the airline has faced significant government and public examination regarding its operations. Several of its operational methodologies are under scrutiny, including the higher frequency of its flights compared to competitors and the practice of outsourcing maintenance abroad.
During a press conference at Muan International Airport on the day of the accident, Kim stated that maintenance inspections had uncovered no issues with the aircraft, which he claimed had a clean accident history. In a public communiqué, Jeju Air expressed its “commitment” to aiding those impacted by the crash and asserted it was “fully cooperating” with investigations into the causes. The company did not immediately provide a response to a request for comments.
Jeju Air’s business forecast was already precarious. Over the last two years, similar to other airlines, it has struggled with rising costs due to inflation and increasing interest rates. Data from OAG, a worldwide aviation data provider, indicates that Jeju Air’s flight capacity has not fully recovered to levels seen before the pandemic, operating 4% fewer flights in 2024 than in 2019.
The incident followed the completion of Korean Air’s acquisition of a controlling interest in Asiana Airlines last month. This merger—a $1.05 billion agreement reached four years prior—will ultimately establish a single national airline. As part of this arrangement, three budget carriers operated by both companies will consolidate under a single brand, surpassing Jeju Air to become South Korea’s leading low-cost airline.
Twenty years ago, Jeju Air pioneered the country’s budget airline sector, aiming to disrupt the dominance of Korean Air and Asiana. The airline regularly operated the busy route connecting Seoul and Jeju, a picturesque island located off South Korea’s southern coast. Jeju Air is primarily owned by AK Holdings, a conglomerate primarily known for laundry detergent and toothpaste, with Jeju’s provincial government as its second-largest stakeholder.
Jeju Air transitioned from a mix of smaller airlines to the nation’s premier low-cost carrier. It introduced routes throughout Asia, including destinations outside traditional tourist hotspots, catering to the growing number of affluent South Koreans seeking vacations abroad. According to OAG, over the past 12 years, it has increased its capacity by an average of 20% annually, as measured by the number of available seats.
In line with many budget airlines, Jeju Air maintained strict control over expenses, implemented innovative technologies, and charged for minor services. It concentrated on short regional flights, utilizing the same model of aircraft, the single-aisle Boeing 737-800.
“It’s a dependable low-cost carrier with robust access to Southeast Asia and northern Asia,” noted Mayur Patel, a regional sales director at OAG.
Following an initial public offering in 2015, Jeju Air enjoyed relatively stable financial health until the onset of the pandemic. Since 2020, it has had to raise capital three times, amassing nearly $500 million, and it secured a government loan of $29 million on the condition of retaining 90% of its workforce.
Despite the lifting of travel restrictions and a surge in demand, Jeju Air’s debt challenges continued as rising costs matched revenue growth.
In corporate filings, Jeju Air disclosed a need to repay approximately $165 million in short-term loans by the end of September, exceeding its cash reserves of nearly $150 million. This situation arose prior to an anticipated wave of cancellations that is likely to further deplete its cash reserves.
However, analysts suggest that liquidity issues are common among low-cost carriers.
“Many of these airlines, if you examine their financial standings, would appear financially precarious, but airlines tend to have mechanisms for navigating such challenges better than other businesses,” remarked Brendan Sobie, an independent aviation consultant and analyst. He pointed out that entities within the airline supply chains have strong motivations to support airlines in distress.
On Thursday, a Jeju Air executive minimized liquidity concerns, asserting that the company was advancing with its expansion plans, which include an agreement to acquire up to 40 new aircraft from Boeing in the coming years.
The airline aspires to update its fleet to capitalize on a South Korean government initiative aimed at bolstering low-cost airlines as a counterbalance to the monopoly risk from the union of Korean Air and Asiana. The government indicated it would prioritize budget airlines in allocating new international routes from South Korea to Europe and Asia.
Nevertheless, some of the operational strategies that enabled Jeju Air to maintain low costs are now facing scrutiny.
Jeju Air operated its Boeing 737-800 fleet more frequently than its competitors. In the first eleven months of 2024, the airline logged an average of 14.1 flight hours per day per plane, as reported by South Korea’s Ministry of Land, Infrastructure and Transport. In contrast, Korean Air averaged 8.6 hours, while its low-cost competitor, Jin Air, averaged 11.4 hours, according to the ministry.
