As the Aviation Industry Restructuring Gains Momentum, Will the Unexpected 'COVID-19' Setback Allow Smooth Sailing?

As four confirmed cases of the novel coronavirus infection (Wuhan pneumonia) have been reported domestically, raising the infectious disease alert level from caution to warning, the check-in waiting area for Chinese national airlines at Incheon International Airport appeared quiet on the 28th. / Yeongjongdo = Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Yoo Je-hoon] Since the beginning of the year, 'COVID-19' has severely impacted the domestic air transportation industry, drawing attention to the ongoing industry restructuring efforts. Currently, HDC Hyundai Development Company and Jeju Air are respectively engaged in acquiring Asiana Airlines and Eastar Jet, but concerns have arisen that if the situation prolongs, the 'winner's curse' may become a reality.

According to the industry on the 13th, Asiana Airlines recorded separate financial statements showing sales of 5.9538 trillion KRW and an operating loss of 368.7 billion KRW last year. These figures represent decreases of 4% and 950%, respectively, compared to the previous year.

When including the performance of subsidiaries such as Air Busan, Air Seoul, and Asiana IDT in the consolidated financial statements, the operating loss increases to 427.4 billion KRW. This amount is not significantly different from the operating profit of 551.4 billion KRW recorded by HDC Hyundai Development Company, which owns Asiana Airlines, last year.

The main factors behind the deteriorating performance include the boycott of travel to Japan in the second half of last year, resulting in oversupply in the short-haul market; a decline in cargo performance due to reduced freight volume caused by the US-China trade dispute; increased foreign currency expenses due to exchange rate rises; and expanded investments in aircraft engines and other areas.

Asiana Airlines plans to use the acquisition by the HDC Group as a stepping stone for a 'turnaround.' An Asiana Airlines official stated, "Once the sale and acquisition procedures are completed, capital of about 2.2 trillion KRW will be injected, and based on this financial stability, we plan to expand investments to improve credit ratings and profitability," adding, "We also expect performance improvements through new business synergies with the HDC Group and the broader Hyundai family."

However, some predict that the situation HDC Hyundai Development Company will face in the future will not be easy. Due to the COVID-19 crisis, many of Asiana Airlines' main routes to China have been significantly reduced. As of the third quarter of last year, the proportion of sales from China routes was 19%, the highest among all domestic airlines, including low-cost carriers (LCCs). In March, operations on the Incheon-San Francisco route, once called a 'cash cow,' will be suspended for 45 days due to administrative sanctions following a landing accident in San Francisco in 2013. Although the direct losses are not significant, intangible losses such as the loss of transfer demand are expected to be considerable.

For HDC Hyundai Development Company, this means encountering unexpected risks early in the acquisition process. Industry insiders agree that to avoid the winner's curse, a thorough overhaul is necessary after completing the acquisition. An industry official said, "If the current operating methods continue to focus on short-haul routes, the same situation will arise again within a few years," adding, "A complete overhaul is needed in all areas, including personnel restructuring, sales methods, fleet management, and route network development."

The situation is also challenging for Jeju Air, which is pursuing the acquisition of Eastar Jet. Jeju Air posted a consolidated loss of 32.9 billion KRW last year and declared a 'crisis management system' yesterday as passenger demand sharply declined due to the COVID-19 outbreak from the beginning of the year. The company plans to expand unpaid leave to all employees and implement austerity measures such as a 30% salary cut for executives.

Because of this, there are market rumors that Jeju Air's acquisition of Eastar Jet, the first M&A case among LCCs, might fail. Although Jeju Air is evaluated to have sufficient acquisition capacity with about 320 billion KRW in cash and short-term financial assets, Eastar Jet's financial instability could become a stumbling block.

However, Jeju Air has dismissed the acquisition failure rumors. A Jeju Air representative said, "The due diligence process has been delayed due to the Lunar New Year holidays and other reasons, but there is no change in our intention to acquire," adding, "There will be no failure of the acquisition as the market fears."

This content was produced with the assistance of AI translation services.