Is the Funding Drying Up for LCCs Leading to Restructuring Steps?

Emergency Injection of 2.9 Trillion Won for Major Companies
"No Additional Support for LCCs"
Most Aircraft Leased
No Assets for Sale... KDB Also in a Dilemma

[Asia Economy Reporter Jo Gang-wook] With the recently announced support measures for the aviation industry excluding additional support plans for low-cost carriers (LCCs), there is speculation that restructuring of the nine domestic LCCs may be set in motion. Although a total of 2.9 trillion KRW in emergency funds was injected into Korean Air and Asiana Airlines, which have been struggling financially due to the COVID-19 pandemic, no further measures beyond the 300 billion KRW support announced two months ago have been considered for LCCs.

According to the financial sector on the 27th, the total amount injected by two state-run banks, KDB Industrial Bank and Korea Eximbank, into the domestic aviation industry, which is running out of funds due to the prolonged COVID-19 situation, reaches approximately 3.4 trillion KRW. Previously, 1.7 trillion KRW was allocated to Asiana Airlines. Additionally, 1.2 trillion KRW will be invested in Korean Air. The support amount for the two major national airlines alone totals 2.9 trillion KRW.

On the other hand, there have been no additional support plans for the LCC sector beyond the 300 billion KRW announced in February. The Industrial Bank stated, "No additional support for LCCs is currently under consideration," drawing a clear line. So far, about 140 billion KRW has been disbursed to the LCC sector. After holding a meeting with LCC airlines and their main banks on the 3rd of last month, the bank provided 6 billion KRW to T'way Air, and through Asiana Airlines, supported its affiliates Air Seoul and Air Busan with 20 billion KRW and 30 billion KRW respectively, totaling 56 billion KRW. In addition, 40 billion KRW was provided to Jeju Air and 30 billion KRW to Jin Air for operating funds, bringing the total support to 126 billion KRW as of the 31st of last month. Further support is scheduled this month through Asiana Airlines to Air Busan (28 billion KRW) and T'way Air. Regarding Jeju Air's acquisition of Eastar Jet, the Industrial Bank (100 billion KRW) and Korea Eximbank (70 billion KRW) are reviewing a support plan totaling 170 billion KRW. Including this, the total amount of support to the aviation industry is estimated at 3.37 trillion KRW.

The fact that additional support measures for LCCs are not even being considered has led some to interpret this as a step toward restructuring some LCCs in the future. There have been ongoing criticisms that the domestic LCC industry is in a state of excessive competition. Currently, there are seven operating domestic LCCs, and including those licensed and preparing such as Aero K and Air Premia, the total is nine. In particular, the government's requirement for additional self-help efforts as a precondition for support is interpreted as an intention to downsize some of the nine LCCs. Unlike major airlines, most LCCs lease their aircraft, so they have almost no assets to sell.

The possibility of Air Busan being put up for sale has also been raised. Asiana Airlines holds a 44.17% stake in Air Busan, and if HDC Hyundai Development Company acquires Asiana Airlines, it will be required under the Fair Trade Act to secure 100% ownership of its subsidiary Air Busan within two years. Despite a sharp drop in stock prices, Air Busan's market capitalization still exceeds 200 billion KRW.

The position of the Industrial Bank, which acts as an emergency room for companies, is also difficult. If it supports all companies struggling to secure liquidity, it will inevitably bear a huge loan burden. The problem is that it does not have sufficient capital capacity to fully implement government measures and to actively resuscitate companies. There are not just one or two companies sending urgent rescue requests, including Doosan Heavy Industries and Ssangyong Motor.

A financial sector official said, "State-run banks like the Industrial Bank are under pressure to prevent the collapse of the entire market while simultaneously facing concerns about deteriorating soundness," adding, "In such a situation, other roles such as supporting new growth industries, promoting overseas expansion, and investment-type policy finance inevitably come to a halt."

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