Airlines Struggling with COVID-19 Impact, Eyeing Corporate Bonds Amid Business Slump

Jeju Air Acquires Eastar Jet
Likely to Issue Funds for Financing
Experts Negative Due to Industry Slowdown

[Asia Economy Reporter Minji Lee] Airlines are facing their worst crisis as the new coronavirus infection (COVID-19) coincided with last year's trade conflict with Japan. Although airlines are considering issuing corporate bonds to raise funds, market conditions are not so favorable.

On the 3rd, as the number of countries banning or restricting entry of people visiting or transiting through South Korea due to the spread of COVID-19 increases, the status board at the airline check-in counters in the departure hall of Terminal 1 at Incheon International Airport displays information regarding the cancellation of flights to Kota Kinabalu. Photo by Moon Honam munonam@

According to the industry on the 4th, Jeju Air is expected to issue corporate bonds to secure funds following the acquisition of Eastar Jet. Jeju Air agreed on the 2nd to acquire 51.17% of Eastar Jet's shares for 54.5 billion KRW. As of the end of January, Jeju Air's cash and cash equivalents stand at around 150 billion KRW.

Yang Ji-hwan, a researcher at Daishin Securities, explained, "Considering the additional payment of 32.55 billion KRW for the Eastar Jet acquisition and the negative business conditions, most of the cash will be depleted in the first quarter," adding, "The situation will continue where cash must be secured through corporate bond issuance, etc."

Currently, Eastar Jet is estimated to be in a state of full capital erosion as of the end of last year, based on its 48% capital erosion status in the 2018 year-end financial statements. Since a substantial capital increase is inevitable for Eastar Jet, it is analyzed that Jeju Air's financial structure will inevitably face burdens.

Industry experts foresee that issuing corporate bonds will be difficult for airlines considering the negative aviation business conditions. The poor performance of companies and the decreased attractiveness of interest rates have lowered investment sentiment toward non-investment grade corporate bonds. Currently, Korean Air and Asiana Airlines have corporate bond ratings of BBB+ and BBB-, respectively.

A credit rating agency official stated, "Because it is difficult for airlines' business conditions to recover in the short term, they inevitably feel burdened to raise funds through public corporate bond offerings," and predicted, "They are expected to issue private placement bonds, which do not require disclosure of the company's credit rating, or secure funds through asset-backed securities (ABS)."

HDC Hyundai Development Company, which recently took over Asiana Airlines, issued a 10-year senior private bond worth 170 billion KRW with a coupon rate of 3.7% on the 28th of last month. It included a put option allowing early principal repayment before maturity if the credit rating is downgraded starting next month. This reflects growing concerns about the aviation industry after COVID-19, allowing the put option to be exercised immediately without waiting for a certain period.

Since the COVID-19 outbreak, the aviation industry has faced an even more difficult environment due to demand contraction. Park So-young, a researcher at Korea Ratings, said, "The situation is compounded by poor performance on Japan routes due to heightened anti-Japanese sentiment in the second half of last year and a sharp decline in passengers on China routes in the first half of this year, leading to reduced air travel demand," adding, "Korean Air and Asiana Airlines are expected to see sales decrease by about 3-4% and 4-5%, respectively."

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