The Sky Routes Are 'Shutdown,' but Fixed Costs Burden 1 Trillion Won... Tensions Over Government Support Plan

Airline Industry Facing Liquidity Crisis... Estimated Monthly Fixed Costs Around 1 Trillion KRW
"Two-Track Approach Needed: 'Payment Guarantees' for Major Airlines and 'Emergency Loans' for LCCs"

[Image source=Yonhap News]

[Asia Economy Reporter Yoo Je-hoon] As the global skies have been forced into a 'shutdown' state due to the novel coronavirus infection (COVID-19) crisis, it has been revealed that national airlines are losing about 1 trillion won in fixed costs every month. While each company is pushing for asset sales and paid-in capital increases to secure liquidity, the industry is also keenly awaiting the imminent government financial support plan.

According to the aviation industry on the 21st, national airlines are struggling as the burden of fixed costs such as aircraft lease fees is increasing day by day while international flight revenues are almost 'zero (0)'. As of the fourth week of March, the number of international passengers of domestic airlines plummeted by 96% compared to the same period last year, but the high fixed costs are still being paid every month. Typically, the aviation industry is known to have a high proportion of fixed costs in operating expenses, about 30-40%, compared to other industries. Because aircraft are expensive equipment worth several hundred billion won each, lease fees and related interest costs are enormous even excluding expenses such as salaries.

The industry estimates that fixed costs for Korean Air amount to 400 billion to 500 billion won per month, and Asiana Airlines about 200 billion to 300 billion won. Among low-cost carriers (LCCs), Jeju Air, the largest in scale, is also estimated to incur fixed costs of around 20 billion to 30 billion won. Overall, national airlines are spending nearly 1 trillion won in fixed costs every month. The Korea Air Transport Association also estimated earlier this month that the fixed costs paid monthly by national airlines reach 900 billion won.

As this situation continues, each airline is facing a liquidity crisis. Korean Air succeeded in issuing 622.8 billion won of aircraft fare receivables asset-backed securities (ABS) at the end of last month, but this is only enough to repay 240 billion won in corporate bonds maturing this month and cover fixed costs. Asiana Airlines is in a similar situation.

Airlines are also focusing on preparing self-help plans. Korean Air is currently negotiating with major domestic securities firms to push for a paid-in capital increase of up to 1 trillion won. A Korean Air official said, "This is part of the process of exploring all possible ways to secure liquidity," adding, "Nothing has been finalized yet." In addition, they are conducting asset sales such as the land in Songhyeon-dong, Jongno-gu, Seoul, and shares in Wangsang Leisure Development Co., Ltd., along with a 70% employee furlough. Asiana Airlines, whose acquisition process is delayed, plans to continue unpaid leave for 50% of its employees for the time being and is appealing to creditors for support.

However, the industry believes that overcoming the crisis with self-help plans alone is impossible, so they are pinning hopes on the government's aviation industry support measures to be announced soon. For major airlines, repaying massive borrowings is an urgent task, so they are requesting government and policy bank payment guarantees when issuing bonds, while LCCs are appealing for emergency loans to secure immediate operating funds. Professor Heo Hee-young of Korea Aerospace University said, "Some European countries are offering 'unlimited' financial support," adding, "Since the current crisis is caused by a temporary demand contraction due to COVID-19 rather than the industry itself, sufficient support is necessary."

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